<PAGE> 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, 1994
------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8661
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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, 1994
was 87,148,353.
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THE CHUBB CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
September 30, 1994 and December 31, 1993..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1994 and 1993.................................. 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993................ 3
Notes to Consolidated Financial Statements.................... 4
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 7
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K....................... 16
</TABLE>
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1994 1993
--------- ---------
(in millions)
<S> <C> <C>
Assets
Invested Assets
Short Term Investments............................... $ 814.0 $ 531.3
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,267.1 and $6,048.4)......... 3,170.7 5,528.9
Taxable (market $638.6 and $2,726.0).............. 642.4 2,528.9
Available-for-Sale
Tax Exempt (1994 cost $2,336.6)................... 2,397.3 -
Taxable (1994 cost $4,307.5 and
1993 market $2,148.5)............................ 4,143.4 2,128.7
Equity Securities (cost $895.3 and $709.9)........... 1,015.0 930.0
Policy and Mortgage Loans............................ 197.2 194.3
--------- ---------
Total Invested Assets......................... 12,380.0 11,842.1
Cash................................................... 5.0 4.6
Accrued Investment Income.............................. 200.4 205.0
Premiums Receivable.................................... 753.0 720.1
Reinsurance Recoverable on Property and Casualty
Unpaid Claims......................................... 1,902.8 1,785.4
Prepaid Reinsurance Premiums........................... 462.9 427.3
Funds in Escrow - Asbestos-Related Settlement.......... 551.8 538.2
Deferred Policy Acquisition Costs
Property and Casualty Insurance...................... 532.9 489.7
Life and Health Insurance............................ 581.6 522.6
Real Estate Assets..................................... 1,737.7 1,709.0
Deferred Income Tax.................................... 285.3 229.0
Other Assets........................................... 1,092.1 963.9
--------- ---------
Total Assets.................................. $20,485.5 $19,436.9
========= =========
Liabilities
Property and Casualty Unpaid Claims.................... $ 8,758.2 $ 8,235.4
Life and Health Policy Liabilities..................... 2,578.2 2,446.6
Unearned Premiums...................................... 2,392.6 2,180.0
Short Term Debt........................................ 141.3 94.9
Long Term Debt......................................... 1,286.9 1,273.8
Dividend Payable to Shareholders....................... 40.4 37.7
Accrued Expenses and Other Liabilities................. 977.5 972.4
--------- ---------
Total Liabilities............................. 16,175.1 15,240.8
========= =========
Shareholders' Equity
Common Stock - $1 Par Value; 87,779,453 and
87,709,465 Shares..................................... 87.8 87.7
Paid-In Surplus........................................ 785.8 782.2
Retained Earnings...................................... 3,564.5 3,313.1
Foreign Currency Translation Gains, Net of Income Tax.. 14.1 0.3
Unrealized Appreciation of Investments, Net............ 21.9 143.1
Receivable from Employee Stock Ownership Plan.......... (126.7) (130.3)
Treasury Stock, at Cost; 516,100 Shares................ (37.0) -
--------- ---------
Total Shareholders' Equity.................... 4,310.4 4,196.1
--------- ---------
Total Liabilities and Shareholders' Equity.... $20,485.5 $19,436.9
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues
Premiums Earned and Policy Charges.... $1,149.2 $1,206.8 $3,431.9 $3,191.0
Investment Income..................... 210.3 204.5 614.2 594.1
Real Estate........................... 54.8 41.1 148.2 112.8
Realized Investment Gains............. 14.6 117.9 45.2 193.5
-------- -------- -------- --------
Total Revenues................. 1,428.9 1,570.3 4,239.5 4,091.4
-------- -------- -------- --------
Benefits, Claims and Expenses
Insurance Claims and Policyholders'
Benefits............................. 785.4 1,416.1 2,469.8 2,766.8
Amortization of Deferred Policy
Acquisition Costs.................... 273.9 255.3 820.1 750.0
Other Insurance Operating Costs and
Expenses............................. 109.5 94.9 317.8 287.7
Real Estate Cost of Sales and Expenses 55.3 40.5 150.0 111.2
Investment Expenses................... 2.7 2.5 9.6 7.7
Corporate Expenses.................... 9.8 6.3 27.7 22.1
-------- -------- -------- --------
Total Benefits, Claims and
Expenses...................... 1,236.6 1,815.6 3,795.0 3,945.5
-------- -------- -------- --------
Income (Loss) Before Federal and Foreign
Income Tax............................. 192.3 (245.3) 444.5 145.9
Federal and Foreign Income Tax (Credit). 39.6 (114.7) 71.9 (37.8)
-------- -------- -------- --------
Income (Loss) Before Cumulative Effect
of Changes in Accounting Principles.... 152.7 (130.6) 372.6 183.7
Cumulative Effect of Changes in
Accounting Principles, Net of Tax...... - - - (20.0)
-------- -------- -------- --------
Net Income (Loss)....................... $ 152.7 $ (130.6) $ 372.6 $ 163.7
======== ======== ======== ========
Average Common and Common Equivalent
Shares Outstanding (In Thousands)...... 90,543 90,584 90,608 90,529
PER SHARE DATA
- --------------
Income (Loss) Before Cumulative Effect
of Changes in Accounting Principles.... $ 1.71 $ (1.42) $ 4.19 $ 2.11
Cumulative Effect of Changes in
Accounting Principles.................. - - - (.22)
-------- -------- -------- --------
Net Income (Loss)....................... $ 1.71 $ (1.42) $ 4.19 $ 1.89
======== ======== ======== ========
Dividends Declared...................... $ .46 $ .43 $ 1.38 $ 1.29
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income............................................. $ 372.6 $ 163.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims, Net. 405.4 1,058.8
Increase (Decrease) in Life and Health Policy
Liabilities, Net.................................... (22.2) 46.1
Increase in Unearned Premiums, Net................... 177.0 135.0
Increase in Premiums Receivable...................... (32.9) (37.3)
Increase in Deferred Policy Acquisition Costs........ (84.8) (68.3)
Medical Malpractice Reinsurance Premium Receivable... - (125.0)
Decrease in Income Tax Payable....................... (20.0) (63.4)
Deferred Income Tax (Credit)......................... 2.3 (81.0)
Realized Investment Gains............................ (45.2) (193.5)
Cumulative Effect of Changes in Accounting Principles - 20.0
Other, Net........................................... (58.7) 83.3
--------- ---------
Net Cash Provided by Operating Activities.............. 693.5 938.4
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................ 2,169.1 3,306.6
Proceeds from Maturities of Fixed Maturities........... 463.7 498.6
Proceeds from Sales of Equity Securities............... 239.9 196.2
Purchases of Fixed Maturities.......................... (2,930.4) (4,084.0)
Purchases of Equity Securities......................... (360.7) (267.4)
Increase in Short Term Investments, Net................ (282.7) (609.1)
Increase in Net Payable from Security
Transactions Not Settled.............................. 27.2 59.4
Additions to Real Estate Properties, Net............... (32.5) (44.8)
Other, Net............................................. (46.8) (24.8)
--------- ---------
Net Cash Used in Investing Activities.................. (753.2) (969.3)
--------- ---------
Cash Flows from Financing Activities
Deposits Credited to Policyholder Funds................ 243.1 217.1
Withdrawals from Policyholder Funds.................... (91.9) (79.9)
Proceeds from Issuance of Long Term Debt............... 33.2 254.8
Repayment of Long Term Debt............................ (20.1) (55.1)
Increase (Decrease) in Short Term Debt, Net............ 46.4 (204.0)
Dividends Paid to Shareholders......................... (118.5) (110.4)
Repurchase of Shares................................... (37.0) -
Other, Net............................................. 4.9 7.7
--------- ---------
Net Cash Provided by Financing Activities.............. 60.1 30.2
--------- ---------
Net Increase (Decrease) in Cash.......................... 0.4 (0.7)
Cash at Beginning of Year................................ 4.6 6.7
--------- ---------
Cash at End of Period.................................. $ 5.0 $ 6.0
========= =========
</TABLE>
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 1993 Annual
Report to Shareholders.
2) Changes in Accounting Principles
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Similar to the Corporation's
previous accounting policy for investments in fixed maturities and
equity securities, SFAS No. 115 provides that the accounting for such
securities depends on their classification as either held-to-maturity
(previously referred to as held for investment), available-for-sale or
trading. However, SFAS No. 115 establishes more stringent criteria for
classifying fixed maturities as held-to-maturity. Therefore, the
adoption of SFAS No. 115 resulted in an increase in the portion of the
Corporation's fixed maturities classified as available-for-sale and a
similar decrease in those classified as held-to-maturity. SFAS No. 115
also requires that fixed maturities classified as available-for-sale be
carried at market value, with unrealized appreciation or depreciation
excluded from income and credited or charged directly to a separate
component of shareholders' equity. Previously, such fixed maturities
were carried at the lower of the aggregate amortized cost or market
value. In conjunction with the Corporation's adoption of SFAS No. 115,
deferred policy acquisition costs related to interest-sensitive life
insurance contracts were adjusted to reflect the effects that would have
been recognized had the unrealized gains relating to investments
classified as available-for-sale actually been realized, with a
corresponding charge directly to the separate component of shareholders'
equity. SFAS No. 115 may not be retroactively applied to prior years'
financial statements. The cumulative effect, as of January 1, 1994, of
the change in accounting principle was an increase in shareholders'
equity of $220.5 million, net of the related adjustment to deferred
policy acquisition costs of $60.7 million and deferred income taxes of
$118.8 million. Adoption of the Statement did not have an impact on net
income in the first nine months of 1994 nor will it in future periods.
In the first quarter of 1993, the Corporation adopted SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, and SFAS No. 109, Accounting for Income Taxes. SFAS No. 106
requires the Corporation to accrue the expected cost of providing
postretirement benefits, principally health care and life insurance, to
employees and their beneficiaries and covered dependents during the
years that the employees render the necessary service. The transition
obligation of $89.4 million, which represents the unfunded and
unrecognized accumulated postretirement benefit obligation as of January
1, 1993, was recognized in the first quarter of 1993 as the cumulative
effect of a change in accounting principle. The cumulative effect, net
of related income tax benefits of $30.4 million, was a decrease in net
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income of $59.0 million or $.65 per share. SFAS No. 109 prescribes an
asset and liability method of accounting for income taxes, the objective of
which is to recognize an asset or liability for the expected future tax
effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on the enacted
tax rates and other provisions of tax law. SFAS No. 109 was implemented
by including the cumulative effect of the change in accounting principle
in net income in the first quarter of 1993. Such cumulative effect was an
increase in net income of $39.0 million or $.43 per share. Excluding the
cumulative effect adjustments, the adoption of the two Statements did not
have a significant impact on net income in the first nine months of 1994 or
1993.
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 considered held-to-maturity are carried at
amortized cost. Fixed maturities considered available-for-sale are
carried at market value as of the balance sheet date. Prior to 1994,
fixed maturities considered available-for-sale were carried at the lower
of the aggregate amortized cost or market value as of the balance sheet
date. 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:
<TABLE>
<CAPTION>
Periods Ended September 30
--------------------------------
Third Quarter Nine Months
-------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Change in unrealized appreciation of
equity securities...................... $ 21.9 $43.9 $(100.4) $76.0
Change in unrealized appreciation or
depreciation of fixed maturities....... (72.7) - (503.4) -
Change in deferred policy acquisition
cost adjustment........................ 12.4 - 78.1 -
------ ----- ------- -----
(38.4) 43.9 (525.7) 76.0
Deferred income tax (credit)............ (13.4) 16.5 (184.0) 27.4
------ ----- ------- -----
(25.0) 27.4 (341.7) 48.6
Cumulative effect, as of January 1,
1994, of change in accounting
principle, net......................... - - 220.5 -
------ ----- ------- -----
Change in unrealized appreciation of
investments, net....................... $(25.0) $27.4 $(121.2) $48.6
====== ===== ======= =====
</TABLE>
<PAGE> 8
Page 6
4) Property and Casualty Claims and Claim Expenses
In 1993, Pacific Indemnity Company, a subsidiary of the
Corporation, entered into a global settlement agreement with Continental
Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard
Corporation and attorneys representing claimants against Fibreboard for
all future asbestos-related bodily injury claims against Fibreboard.
This agreement is subject to court approval. Pacific Indemnity and
Continental Casualty reached a separate agreement for the handling of
all pending asbestos-related bodily injury claims against Fibreboard.
That agreement further provides that the total responsibility of both
insurers with respect to pending and future asbestos-related bodily
injury claims against Fibreboard will be shared between Pacific
Indemnity and Continental Casualty on an approximate 35% and 65% basis,
respectively. As a result of these and other related agreements,
additional loss reserves of $675 million were provided in the third
quarter of 1993.
5) Commutation of Medical Malpractice Reinsurance Agreement
In August 1993, the Corporation announced its intention to
exercise its option to commute, as of December 31, 1995, a stop loss
reinsurance agreement relating to medical malpractice unpaid claims.
The commutation will result in a return premium to the Corporation's
property and casualty insurance subsidiaries of approximately
$125 million, which was recognized in the third quarter of 1993.
6) Per Share Data
Earnings per share amounts are based on the weighted average
number of common and common equivalent shares outstanding. The 6%
guaranteed exchangeable subordinated notes are considered to be common
equivalent shares. The computation assumes the addition to income of
the after-tax interest expense applicable to such notes.
<PAGE> 9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND
1993 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1994 AND 1993
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were significantly
higher in 1994 compared with the prior year. Results in 1993 were adversely
affected by a $675 million increase in loss reserves in the third quarter
related to an agreement for the settlement of asbestos-related litigation (the
"$675 million charge"). This was partially offset by a $125 million return
premium to the property and casualty insurance subsidiaries, recorded in the
third quarter of 1993, related to the Corporation's intention to exercise its
option to commute an unrelated existing medical malpractice reinsurance
agreement (the "$125 million return premium"). Discussions of the settlement
of the asbestos-related litigation and the return premium related to the
commutation of the medical malpractice reinsurance agreement are incorporated
by reference from Item 7 of the Registrant's Form 10-K for the year ended
December 31, 1993.
Property and casualty income after taxes amounted to $327.5 million in
the first nine months of 1994 compared with $1.2 million in 1993. Property and
casualty income after taxes was $139.9 million in the third quarter of 1994
compared with a loss after taxes of $227.5 million in the same period of 1993.
Excluding the effects of the $675 million charge and the $125 million return
premium, property and casualty income after taxes was $358.7 million in the
first nine months of 1993 and $130.0 million in the third quarter of that year.
Net premiums written were $3.0 billion in the first nine months of 1994
and $1.0 billion in the third quarter, representing increases of 13.0% and
15.0%, respectively, over the comparable periods of 1993, after excluding the
$125 million return premium from the 1993 amounts. The marketplace continued
to be competitive, particularly in the commercial classes. Property related
business has experienced some rate firming but price increases in casualty
lines continued to be difficult to achieve. Premium growth was due primarily
to the selective writing of new business, improved renewal retention of
customers who appreciate the stability, expertise and added value we provide,
and exposure growth on existing business.
Underwriting results were near breakeven in the first nine months of
1994 and profitable in the third quarter. Underwriting results were
significantly unprofitable in the first nine months and the third quarter of
1993 due to the adverse effect of the $675 million charge. Our combined loss
and expense ratio was 100.6% in the first nine months of 1994 and 95.9% in the
third quarter compared with 119.9% and 154.9%, respectively, in 1993.
Excluding the effects of the $675 million charge and the $125 million return
premium, the combined loss and expense ratio was 98.7% in the first nine months
of 1993 and 98.2% in the third quarter.
The loss ratio was 68.0% for the first nine months of 1994 and 63.8% for
the third quarter compared with 87.8% and 125.9%, respectively, in the prior
year. Excluding the effects of the $675 million charge and the $125 million
return premium, the loss ratio was 65.0% for the first nine months of 1993 and
65.2% for the third quarter. The loss ratio in the first nine months of 1994
was adversely affected by high catastrophe losses in the first quarter,
resulting primarily from the earthquake in California and the winter storms in
<PAGE> 10
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the eastern and midwestern parts of the United States. Catastrophe losses in
the first nine months of 1994 amounted to $163.9 million which represented 5.9
percentage points of the loss ratio compared with $72.9 million or 2.8
percentage points in 1993. Catastrophe losses for the third quarter of 1994
amounted to $3.6 million or 0.4 of a percentage point of the loss ratio
compared with $27.6 million or 2.8 percentage points in 1993.
Our expense ratio was 32.6% for the first nine months of 1994 and 32.1%
for the third quarter compared with 32.1% and 29.0%, respectively, in 1993.
Excluding the effect of the $125 million return premium, the expense ratio was
33.7% for the first nine months of 1993 and 33.0% for the third quarter. The
expense ratio in 1994 benefited from growth in written premiums at a greater
rate than the increase in overhead expenses. Expenses were reduced in the
first nine months of 1994 and 1993 by contingent profit sharing accruals of
$6.0 million ($2.0 million per quarter) relating to the medical malpractice
stop loss reinsurance agreement. A quarterly accrual similar to those in the
first three quarters is anticipated during the fourth quarter of 1994.
Underwriting results during 1994 and 1993 by class of business were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
--------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 142.6 $ 147.3 95.6% 98.3%
Homeowners........................ 326.8 322.9 118.2 98.7
Other............................. 149.7 147.5 83.3 84.6
-------- -------- ----- -----
619.1 617.7 104.6 95.2
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 453.6 396.0 112.2 110.4
Casualty.......................... 413.3 508.6(a) 105.0 213.2 (a)
Workers' Compensation............. 139.4 126.4 106.5 119.5
-------- -------- ----- -----
1,006.3 1,031.0(a) 108.5 162.6 (a)
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 524.9 451.2 77.3 79.2
Other............................. 575.4 489.1 104.0 100.7
-------- -------- ----- -----
1,100.3 940.3 91.0 90.1
-------- -------- ----- -----
Reinsurance Assumed................. 241.3 162.2 101.3 115.6
-------- -------- ----- -----
Total........................... $2,967.0 $2,751.2(a) 100.6% 119.9%(a)
======== ======== ===== =====
</TABLE>
(a) Includes the effects of the $675 million charge and the $125 million
return premium. Excluding the effects of these items, net premiums
written and the combined loss and expense ratio were $383.6 million and
100.1% for Casualty, $906.0 million and 107.3% for Standard Commercial
and $2,626.2 million and 98.7% in Total.
<PAGE> 11
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<TABLE>
<CAPTION>
Quarter Ended September 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
--------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 48.0 $ 49.1 95.7% 98.3%
Homeowners........................ 113.0 114.9 94.7 91.4
Other............................. 50.3 50.1 76.3 81.4
-------- -------- ----- -----
211.3 214.1 90.5 90.7
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 153.3 133.1 105.2 115.1
Casualty.......................... 129.0 251.5(b) 105.4 322.5 (b)
Workers' Compensation............. 44.7 38.6 103.7 125.2
-------- -------- ----- -----
327.0 423.2(b) 105.2 240.5 (b)
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 180.1 155.2 72.0 75.3
Other............................. 185.0 161.9 108.8 100.8
-------- -------- ----- -----
365.1 317.1 90.8 88.4
-------- -------- ----- -----
Reinsurance Assumed................. 130.4 69.5 97.3 111.7
-------- -------- ----- -----
Total........................... $1,033.8 $1,023.9(b) 95.9% 154.9%(b)
======== ======== ===== =====
</TABLE>
(b) Includes the effects of the $675 million charge and the $125 million
return premium. Excluding the effects of these items, net premiums
written and the combined loss and expense ratio were $126.5 million and
103.1% for Casualty, $298.2 million and 111.4% for Standard Commercial
and $898.9 million and 98.2% in Total.
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 21% of the premiums written by our property and casualty
insurance subsidiaries, increased less than 1% in the first nine months of 1994
and decreased 1.3% in the third quarter compared with the similar periods in
1993. It continues to be difficult to write new homeowners and other
non-automobile business due to our disciplined pricing. Rates for these
coverages have not increased during the past year. Personal automobile
premiums decreased modestly in 1994, which is consistent with our plan to
control our exposure in this class.
Our personal insurance business produced unprofitable underwriting
results in the first nine months of 1994 due to the adverse effect of the
significant catastrophe losses in the first quarter. Underwriting results were
profitable for the first nine months of 1993 and for the third quarter of both
1994 and 1993. The combined loss and expense ratio was 104.6% for the first
nine months of 1994 and 90.5% for the third quarter compared with 95.2% and
90.7%, respectively, in 1993.
Significant weather-related catastrophe losses in the first quarter of
the year adversely affected homeowners results in 1994 and, to a lesser extent,
in 1993. Catastrophe losses for this class represented 23.8 percentage points
of the loss ratio for the first nine months of 1994 and 1.5 percentage points
for the third quarter compared with 11.7 and 6.7 percentage points,
respectively, in the comparable 1993 periods. Other personal coverages, which
<PAGE> 12
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include insurance for personal valuables and excess liability, produced
profitable results in 1994 and 1993. Improvement in personal excess liability
results in 1994 due to favorable loss experience was offset by the adverse
effect of losses of personal valuables resulting from the earthquake in
California. Catastrophe losses represented 6.2 percentage points of the loss
ratio for other personal coverages in the first nine months of 1994 compared
with less than 1 percentage point in 1993. Our automobile business produced
profitable results in 1994 and 1993.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which include multiple
peril, casualty and workers' compensation, represent approximately 34% of our
total writings. Premiums from standard commercial insurance increased 11.1% in
the first nine months of 1994 and 9.7% in the third quarter compared with the
similar periods in 1993, after excluding the $125 million return premium
discussed below from the 1993 premium amounts. The competitive market has
continued to place significant pressure on prices. Premium growth was due
primarily to a combination of the disciplined writing of new accounts, improved
renewal retention and exposure growth on existing business.
In August 1993, the Corporation announced its intention to exercise its
option to commute, as of December 31, 1995, a stop loss reinsurance agreement
relating to medical malpractice unpaid claims. The Corporation's property and
casualty insurance subsidiaries recognized a return premium of approximately
$125 million in the third quarter of 1993 related to the commutation of this
agreement.
Our standard commercial business produced unprofitable underwriting
results in 1994 and 1993. Results were extremely unprofitable in 1993 due to
the adverse effect of the $675 million charge. The combined loss and expense
ratio was 108.5% for the first nine months of 1994 and 105.2% for the third
quarter compared with 162.6% and 240.5%, respectively, in 1993. Excluding the
effects of the $675 million charge and the $125 million return premium, the
combined loss and expense ratio was 107.3% for the first nine months of 1993
and 111.4% for the third quarter.
Casualty results in 1993 included the effects of the $675 million charge
and the $125 million return premium. Excluding the effects of these items,
casualty results deteriorated modestly in 1994 from the near breakeven results
in 1993. Results in the excess liability component were adversely affected in
1994 by several large losses but remained profitable. These favorable results
were offset in varying degrees in 1994 and 1993 by the need to increase
reserves for asbestos-related and toxic waste claims. Results in the
automobile component were profitable in 1994 and 1993.
Multiple peril results deteriorated modestly in the first nine months of
1994 due to the adverse effect of significant catastrophe losses in the first
quarter, resulting primarily from the earthquake in California. Catastrophe
losses for this class represented 12.4 percentage points of the loss ratio for
the first nine months of 1994 and were negligible in the third quarter compared
with 6.0 and 11.4 percentage points, respectively, in the comparable 1993
periods. Multiple peril results, excluding the impact of catastrophes,
improved in the first nine months of 1994 due primarily to better overseas
property results. Workers' compensation results improved in 1994 but remained
unprofitable. Results in this class were aggravated in 1993 by our share of
the significant losses incurred by the involuntary pools and mandatory business
in which we must participate by law.
<PAGE> 13
Page 11
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial business, which represent
approximately 37% of our total writings, increased by 17.0% in the first nine
months of 1994 and 15.1% in the third quarter compared with the same periods a
year ago. The increases were due to new business opportunities and rate and
exposure increases. Our strategy of working closely with our customers and
our ability to differentiate our products have enabled us to renew a large
percentage of our business.
Our specialty commercial business produced substantial underwriting
profits in both 1994 and 1993. The combined loss and expense ratio was 91.0%
for the first nine months of 1994 and 90.8% for the third quarter compared with
90.1% and 88.4%, respectively, in 1993. Our executive protection, financial
fidelity and surety results were highly profitable in both years due to
favorable loss experience. The non-fidelity portion of our financial
institutions business deteriorated in 1994, particularly in the third quarter,
due in part to several large losses. Marine results were unprofitable in the
first nine months of 1994 compared with profitable results in 1993. The
deterioration was mostly due to significant catastrophe losses in the first
quarter, resulting primarily from the earthquake in California. Results in
several of our smaller specialty classes improved in the first nine months of
1994.
REINSURANCE ASSUMED
Premiums from reinsurance assumed, which is primarily treaty reinsurance
from the Sun Alliance Group plc, represent approximately 8% of our total
premium writings. Premiums increased 48.8% in the first nine months of 1994
and 87.6% in the third quarter compared with the same periods in 1993 due to an
increase in our participation in the business of Sun Alliance. Premiums
written in the third quarter of 1994 included approximately $40 million
relating to our assumption of unearned premiums in connection with the increase
in our participation. Underwriting results for this segment improved
significantly in 1994 compared with the prior year due to risk selection and
rating measures taken as well as favorable weather conditions in the United
Kingdom.
REGULATORY INITIATIVES
In 1988, voters in California approved Ballot Proposition 103, an
insurance reform initiative which affects most property and casualty insurers
writing business in the state. Approximately 14% of the direct business of the
Corporation's property and casualty subsidiaries is written in California.
Provisions of Proposition 103 would have required insurers to roll back
property and casualty rates for certain lines of business to 20 percent below
November 1987 levels and would have required an additional 20 percent reduction
in automobile rates by November 1989. In 1989, the California Supreme Court,
ruling on the constitutional challenge to Proposition 103, held that an insurer
is entitled to a fair rate of return. Since the approval of Proposition 103,
the California Insurance Department has attempted to establish regulations to
implement its provisions. The implementation of such regulations has been
challenged by several lawsuits and the California courts have ruled on related
issues.
<PAGE> 14
Page 12
In August 1994, the California Supreme Court issued a decision upholding
rollback regulations issued by the California Insurance Commissioner which had
been ruled invalid by a lower court. These regulations limit the allowable
rate of return which an insurer could earn on California business for the
rollback period to a rate determined by the Insurance Commissioner and limit
the amount of surplus on which an insurer could earn profit during that period.
It is not clear what implications, if any, this decision will have on future
property and casualty insurance rates in California. It is anticipated that a
petition for review of the California Supreme Court's decision will be filed
with the United States Supreme Court by members of the insurance industry,
including the property and casualty subsidiaries of the Corporation.
None of our property and casualty subsidiaries have been among the
companies thus far ordered to refund premiums for the rollback period. Based
on our analysis of the operating results of our property and casualty
subsidiaries in the State of California during the rollback period, it is
management's belief that it is probable that a final resolution of this matter
will not result in premium refunds of a material amount by the Corporation's
property and casualty subsidiaries.
LOSS RESERVES
Loss reserves, net of reinsurance recoverable, increased by $405.4
million during the first nine months of 1994. Loss reserves were reduced
during the first nine months of 1994 by payments aggregating $182 million
related to pending asbestos-related bodily injury claims against Fibreboard
Corporation. Loss reserves in the third quarter of 1994 were increased by
approximately $90 million from our assumption of loss reserves in connection
with the increase in our participation in the business of Sun Alliance.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 4.6%
in the first nine months of 1994 and 5.7% in the third quarter compared with
the comparable periods in 1993. The growth was due primarily to an increase in
invested assets since the third quarter of 1993, reflecting the strong cash
flow from operations, and to higher yields on new investments. The effective
tax rate on investment income was 14.9% in the first nine months of 1994
compared with 14.7% in the same period in 1993. In the first nine months of
1994, new cash was invested in taxable bonds and, to a lesser extent, equity
securities. We also increased our short term investments. We maintain
investments in highly liquid short term securities at all times to provide for
immediate cash needs. At September 30, 1994, such investments were at a higher
than normal level so that funds are readily available to pay amounts related to
the Fibreboard settlement.
LIFE AND HEALTH INSURANCE
The life and health insurance subsidiaries had earnings after taxes of
$12.2 million for the first nine months of 1994 compared with $47.0 million in
1993. Total life and health insurance premiums and policy charges amounted to
$641.9 million in the first nine months of 1994 compared with $574.8 million in
1993.
<PAGE> 15
Page 13
Premiums and policy charges for personal insurance amounted to $199.4
million in the first nine months of 1994, an increase of 13.0% from the same
period in 1993. Earnings in personal lines were $26.2 million in the first
nine months of 1994 compared with $27.5 million for the same period in 1993.
The decrease in earnings was due to higher mortality experience in the third
quarter of 1994, primarily in our universal life and term products. Earnings
in 1994 benefited from the favorable settlement of litigation in the second
quarter related to certain previously purchased software systems. Tax benefits
of $2.3 million were recognized in the first nine months of 1993 as a result of
settlement of prior years' taxes.
Premium revenue for group insurance was $442.5 million for the first
nine months of 1994, an 11.1% increase compared with the same period in 1993.
Premium revenue for the third quarter of 1994 was $131.4 million, a 19.8%
decrease compared with the same period in 1993. Due to legislation which
became effective in April 1993 in New York, which is our major market, several
insurers reduced their market share in the small group health segment. We
offered a competitive product and thus substantially increased our sales in
that market. The growth in premium revenue in the first six months of 1994
reflected the effect of the significant increase in sales of new policies
during the last three quarters of 1993. Due to increased levels of competition
in the small group market in 1994 as well as our significant rate increases,
some of the new policies written in 1993, which became eligible for renewal
beginning in April 1994, were not renewed. The decline in premium revenue in
the third quarter of 1994 was primarily due to this increase in non-renewals.
We anticipate that this trend will continue during the remainder of 1994.
Group insurance operations resulted in a loss of $14.0 million for the
first nine months of 1994 compared with income of $19.5 million for the same
period in 1993. The deterioration was due to higher lapses and to
significantly greater claim activity related to group health policies than was
anticipated when new rates were developed in 1993. While we have increased
rates substantially, we expect results in the fourth quarter of 1994 to compare
unfavorably with results in the comparable 1993 period.
We expect traditional indemnity health premium revenue to continue to
decrease as our insureds respond to the higher cost of traditional indemnity
coverage and consider managed care alternatives. In response to this market
need, the life and health insurance subsidiaries are offering managed care
products through ChubbHealth, Inc., a health maintenance organization (HMO),
which commenced business in the second quarter of 1994.
Gross investment income increased by 2.8% in the first nine months of
1994 over the same period in 1993. New cash was invested primarily in
mortgage-backed securities. To provide for liquidity, funds believed to be
sufficient to meet any unusual needs for cash have been maintained in short
term securities.
REAL ESTATE
Real estate operations resulted in a loss after taxes of $1.4 million
for the first nine months of 1994 compared with a loss of $2.5 million in 1993.
Earnings were adversely affected in both periods by increased portions of
interest costs being charged directly to expense rather than being capitalized
as well as provisions for possible uncollectible receivables related to
mortgages. In 1993, results were also adversely affected by a $3.2 million tax
charge in the third quarter related to the corporate tax rate increase.
Revenues were $148.2 million in the first nine months of 1994 compared with
$112.8 million in 1993.
<PAGE> 16
Page 14
CORPORATE
In July 1994, the Corporation replaced its $300 million revolving credit
agreement which would have terminated in November 1994 with a new agreement
which will provide for unsecured borrowings of up to the same amount. The new
agreement includes generally the same terms and conditions as the previous
agreement and will terminate in July 1997.
During the third quarter of 1994, the Corporation repurchased 516,100
shares of common stock in open-market transactions at a cost of $37.0 million.
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.
Investment gains before taxes of $45.2 million were realized in the first nine
months of 1994 compared with gains of $193.5 million for the same period in
1993. The higher gains in 1993 were due to the sale of fixed maturities in the
first half of the year as part of the realignment of our portfolio and in the
third quarter to realize gains to partially offset the reduction in statutory
surplus of the property and casualty insurance subsidiaries resulting from the
decrease in income related to the asbestos-related settlement.
FEDERAL INCOME TAXES
The Omnibus Budget Reconciliation Act of 1993 was enacted on August 10,
1993. One provision of the Act increased the federal corporate tax rate from
34% to 35%, retroactive to January 1, 1993. The federal income tax provision
for the third quarter of 1993 reflected the effect of the rate increase on
deferred income tax assets and liabilities as of January 1, 1993, as required
by the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as well as the effect of retroactively applying
the higher tax rate to pre-tax income for the first six months of 1993. The
net effect on consolidated income taxes in the third quarter of 1993 was
immaterial; however, the effect of the 1% increase in the tax rate on the
various business segments was as follows:
Property and casualty underwriting $(10.8)
Property and casualty investment income 2.9
Life and health insurance 1.9
Real estate 3.2
Realized investment gains 0.4
------
Consolidated tax benefit $ (2.4)
======
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As a result, a substantial portion
of our fixed maturity portfolio is now carried at market value, with unrealized
appreciation or depreciation excluded from income and credited or charged
directly to a separate component of shareholders' equity. The cumulative
<PAGE> 17
Page 15
effect of this change in accounting principle was an increase in shareholders'
equity of $220.5 million as of January 1, 1994. However, due to rising
interest rates in the first nine months of 1994 and the resulting decrease in
the market value of fixed maturities, the effect of this change in accounting
principle on shareholders' equity at September 30, 1994 was a reduction of
$55.9 million. The adoption of SFAS No. 115 did not have an impact on net
income in the first nine months of 1994. At September 30, 1994, the unrealized
appreciation of that portion of our fixed maturity portfolio still carried at
amortized cost was $93 million. Such unrealized appreciation was not reflected
in the consolidated financial statements.
In the first quarter of 1993, the Corporation adopted SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS
No. 109, Accounting for Income Taxes. Net income in the first quarter of 1993
reflected a one-time charge of $20.0 million for the cumulative effect of these
changes in accounting principles.
These changes in accounting principles are discussed further in Note 2
of the Notes to Consolidated Financial Statements.
<PAGE> 18
Page 16
PART II. OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit 11.1 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended September 30, 1994.
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 10, 1994
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
<PAGE> 1
Exhibit 11.1
THE CHUBB CORPORATION
COMPUTATION OF EARNINGS PER SHARE
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net income (loss)............................ $152.7 $(130.6) $372.6 $163.7
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes............. 2.4 2.3 7.3 7.3
------ ------- ------ ------
Net income (loss) for computing earnings
per share................................... $155.1 $(128.3) $379.9 $171.0
====== ======= ====== ======
Average number of common shares
outstanding................................. 87.6 87.7 87.7 87.6
Additional shares from assumed conversion
of 6% guaranteed exchangeable subordinated
notes as if each $1,000 of principal
amount had been converted at issuance
into 11.628 shares of common stock.......... 2.9 2.9 2.9 2.9
------ ------- ------ ------
Average number of common and common
equivalent shares assumed outstanding for
computing earnings per share................ 90.5 90.6 90.6 90.5
====== ======= ====== ======
Net income (loss) per share.................. $ 1.71 $ (1.42) $ 4.19 $ 1.89
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE CHUBB CORPORATION
Financial Data Schedule(*)
(*) This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Consolidated Statements of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 6,541<F1>
<DEBT-CARRYING-VALUE> 3,813<F2>
<DEBT-MARKET-VALUE> 3,906<F3>
<EQUITIES> 1,015
<MORTGAGE> 12
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,380
<CASH> 5
<RECOVER-REINSURE> 45<F4>
<DEFERRED-ACQUISITION> 1,115
<TOTAL-ASSETS> 20,486
<POLICY-LOSSES> 11,336<F5>
<UNEARNED-PREMIUMS> 2,393<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,428<F7>
<COMMON> 88
0
0
<OTHER-SE> 4,222<F8>
<TOTAL-LIABILITY-AND-EQUITY> 20,486
3,432
<INVESTMENT-INCOME> 614
<INVESTMENT-GAINS> 45
<OTHER-INCOME> 148<F9>
<BENEFITS> 2,470
<UNDERWRITING-AMORTIZATION> 820
<UNDERWRITING-OTHER> 318
<INCOME-PRETAX> 445
<INCOME-TAX> 72
<INCOME-CONTINUING> 373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 373
<EPS-PRIMARY> 4.19
<EPS-DILUTED> 0
<RESERVE-OPEN> 0<F10>
<PROVISION-CURRENT> 0<F10>
<PROVISION-PRIOR> 0<F10>
<PAYMENTS-CURRENT> 0<F10>
<PAYMENTS-PRIOR> 0<F10>
<RESERVE-CLOSE> 0<F10>
<CUMULATIVE-DEFICIENCY> 0<F10>
<FN>
<F1>DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS
AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS
NO. 115.
<F2>DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS
HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO.
115.
<F3>DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES
CLASSIFIED AS HELD-TO-MATURITY.
<F4>RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS.
<F5>POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON
UNPAID CLAIMS ($1,903) AND POLICY LIABILITIES ($184), AS PRESCRIBED BY
SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($463), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $141 AND LONG-TERM DEBT OF $1,287.
<F8>OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY
TRANSLATION GAINS, NET OF INCOME TAX; UNREALIZED APPRECIATION OF
INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK.
<F9>OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS.
<F10>AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY
GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY,
NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
</FN>
</TABLE>
