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 September 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 October 31, 1999
was 175,936,356.
2
THE CHUBB CORPORATION
INDEX
Page Number
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1999 and 1998.................................. 2
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 1999 and 1998.................................. 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 6 - Exhibits and Reports on Form 8-K....................... 20
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31,
1999 1998
--------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 957.8 $ 344.2
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $1,895.2
and $2,140.2)..................................... 1,819.4 2,002.2
Available-for-Sale
Tax Exempt (cost $7,868.4 and $6,509.3)........... 7,953.4 6,935.1
Taxable (cost $4,827.2 and $4,259.0).............. 4,773.9 4,381.6
Equity Securities (cost $657.8 and $1,002.6)......... 648.2 1,092.2
--------- ---------
TOTAL INVESTED ASSETS......................... 16,152.7 14,755.3
Cash................................................... 19.5 8.3
Accrued Investment Income.............................. 230.9 221.0
Premiums Receivable.................................... 1,245.2 1,199.3
Reinsurance Recoverable on Unpaid Claims............... 1,592.3 1,306.6
Prepaid Reinsurance Premiums........................... 244.7 134.6
Funds Held for Asbestos-Related Settlement............. 599.1 607.4
Deferred Policy Acquisition Costs...................... 798.1 728.7
Real Estate Assets..................................... 706.1 746.0
Deferred Income Tax.................................... 601.1 320.8
Goodwill............................................... 512.1 -
Other Assets........................................... 1,008.0 718.0
--------- ---------
TOTAL ASSETS.................................. $23,709.8 $20,746.0
========= =========
Liabilities
Unpaid Claims.......................................... $11,826.5 $10,356.5
Unearned Premiums...................................... 3,368.6 2,915.7
Long Term Debt......................................... 792.6 607.5
Dividend Payable to Shareholders....................... 56.4 50.3
Accrued Expenses and Other Liabilities................. 1,335.0 1,171.9
--------- ---------
TOTAL LIABILITIES............................. 17,379.1 15,101.9
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 177,016,691 and
175,989,202 Shares.................................... 177.0 176.0
Paid-In Surplus........................................ 412.0 546.7
Retained Earnings...................................... 5,901.2 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 14.4 414.7
Foreign Currency Translation Losses, Net of Tax....... (45.4) (36.0)
Receivable from Employee Stock Ownership Plan.......... (80.7) (86.3)
Treasury Stock, at Cost - 758,389 and
13,722,376 Shares..................................... (47.8) (975.0)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 6,330.7 5,644.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $23,709.8 $20,746.0
========= =========
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months
1999 1998 1999 1998
(in millions)
Revenues
Premiums Earned....................... $1,452.1 $1,328.4 $4,209.4 $3,966.9
Investment Income..................... 230.0 205.4 654.8 613.8
Real Estate........................... 21.8 23.1 78.5 70.7
Realized Investment Gains............. 5.4 36.3 82.8 126.7
-------- -------- -------- --------
Total Revenues................. 1,709.3 1,593.2 5,025.5 4,778.1
-------- -------- -------- --------
Claims and Expenses
Insurance Claims...................... 1,125.2 889.2 2,957.5 2,589.4
Amortization of Deferred Policy
Acquisition Costs.................... 388.7 368.5 1,136.1 1,096.3
Other Insurance Operating Costs
and Expenses......................... 98.9 93.1 281.2 277.2
Real Estate Cost of Sales and Expenses 22.7 24.0 81.1 73.4
Investment Expenses................... 3.0 2.3 11.2 10.2
Corporate Expenses.................... 14.8 8.9 39.9 22.7
Restructuring Charge.................. - - - 40.0
-------- -------- -------- --------
Total Claims and Expenses...... 1,653.3 1,386.0 4,507.0 4,109.2
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................. 56.0 207.2 518.5 668.9
Federal and Foreign Income Tax (Credit). (21.3) 33.8 61.0 119.5
-------- -------- -------- --------
Net Income.............................. $ 77.3 $ 173.4 $ 457.5 $ 549.4
======== ======== ======== ========
Average Common Shares Outstanding....... 172.9 164.2 165.2 166.7
Average Common and Potentially Dilutive
Shares Outstanding..................... 175.1 167.0 167.4 169.9
Net Income Per Share
Basic.................................. $.45 $1.05 $2.77 $3.29
Diluted................................ .44 1.04 2.73 3.24
Dividends Declared Per Share............ .32 .31 .96 .93
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months
1999 1998 1999 1998
(in millions)
Net Income................................ $ 77.3 $173.4 $ 457.5 $549.4
------- ------ ------- ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation
of Investments, Net of Tax............. (113.7) (38.3) (400.3) (24.0)
Foreign Currency Translation Losses,
Net of Tax............................. (1.0) (5.6) (9.4) (12.1)
------- ------ ------- ------
(114.7) (43.9) (409.7) (36.1)
------- ------ ------- ------
Comprehensive Income (Loss)............... $ (37.4) $129.5 $ 47.8 $513.3
======= ====== ======= ======
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................ $ 457.5 $ 549.4
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net...................... 578.5 463.0
Increase in Unearned Premiums, Net.................. 90.0 169.6
Decrease (Increase) in Premiums Receivable.......... 4.4 (21.4)
Increase in Deferred Policy Acquisition Cost........ (14.2) (43.4)
Change in Deferred Federal Income Tax............... (17.1) (8.0)
Depreciation........................................ 48.1 40.6
Realized Investment Gains........................... (82.8) (126.7)
Other, Net.......................................... 42.5 4.8
--------- --------
Net Cash Provided by Operating Activities............. 1,106.9 1,027.9
--------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities............... 1,127.4 1,411.7
Proceeds from Maturities of Fixed Maturities.......... 647.2 602.1
Proceeds from Sales of Equity Securities.............. 912.0 296.3
Purchases of Fixed Maturities......................... (2,561.9) (2,553.8)
Purchases of Equity Securities........................ (420.1) (484.6)
Purchase of Interest in Hiscox plc.................... (145.3) -
Decrease (Increase) in Short Term Investments, Net.... (417.6) 165.2
Other, Net............................................ (2.8) (57.5)
--------- ---------
Net Cash Used in Investing Activities................. (861.1) (620.6)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance Long Term Debt................. - 400.3
Repayment of Long Term Debt........................... (14.9) (161.3)
Dividends Paid to Shareholders........................ (154.2) (153.1)
Repurchase of Shares.................................. (94.1) (534.7)
Other, Net............................................ 28.6 47.0
--------- ---------
Net Cash Used in Financing Activities................. (234.6) (401.8)
--------- ---------
Net Increase in Cash.................................... 11.2 5.5
Cash at Beginning of Year............................... 8.3 11.5
--------- ---------
Cash at End of Period................................. $ 19.5 $ 17.0
========= =========
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 $11.5
million or $.07 per diluted share for the nine months ended September
30, 1999.
3) Business Acquisition
In July 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 has been accounted for using the purchase method
of accounting. Therefore, the results of operations of Executive Risk
are included in the Corporation's consolidated results of operations
from the date of acquisition. The assets and liabilities of Executive
Risk were recorded at their estimated fair values at the date of
acquisition. The value of the stock options assumed by
the Corporation has been included in the purchase price. The excess of
the purchase price over the estimated fair value of the net assets
acquired, in the amount of approximately $517 million, has been recorded
as goodwill and is being amortized over 26 years.
Since the acquisition is a noncash transaction, it has been
excluded from the statement of cash flows. The details of the
acquisition were as follows: fair value of assets acquired, including
goodwill, $2,442 million; fair value of liabilities assumed, $1,622
million; and fair value of common stock issued and options assumed,
$820 million.
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4) 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 or depreciation of
investments carried at market value was as follows:
Periods Ended September 30
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
Change in unrealized appreciation or
depreciation of equity securities.... $ (29.4) $(193.8) $ (99.2) $(148.9)
Change in unrealized appreciation of
fixed maturities..................... (145.6) 134.9 (516.7) 111.9
------- ------- ------- -------
(175.0) (58.9) (615.9) (37.0)
Deferred income tax credit............ (61.3) (20.6) (215.6) (13.0)
------- ------- ------- -------
Change in unrealized appreciation of
investments, net..................... $(113.7) $ (38.3) $(400.3) $ (24.0)
======= ======= ======= =======
5) 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.
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6) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Periods Ended September 30
--------------------------
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(in millions,
except per share amounts)
Basic earnings per share:
Net income............................... $ 77.3 $173.4 $457.5 $549.4
====== ====== ====== ======
Weighted average number of common
shares outstanding...................... 172.9 164.2 165.2 166.7
====== ====== ====== ======
Basic earnings per share................. $ .45 $ 1.05 $ 2.77 $ 3.29
====== ====== ====== ======
Diluted earnings per share:
Net income............................... $ 77.3 $173.4 $457.5 $549.4
====== ====== ====== ======
Weighted average number of common
shares outstanding...................... 172.9 164.2 165.2 166.7
Additional shares from assumed exercise
of stock-based compensation awards...... 2.2 2.8 2.2 3.2
------ ------ ------ ------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share...................... 175.1 167.0 167.4 169.9
====== ====== ====== ======
Diluted earnings per share............... $ .44 $ 1.04 $ 2.73 $ 3.24
====== ====== ====== ======
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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Revenues and income before income tax of the operating segments
were as follows:
Periods Ended September 30
--------------------------
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal......................... $ 369.2 $ 330.6 $1,069.6 $ 965.7
Standard commercial.............. 484.1 492.5 1,477.4 1,481.4
Specialty commercial............. 598.8 505.3 1,662.4 1,519.8
-------- -------- -------- --------
1,452.1 1,328.4 4,209.4 3,966.9
Investment income.................. 214.9 189.8 610.2 566.5
-------- -------- -------- --------
Total property and casualty
insurance....................... 1,667.0 1,518.2 4,819.6 4,533.4
Corporate and other.................. 36.9 38.7 123.1 118.0
Realized investment gains............ 5.4 36.3 82.8 126.7
-------- -------- -------- --------
Total revenues................... $1,709.3 $1,593.2 $5,025.5 $4,778.1
======== ======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal......................... $ (23.9) $ 31.6 $ 56.6 $ 114.6
Standard commercial.............. (127.9) (78.4) (303.3) (257.5)
Specialty commercial............. (.2) 18.0 74.7 117.6
-------- ------ -------- -------
(152.0) (28.8) (172.0) (25.3)
Increase (decrease) in deferred
policy acquisition costs........ (3.4) 10.3 14.2 43.4
-------- ------ -------- -------
Underwriting income (loss)....... (155.4) (18.5) (157.8) 18.1
Investment income.................. 212.2 187.7 600.6 558.0
Amortization of goodwill and
other charges..................... (5.3) (3.9) (7.6) (14.1)
Restructuring charge............... - - - (40.0)
-------- ------ -------- -------
Total property and casualty
insurance....................... 51.5 165.3 435.2 522.0
Corporate and other.................. (.9) 5.6 .5 20.2
Realized investment gains............ 5.4 36.3 82.8 126.7
-------- ------ -------- -------
Total income before income tax... $ 56.0 $207.2 $ 518.5 $ 668.9
======== ====== ======== =======
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8) 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 $1.5 million remained unpaid at September 30, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for
the third quarter and nine months ended September 30, 1999 and 1998:
Periods Ended September 30
--------------------------
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written........... $1,459.7 $1,366.7 $4,299.4 $4,136.5
Increase in Unearned Premiums.. (7.6) (38.3) (90.0) (169.6)
-------- -------- -------- --------
Premiums Earned............. 1,452.1 1,328.4 4,209.4 3,966.9
-------- -------- -------- --------
Claims and Claim Expenses...... 1,125.2 889.2 2,957.5 2,589.4
Operating Costs and Expenses... 467.6 459.1 1,392.0 1,376.3
Decrease (Increase) in Deferred
Policy Acquisition Costs...... 3.4 (10.3) (14.2) (43.4)
Dividends to Policyholders..... 11.3 8.9 31.9 26.5
-------- -------- -------- --------
Underwriting Income (Loss)..... (155.4) (18.5) (157.8) 18.1
-------- -------- -------- --------
Investments
Investment Income Before
Expenses...................... 214.9 189.8 610.2 566.5
Investment Expenses............ 2.7 2.1 9.6 8.5
-------- -------- -------- --------
Investment Income.............. 212.2 187.7 600.6 558.0
-------- -------- -------- --------
Amortization of Goodwill and
Other Charges.................. (5.3) (3.9) (7.6) (14.1)
Restructuring Charge............ - - - (40.0)
-------- -------- -------- --------
Property and Casualty Income.... 51.5 165.3 435.2 522.0
CORPORATE AND OTHER.............. (.9) 5.6 .5 20.2
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME
BEFORE INCOME TAX............... 50.6 170.9 435.7 542.2
Federal and Foreign Income Tax
(Credit)........................ (24.2) 21.1 31.0 75.2
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME.... 74.8 149.8 404.7 467.0
REALIZED INVESTMENT GAINS,
AFTER INCOME TAX................ 2.5 23.6 52.8 82.4
-------- -------- -------- --------
CONSOLIDATED NET INCOME.......... $ 77.3 $ 173.4 $ 457.5 $ 549.4
======== ======== ======== ========
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ACQUISITION OF EXECUTIVE RISK INC.
In July 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 has been accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk are included
in the Corporation's consolidated results of operations from the date of
acquisition. The assets and liabilities of Executive Risk were recorded at their
estimated fair values at the date of acquisition. The value of the stock options
assumed by the Corporation has been included in the purchase price. The excess
of the purchase price over the estimated fair value of the net assets acquired,
in the amount of approximately $517 million, has been recorded as goodwill and
is being amortized over 26 years.
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were lower in the
first nine months of 1999 compared with the same period of 1998. The decrease in
1999 was due to deterioration in underwriting results caused in large part by
substantially higher catastrophe losses and continued weakness in the standard
commercial classes, which include multiple peril, casualty and workers'
compensation. Investment income increased in the first nine months of 1999
compared with 1998. Property and casualty income before taxes amounted to $435.2
million in the first nine months of 1999 and $51.5 million in the third quarter
compared with $522.0 million and $165.3 million, respectively, in 1998. Property
and casualty earnings in 1998 reflect a first quarter charge of $40 million
related to the implementation of a cost control initiative.
Net premiums written were $4.3 billion in the first nine months of
1999, an increase of 3.9% compared with the same period in 1998. Net premiums
written were $1.5 billion in the third quarter of 1999, an increase of 6.8% over
the comparable period of 1998. Excluding premiums written by Executive Risk,
premium growth was 2.0% for the nine month period and 1.1% for the third
quarter. 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. However, our
strategy to increase the pricing in the standard commercial classes has shown
success in the first nine months of 1999. Further, we believe that many of our
competitors have also insisted on higher prices in recent months. As a result,
the pricing outlook in the standard commercial classes is considerably brighter
than it was at the outset of 1999. Substantial premium growth in the first nine
months of 1999 was achieved outside the United States, particularly in Europe,
our largest foreign market.
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Underwriting results were unprofitable in the first nine months of 1999
compared with marginally profitable results in 1998. Underwriting results were
unprofitable in the third quarter of both 1999 and 1998, but more so in 1999.
Our combined loss and expense ratio was 103.4% in the first nine months of 1999
and 110.4% in the third quarter compared with 99.2% and 101.2%, respectively, in
1998.
The loss ratio was 70.8% for the first nine months of 1999 and 78.1%
for the third quarter compared with 65.7% and 67.4%, respectively, in the prior
year. The loss ratios in both years were adversely affected by significant
catastrophe losses. Catastrophe losses during the first nine months of 1999
amounted to $221.9 million which represented 5.3 percentage points of the loss
ratio compared with $160.8 million or 4.1 percentage points in 1998. Catastrophe
losses for the third quarter of 1999 amounted to $135.0 million or 9.4
percentage points of the loss ratio compared with $68.8 million or 5.2
percentage points in 1998. The 1999 catastrophe losses resulted primarily from
weather-related events in the United States: winter storms in the first quarter,
wind storms and tornadoes in the second quarter and Hurricane Floyd in the third
quarter. The 1998 catastrophe losses resulted primarily from the winter ice
storms in Canada in the first quarter, the wind and hail storms in the United
States in the second quarter and Hurricane Georges in Puerto Rico in the third
quarter.
Our expense ratio was 32.6% for the first nine months of 1999 and 32.3%
for the third quarter compared with 33.5% and 33.8%, respectively, in 1998. The
lower ratio in 1999 was due to salary and overhead expenses remaining flat
compared with the first nine 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 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 $1.5 million remained
unpaid at September 30, 1999.
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Underwriting results during 1999 and 1998 by class of business were as
follows:
Nine Months Ended September 30
------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
Personal Insurance
Automobile........................ $ 257.5 $ 233.1 90.1% 87.7%
Homeowners........................ 620.5 551.1 103.5 93.3
Other............................. 266.2 242.9 69.2 67.8
-------- -------- ----- -----
Total Personal 1,144.2 1,027.1 92.5 86.0
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 537.3 576.9 134.3 122.1
Casualty.......................... 631.1 673.3 116.4 114.9
Workers' Compensation............. 221.4 238.0 112.7 113.1
-------- -------- ----- -----
Total Standard Commercial 1,389.8 1,488.2 122.9 117.4
-------- -------- ----- -----
Property and Marine............... 389.5 414.5 111.8 112.0
Executive Protection.............. 792.6 709.1 84.3 75.6
Financial Institutions............ 298.4 296.2 95.2 83.8
Other............................. 284.9 201.4 90.6 102.3
-------- -------- ----- -----
Total Specialty Commercial 1,765.4 1,621.2 93.5 90.0
-------- -------- ----- -----
Total Commercial 3,155.2 3,109.4 107.2 103.5
-------- -------- ----- -----
Total $4,299.4 $4,136.5 103.4% 99.2%
======== ======== ===== =====
Quarter Ended September 30
--------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
Personal Insurance
Automobile........................ $ 91.0 $ 80.9 97.8% 88.1%
Homeowners........................ 223.8 199.2 120.5 92.3
Other............................. 89.0 82.7 69.1 74.9
-------- -------- ----- -----
Total Personal 403.8 362.8 103.4 87.2
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 171.3 187.1 149.7 126.3
Casualty.......................... 199.4 212.6 119.3 109.9
Workers' Compensation............. 64.6 68.5 111.6 119.8
-------- -------- ----- -----
Total Standard Commercial 435.3 468.2 130.4 117.9
-------- -------- ----- -----
Property and Marine............... 128.0 129.2 130.2 116.8
Executive Protection.............. 301.8 241.4 84.9 77.6
Financial Institutions............ 85.6 96.4 107.1 87.9
Other............................. 105.2 68.7 88.6 116.3
-------- -------- ----- -----
Total Specialty Commercial 620.6 535.7 98.9 94.5
-------- -------- ----- -----
Total Commercial 1,055.9 1,003.9 112.8 105.9
-------- -------- ----- -----
Total $1,459.7 $1,366.7 110.4% 101.2%
======== ======== ===== =====
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PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 27% of the
premiums written by our property and casualty subsidiaries, increased by 11.4%
in the first nine months of 1999 and 11.3% in the third quarter compared with
the similar periods in 1998. We continued to grow our personal lines business
with the in-force policy count increasing by about 10% on an annualized basis
for automobile, homeowners and other personal business. Premiums outside the
United States grew significantly in the first nine months of 1999, although from
a small base.
Our personal insurance business produced highly profitable underwriting
results in the first nine months of 1999 and 1998, but more so in 1998. Results
were unprofitable in the third quarter of 1999 due to significant catastrophe
losses in the homeowners class. In the comparable period of 1998, results were
highly profitable. The combined loss and expense ratio for our personal
insurance business was 92.5% for the first nine months of 1999 and 103.4% for
the third quarter compared with 86.0% and 87.2%, respectively, in 1998.
Homeowners results were modestly unprofitable in the first nine months
of 1999 compared with profitable results in 1998, due to an increase in both
catastrophe and non-catastrophe related losses, the latter due in part to one $7
million loss in the first quarter. Homeowners results were highly unprofitable
in the third quarter of 1999 due to substantial catastrophe losses. Catastrophe
losses represented 16.3 percentage points of the loss ratio for this class in
the first nine months of 1999 and 31.0 percentage points in the third quarter
compared with 10.9 percentage points and 8.5 percentage points, respectively, in
1998.
Our automobile business produced profitable results in the first nine
months of 1999 and 1998 due primarily to stable loss frequency and severity.
Results deteriorated somewhat in the third quarter of 1999 due to higher
severity on liability claims.
Other personal coverages, which include insurance for personal
valuables and excess liability, produced highly profitable results in 1999 and
1998 due to continued favorable loss experience.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which represent 32% of our
total writings, decreased by 6.6% in the first nine months of 1999 and 7.0% in
the third 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 business where we cannot attain
price adequacy. Retention levels were lower in the first nine months of 1999
compared with the same period in 1998. On the business that was renewed, rates
have increased modestly yet steadily in the first nine months of 1999 and we
expect this trend to continue. 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 underpriced business. Thus, it will be
mid-2000 before these actions are expected to have a significant positive effect
on our standard commercial results.
Our standard commercial insurance business produced highly unprofitable
underwriting results in 1999 and 1998. The combined loss and expense ratio was
122.9% for the first nine months of 1999 and 130.4% for the third quarter
compared with 117.4% and 117.9%, respectively, in 1998.
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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 first nine months of 1999 due in part to several
large overseas losses. Results in the liability component deteriorated in the
third quarter of 1999 due primarily to a higher frequency of large losses.
Catastrophe losses represented 12.2 percentage points of the loss ratio for this
class in the first nine months of 1999 and 25.1 percentage points in the third
quarter compared with 10.8 percentage points and 18.1 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 unprofitable underwriting
results in 1999 compared with breakeven results in 1998. Excess liability
results in the third quarter of 1998 benefited from favorable development on
several old case reserves. Results for the primary liability component were
highly unprofitable in the first nine 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.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial insurance, which represent 41% of
our total writings, increased by 8.9% in the first nine months of 1999 and 15.8%
in the third quarter compared with the same periods a year ago. Excluding
premiums written by Executive Risk, premium growth was 4.3% for the nine month
period and 2.0% for the third quarter. 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 executive protection and financial
institutions 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 specialty commercial business includes $54 million
of premiums in the first nine months of 1999 from our new Chubb Re operation.
Our specialty commercial business produced profitable underwriting
results in both 1999 and 1998. The combined loss and expense ratio was 93.5% for
the first nine months of 1999 and 98.9% for the third quarter compared with
90.0% and 94.5%, respectively, in 1998.
Property and marine results were similarly unprofitable in the first
nine months of 1999 and 1998. The positive effect of the pricing initiatives and
the culling of unprofitable accounts in 1999 was offset by higher catastrophe
losses. Results in both years were adversely affected by large losses. Results
in the third quarter of 1999 deteriorated due to the catastrophe losses as well
as three large non-catastrophe losses that aggregated $19 million. Catastrophe
losses represented 12.9 percentage points of the loss ratio for this class in
the first nine months of 1999 and 15.8 percentage points in the third quarter
compared with 8.1 percentage points and 14.7 percentage points, respectively, in
1998.
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Executive protection results were highly profitable in 1999 and 1998
due to favorable loss experience on worldwide business, particularly in the
directors and officers liability and fiduciary liability components. Our
financial institutions business produced profitable results in the first nine
months of 1999 and 1998. However, executive protection and financial
institutions results were less profitable in 1999 due to the less adequate
prices in recent years. Results in our financial institutions business were
unprofitable in the third quarter of 1999 due primarily to several large
fidelity losses as well as losses from Hurricane Floyd.
Our other specialty commercial classes produced profitable results in
1999 compared with slightly unprofitable results in the first nine months of
1998. Our surety business produced highly profitable results in the first nine
months of both years. Results in our aviation business were unprofitable in both
years, particularly in the third quarter of 1998.
LOSS RESERVES
Gross loss reserves were $11,826.5 million and $10,356.5 million at
September 30, 1999 and December 31, 1998, respectively. Reinsurance recoverables
on such loss reserves were $1,592.3 million and $1,306.6 million at September
30, 1999 and December 31, 1998, respectively. The 1999 amounts include gross
loss reserves of $990.3 million and reinsurance recoverable of $370.0 million
related to Executive Risk.
Loss reserves, net of reinsurance recoverable, increased by $1,184.3
million during the first nine months of 1999. The increase includes $605.8
million of net reserves assumed upon the acquisition of Executive Risk.
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 $35.5
million in the first nine months of 1999 and $51.0 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.
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Page 17
INVESTMENTS
The growth in investment income in 1999 was due to an increase in
invested assets since the third 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 was 15.4% in both the
first nine months of 1999 and 1998. Investment income after taxes increased by
7.7% in the first nine months of 1999 and by 12.1% in the third quarter compared
with the same periods in 1998. Excluding the investment income of Executive
Risk, such growth was 5.0% in the first nine months of 1999 and 4.3% in the
third quarter.
New cash available for investment in the first nine months of 1999 was
invested in tax-exempt bonds and, to a lesser extent, taxable bonds. During the
first nine months of 1999, we reduced our equity securities portfolio by
approximately $350 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. At
September 30, 1999, such securities were at a higher than normal level due, in
part, to the liquidation of a portion of the Executive Risk portfolio.
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 before tax decreased to $0.5 million in the first nine months
of 1999 from $20.2 million in the first nine months of 1998 due primarily to
higher interest expense in 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
realized investment gains before taxes were $82.8 million in the first nine
months of 1999 compared with net gains of $126.7 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
September 30, 1999, the Corporation repurchased 19,591,600 shares under the 1997
and 1998 authorizations, including 1,596,700 shares repurchased in open-market
transactions in the first nine months of 1999 at a cost of $94.1 million. As of
September 30, 1999, 10,408,400 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.
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Upon the acquisition of Executive Risk, its long-term debt obligations
aggregating $200 million remained in place. Executive Risk has outstanding $75
million of unsecured 7.125% senior notes maturing in 2007. The senior notes may
not be redeemed prior to maturity. Executive Risk Capital Trust, wholly-owned by
Executive Risk, has outstanding $125 million of 8.675% mandatory redeemable
capital securities. The capital securities are subject to mandatory redemption
in 2027 or earlier in certain specified circumstances. Executive Risk Capital
Trust, in turn, holds a similar amount of junior subordinated deferrable
interest debentures of Executive Risk.
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.
We have completed remediation and testing procedures on all of our
mainframe I/T systems, personal computers, servers, other non-mainframe
computers and all related software. We believe that all such computer equipment
and related software are now Year 2000 ready, including those at Executive Risk.
We have also assessed our non-I/T 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 continue to correspond with these third parties
regarding their plans for Year 2000 readiness. We are in the final stages of
developing business contingency plans to address mission critical operations
that may be adversely impacted by the non-compliance of any third party with
whom we interact. Those plans will be supplemented as necessary. We have
electronic data interchanges with some third parties. We have completed physical
testing of all such electronic data interchanges and believe that these
interchanges are now Year 2000 ready.
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 has been 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 final stages
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 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 $35 million was incurred as of September
30, 1999, of which $5 million was incurred in the first nine 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 has been 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 claims, the
availability of coverage for such claims or the likelihood of significant
losses.
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 and growth estimates or with
respect to premium price increases or the non-renewal of underpriced insurance
accounts as well as its expectations with respect to pending litigation matters;
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 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 July 21, 1999 with
respect to the announcement on July 20, 1999 that the Registrant had
completed the previously announced acquisition of Executive Risk Inc.
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: November 12, 1999