<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, 1996
-----------------------------
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)
<TABLE>
<S> <C>
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)
</TABLE>
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, 1996
was 174,010,087.
<PAGE> 2
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, 1996 and December 31, 1995..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1996 and 1995.................................. 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995................ 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....................... 15
</TABLE>
<PAGE> 3
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
--------- --------
(in millions)
Assets
<S> <C> <C>
Invested Assets
Short Term Investments............................... $ 665.4 $ 484.5
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $2,607.9 and $3,004.8)......... 2,489.6 2,826.7
Taxable (market $403.1 and $433.9)................ 391.8 402.5
Available-for-Sale
Tax Exempt (cost $4,207.9 and $3,607.9)........... 4,368.2 3,860.6
Taxable (cost $6,051.2 and $5,282.7).............. 6,103.3 5,513.0
Equity Securities (cost $596.5 and $493.4)........... 696.3 587.8
Policy and Mortgage Loans............................ 222.4 212.3
--------- ---------
TOTAL INVESTED ASSETS......................... 14,937.0 13,887.4
Cash................................................... 9.9 11.9
Accrued Investment Income.............................. 227.5 245.3
Premiums Receivable.................................... 972.6 872.9
Reinsurance Recoverable on Property and Casualty
Unpaid Claims......................................... 1,790.3 1,973.7
Prepaid Reinsurance Premiums........................... 348.3 484.4
Funds Held for Asbestos-Related Settlement............. 670.7 1,038.1
Deferred Policy Acquisition Costs
Property and Casualty Insurance...................... 601.7 558.7
Life and Health Insurance............................ 682.3 612.7
Real Estate Assets..................................... 1,765.1 1,742.6
Deferred Income Tax.................................... 260.7 159.7
Other Assets........................................... 1,315.8 1,409.1
--------- ---------
TOTAL ASSETS.................................. $23,581.9 $22,996.5
========= =========
Liabilities
Property and Casualty Unpaid Claims.................... $ 9,540.5 $ 9,588.2
Life and Health Policy Liabilities..................... 3,176.9 2,943.1
Unearned Premiums...................................... 2,631.6 2,570.7
Short Term Debt........................................ 250.5 187.6
Long Term Debt......................................... 1,078.0 1,156.0
Dividend Payable to Shareholders....................... 47.0 42.7
Accrued Expenses and Other Liabilities................. 1,446.8 1,245.5
--------- ---------
TOTAL LIABILITIES............................. 18,171.3 17,733.8
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 175,615,237 and
87,819,355 Shares (Note 5)............................ 175.6 87.8
Paid-In Surplus........................................ 685.1 778.2
Retained Earnings...................................... 4,555.9 4,206.5
Foreign Currency Translation Losses, Net of Income Tax. (19.0) (3.4)
Unrealized Appreciation of Investments, Net............ 191.2 345.9
Receivable from Employee Stock Ownership Plan.......... (110.7) (115.0)
Treasury Stock, at Cost - 1,567,513 and
518,468 Shares (Note 5)............................... (67.5) (37.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 5,410.6 5,262.7
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $23,581.9 $22,996.5
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues
Premiums Earned and Policy Charges.... $1,212.0 $1,206.1 $3,702.4 $3,557.2
Investment Income..................... 238.1 229.9 704.9 667.0
Real Estate........................... 52.4 77.0 269.8 225.0
Realized Investment Gains............. 0.5 20.3 37.6 74.0
-------- -------- -------- --------
Total Revenues................. 1,503.0 1,533.3 4,714.7 4,523.2
-------- -------- -------- --------
Benefits, Claims and Expenses
Insurance Claims and Policyholders'
Benefits............................. 815.9 816.3 2,523.6 2,391.6
Amortization of Deferred Policy
Acquisition Costs.................... 327.5 304.2 989.1 891.9
Other Insurance Operating Costs and
Expenses............................. 97.5 109.5 302.2 340.5
Real Estate Cost of Sales and Expenses 47.5 73.1 253.5 220.3
Investment Expenses................... 3.1 2.9 11.9 11.2
Corporate Expenses.................... 6.3 6.0 21.0 21.8
-------- -------- -------- --------
Total Benefits, Claims and
Expenses...................... 1,297.8 1,312.0 4,101.3 3,877.3
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................. 205.2 221.3 613.4 645.9
Federal and Foreign Income Tax.......... 40.0 49.9 122.5 142.8
-------- -------- -------- --------
Net Income.............................. $ 165.2 $ 171.4 $ 490.9 $ 503.1
======== ======== ======== ========
Average Common and Common Equivalent
Shares Outstanding (In Thousands)...... 180,001 179,966 180,291 179,753
PER SHARE DATA
- --------------
Net Income.............................. $ .93 $ .97 $ 2.76 $ 2.84
Dividends Declared...................... .27 .24 1/2 .81 .73 1/2
</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>
1996 1995
---- ----
(in millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income............................................. $ 490.9 $ 503.1
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims, Net. 135.7 526.2
Increase in Unearned Premiums, Net................... 197.0 179.1
Increase in Premiums Receivable...................... (99.7) (60.4)
Decrease (Increase) in Funds Held for Asbestos-
Related Settlement.................................. 367.4 (483.6)
Decrease in Medical Malpractice Reinsurance
Related Receivable.................................. 191.2 -
Increase in Deferred Policy Acquisition Costs........ (85.4) (93.9)
Depreciation......................................... 49.4 45.7
Realized Investment Gains............................ (37.6) (74.0)
Other, Net........................................... 42.9 (7.0)
--------- ---------
Net Cash Provided by Operating Activities.............. 1,251.8 535.2
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................ 2,466.4 2,932.2
Proceeds from Maturities of Fixed Maturities........... 708.1 584.1
Proceeds from Sales of Equity Securities............... 183.8 330.0
Purchases of Fixed Maturities.......................... (4,192.2) (4,362.1)
Purchases of Equity Securities......................... (253.5) (156.2)
Decrease (Increase) in Short Term Investments, Net..... (180.9) 175.7
Increase in Net Payable from Security Transactions
Not Settled........................................... 86.9 37.5
Additions to Real Estate Assets, Net................... (40.8) (40.2)
Other, Net............................................. (79.5) (92.8)
--------- ---------
Net Cash Used in Investing Activities.................. (1,301.7) (591.8)
--------- ---------
Cash Flows from Financing Activities
Deposits Credited to Policyholder Funds................ 358.9 338.3
Withdrawals from Policyholder Funds.................... (124.3) (102.9)
Proceeds from Issuance of Long Term Debt............... 5.0 151.5
Repayment of Long Term Debt............................ (83.0) (272.1)
Increase in Short Term Debt, Net....................... 62.9 50.7
Dividends Paid to Shareholders......................... (137.2) (124.9)
Repurchase of Shares................................... (56.4) -
Other, Net............................................. 22.0 15.2
--------- ---------
Net Cash Provided by Financing Activities.............. 47.9 55.8
--------- ---------
Net Decrease in Cash..................................... (2.0) (0.8)
Cash at Beginning of Year................................ 11.9 5.6
--------- ---------
Cash at End of Period.................................. $ 9.9 $ 4.8
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 6
Page 4
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 1995 Annual
Report to Shareholders.
2) Discontinued Operations
In the second quarter of 1996, the Corporation announced a plan
to exit the group health insurance business. A definitive agreement was
reached on May 31, 1996 with Healthsource Inc. under which Healthsource
will acquire the Corporation's 85% interest in ChubbHealth, Inc., a
health maintenance organization, for $25 million. The sale is subject
to regulatory approvals and is expected to be completed no later than
the second quarter of 1997. Also, the life and health insurance
subsidiaries discontinued the marketing of traditional group health
indemnity business. Due to various contractual and regulatory
requirements, group health indemnity coverages will be renewed in
certain jurisdictions until an orderly transition to another carrier or
termination of coverage can occur.
The group health insurance operations have been accounted for as
discontinued operations. However, the Corporation's results of
operations for periods prior to the second quarter of 1996 have not been
restated since amounts attributable to the group health insurance
business were not significant. It is expected that the sale of
ChubbHealth will result in an after tax gain of approximately $15
million which will be substantially offset by costs relating to the life
and health insurance subsidiaries' exit from the traditional indemnity
business. The discontinued group health business had no effect on net
income subsequent to March 31, 1996. Results of the discontinued group
health insurance operations included in the consolidated statements of
income were as follows:
<TABLE>
<CAPTION>
Periods Ended September 30
--------------------------------
Third Quarter Nine Months
------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Premiums earned.................. - $64.3 $57.5 $250.9
Net loss......................... - (1.5) (1.0) (7.6)
</TABLE>
3) Investments
Short term investments, which have an original maturity of one
year or less, are carried at amortized cost which approximates market
value. Fixed maturities classified as held-to-maturity are carried at
amortized cost. Fixed maturities classified as available-for-sale and
equity securities are carried at market value as of the balance sheet
date.
<PAGE> 7
Page 5
The net change in unrealized appreciation or depreciation of
investments carried at market value was as follows:
<TABLE>
<CAPTION>
Periods Ended September 30
--------------------------------
Third Quarter Nine Months
------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Change in unrealized appreciation of
equity securities.................... $(2.4) $24.7 $ 5.4 $ 68.6
Change in unrealized appreciation or
depreciation of fixed maturities..... 65.7 50.8 (270.6) 478.1
Change in deferred policy acquisition
cost adjustment...................... (7.0) 3.5 27.2 (56.5)
----- ----- ------- ------
56.3 79.0 (238.0) 490.2
Deferred income tax (credit), net of
change in valuation allowance........ 19.7 27.8 (83.3) 122.0
----- ----- ------- ------
Change in unrealized appreciation or
depreciation of investments, net..... $36.6 $51.2 $(154.7) $368.2
===== ===== ======= ======
</TABLE>
A valuation allowance of $49.6 million was provided at December
31, 1994 related to future tax benefits on unrealized depreciation of
investments carried at market value. At March 31, 1995, there was
unrealized appreciation of such investments. Therefore, the valuation
allowance was eliminated in the first quarter of 1995. The valuation
allowance had no impact on net income.
4) Property and Casualty Unpaid Claims
A discussion of the 1993 Fibreboard asbestos-related settlement
is presented in Note 14 of the notes to consolidated financial
statements in the 1995 Annual Report to Shareholders. The following
developments during 1996 relate to the settlement.
In July 1996, the United States Court of Appeals for the Fifth
Circuit affirmed the 1995 judgment of the United States District Court
of the Eastern District of Texas, which approved the global settlement
agreement among Pacific Indemnity Company (a subsidiary of the
Corporation), Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation and attorneys
representing claimants against Fibreboard for all future
asbestos-related bodily injury claims against Fibreboard, which are
claims that were not filed in court before August 27, 1993. The Court
also affirmed the approval of the trilateral agreement among Pacific
Indemnity, Continental Casualty and Fibreboard to settle all pending and
future asbestos-related bodily injury claims resulting from insurance
policies that were, or may have been, issued to Fibreboard by the two
insurers. The trilateral agreement will be triggered if the global
settlement agreement is disapproved. The affirmation of these
agreements had no effect on the amount of loss reserves provided for the
settlement. A petition for re-hearing the global settlement agreement
before the entire Fifth Circuit Court is pending. Should the petition
for re-hearing be denied, an appeal to the United States Supreme Court
by the objectors to
<PAGE> 8
Page 6
the settlement is expected. No petition for re-hearing the trilateral
agreement by the entire Fifth Circuit Court was filed. Management
believes that the period during which an appeal of the trilateral
agreement to the United States Supreme Court had to be filed expired on
October 24, 1996 and that the agreement is therefore final. On that
basis, management believes that the uncertainty of our exposure with
respect to asbestos-related bodily injury claims against Fibreboard has
been eliminated.
5) Shareholders' Equity
On March 1, 1996, the Board of Directors approved a two-for-one
stock split payable to shareholders of record as of April 19, 1996.
Accordingly, in the consolidated balance sheet at September 30, 1996,
the shares of common stock issued and the shares held as treasury stock
reflect the effect of the stock split.
At the same time, the Board of Directors approved an increase in
the number of authorized shares of common stock of the Corporation from
300 million shares to 600 million shares.
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. The number of
shares and per share amounts have been retroactively adjusted to reflect
the two-for-one stock split.
<PAGE> 9
Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
1995 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business in the first nine
months of 1996 were similar to those in the comparable 1995 period as a
decrease in underwriting income was substantially offset by higher investment
income. The decrease in underwriting income in 1996 was due to higher
catastrophe losses, resulting primarily from the winter storms in the eastern
part of the United States in the first quarter. Property and casualty income
after taxes amounted to $415.7 million in the first nine months of 1996 and
$145.8 million in the third quarter compared with $418.5 million and $139.9
million, respectively, in 1995.
Net premiums written were $3.6 billion in the first nine months of 1996
and $1.2 billion in the third quarter, representing increases of 10.3% and
6.1%, respectively, over the comparable periods of 1995. More than half of the
premium growth was due to changes in certain reinsurance agreements which are
discussed below. The marketplace remained competitive, particularly in the
commercial classes, in all our markets worldwide. Competitors continued to
place significant pressure on pricing as they attempted to maintain or increase
market share. As a result, price increases have been difficult to achieve. In
this environment, we have focused on our specialty lines where we emphasize the
added value we provide to our customers. In the first nine months of 1996,
substantial premium growth was achieved outside the United States from our
expanding international branch network. Such growth slowed in the third
quarter due in large part to the discontinuation of our participation in
certain pools of accident business in Europe.
Effective January 1, 1996, the agreements pertaining to the exchange of
reinsurance on a quota share basis with the Sun Alliance Group plc were amended
to reduce the portion of each company's business that is reinsured with the
other. The Corporation's property and casualty subsidiaries now retain a
greater portion of the business they write directly and assume less reinsurance
from Sun Alliance. As a result of these changes in retention, net premiums
written in the first nine months of 1996 increased by $48.2 million for the
personal classes and $103.0 million for the commercial classes and decreased by
$64.0 million for reinsurance assumed. There was an additional impact on net
premiums written in the first quarter of 1996 due to the effect of the
portfolio transfers of unearned premiums as of January 1, 1996 resulting from
these changes. The effect of these portfolio transfers was an increase in net
premiums written of $30.6 million for the personal classes and $61.0 million
for the commercial classes and a decrease of $65.2 million for reinsurance
assumed.
Also, effective January 1, 1996, our casualty excess of loss reinsurance
program was modified, principally for excess liability and executive protection
coverages. The changes include an increase in the initial retention for each
loss from $5 million to $10 million and an increase in the initial aggregate
amount of losses retained for each year before reinsurance becomes available.
These changes in our casualty reinsurance program increased net premiums
written in the first nine months of 1996 by approximately $90 million.
<PAGE> 10
Page 8
Underwriting results were profitable in 1996 and 1995. Our combined
loss and expense ratio was 98.3% in the first nine months of 1996 and 97.2% in
the third quarter compared with 96.5% and 96.9%, respectively, in 1995.
The loss ratio was 66.2% for the first nine months of 1996 and 65.4% for
the third quarter compared with 64.4% and 65.4%, respectively, in the prior
year. The loss ratios continue to reflect the favorable experience resulting
from the consistent application of our disciplined underwriting standards.
Catastrophe losses in the first nine months of 1996 amounted to $107.8 million
which represented 3.2 percentage points of the loss ratio compared with $55.1
million or 1.8 percentage points in 1995. Catastrophe losses for the third
quarter of 1996 amounted to $23.9 million or 2.1 percentage points of the loss
ratio compared with $6.0 million or 0.6 of a percentage point in 1995.
Our expense ratio was 32.1% for the first nine months of 1996 and 31.8%
for the third quarter compared with 32.1% and 31.5%, respectively, in 1995.
The discussion of underwriting results reflects certain
reclassifications to present results in a manner more consistent with the way
the property and casualty business is now managed. Prior period amounts have
been restated to conform with the new presentation.
Underwriting results during 1996 and 1995 by class of business were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
--------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 184.9 $ 152.0 86.2% 87.2%
Homeowners........................ 413.8 342.3 107.8 91.1
Other............................. 192.1 160.4 67.5 73.3
-------- -------- ----- -----
Total Personal................ 790.8 654.7 93.0 85.8
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 496.1 418.0 117.8 111.5
Casualty.......................... 620.3 548.4 111.8 113.0
Workers' Compensation............. 183.8 164.0 100.1 94.8
Property and Marine............... 377.9 332.9 95.3 89.4
Executive Protection.............. 578.2 484.2 78.4 81.2
Other............................. 407.0 378.0 88.2 97.8
-------- -------- ----- -----
Total Commercial.............. 2,663.3 2,325.5 99.2 99.1
-------- -------- ----- -----
Reinsurance Assumed................. 135.3 275.2 N/M 100.4
-------- -------- ----- -----
Total......................... $3,589.4 $3,255.4 98.3% 96.5%
======== ======== ===== =====
</TABLE>
The combined loss and expense ratio for Reinsurance Assumed was not meaningful
for the first nine months of 1996 due to the effect of the portfolio transfer
of unearned premiums on the expense ratio.
<PAGE> 11
Page 9
<TABLE>
<CAPTION>
Quarter Ended September 30
--------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
--------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 63.0 $ 52.6 87.4% 81.2%
Homeowners........................ 139.1 124.4 98.4 86.6
Other............................. 61.8 54.9 67.4 72.3
-------- -------- ----- -----
Total Personal................ 263.9 231.9 88.3 81.9
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 170.4 142.4 117.0 121.3
Casualty.......................... 198.5 173.3 113.1 116.6
Workers' Compensation............. 55.8 57.8 108.4 91.1
Property and Marine............... 122.7 118.3 99.8 92.7
Executive Protection.............. 196.6 164.9 72.2 80.0
Other............................. 131.2 130.0 89.8 92.4
-------- -------- ----- -----
Total Commercial.............. 875.2 786.7 99.4 100.8
-------- -------- ----- -----
Reinsurance Assumed................. 66.7 117.6 102.9 99.7
-------- -------- ----- -----
Total......................... $1,205.8 $1,136.2 97.2% 96.9%
======== ======== ===== =====
</TABLE>
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 22% of the premiums written by our property and casualty
insurance subsidiaries, increased 20.8% in the first nine months of 1996 and
13.8% in the third quarter compared with the similar periods in 1995. More
than half of such growth in the first nine months of 1996 was due to the
changes in the reinsurance agreement with Sun Alliance which resulted in both
the portfolio transfer of unearned premiums as of January 1, 1996 and an
increase in our retention percentage for these classes. Similarly, half of the
growth in the third quarter for these classes was due to the increase in our
retention. Excluding the effects of the changes in the reinsurance agreement,
homeowners and other non-automobile premiums increased due to further progress
made to increase premiums written in non-catastrophe prone areas and personal
automobile premiums increased as a result of an increase in the number of
in-force policies for high value automobiles.
Our personal insurance business produced less profitable underwriting
results in 1996 than the highly profitable results in the prior year. The
combined loss and expense ratios were 93.0% for the first nine months of 1996
and 88.3% for the third quarter compared with 85.8% and 81.9%, respectively, in
1995.
Homeowners results were unprofitable in the first nine months of 1996
compared with profitable results in the same period in 1995. Weather-related
catastrophe losses adversely affected homeowners results in the first nine
months of both years, but more so in 1996. Catastrophe losses for this class
represented 17.9 percentage points of the loss ratio for the first nine months
of 1996 and 6.5 percentage points for the third quarter compared with 9.8 and
<PAGE> 12
Page 10
3.8 percentage points, respectively, in the comparable 1995 periods.
Homeowners results in 1995 also benefited from an unusually low number of large
losses. Other personal coverages, which include insurance for personal
valuables and excess liability, produced highly profitable results in 1996 and
1995 due to continued favorable loss experience. Our automobile business
produced profitable results in 1996 and 1995 due primarily to stable loss
frequency and severity.
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent approximately 74% of
our total writings, increased by 14.5% in the first nine months of 1996 and
11.3% in the third quarter compared with the similar periods in 1995.
Approximately half of the growth in premiums in the first nine months of 1996
was due to the changes in the reinsurance agreement with Sun Alliance which
resulted in both the portfolio transfer of unearned premiums as of January 1,
1996 and an increase in our retention percentage for these classes. Similarly,
40% of the growth in the third quarter for these classes was due to the
increase in our retention. In addition, premium growth in 1996 for the excess
liability component of our casualty coverages and for our executive protection
coverages benefited from the changes in our casualty excess of loss reinsurance
program. Excluding the effects of the changes in our reinsurance agreements,
premium growth was due primarily to the selective writing of new accounts and
exposure growth on existing business. The competitive market has continued to
place significant pressure on prices and has made price increases difficult to
achieve for most coverages. Premium growth in the first nine months of 1996
was strong outside the United States for property and marine, executive
protection and financial institution coverages. Premium growth in the other
commercial coverages was adversely affected in the third quarter by the
discontinuation of our participation in certain pools of accident business in
Europe.
Our commercial insurance business produced marginally profitable
underwriting results in 1996 and 1995. The combined loss and expense ratios
were 99.2% for the first nine months of 1996 and 99.4% for the third quarter
compared with 99.1% and 100.8%, respectively, in 1995.
Multiple peril results deteriorated in the first nine months of 1996
compared with 1995 due primarily to an increase in catastrophe losses in the
property component of this business and, to a lesser extent, an increase in the
frequency of large losses in the liability component. Catastrophe losses in
the first nine months of 1996 represented 4.8 percentage points of the loss
ratio for this class compared with 1.4 percentage points in 1995.
Results for our casualty business were similarly unprofitable in 1996
and 1995. Casualty results were adversely affected in both years by losses
incurred related to asbestos-related and toxic waste claims. The excess
liability component of our casualty coverages has remained profitable due to
favorable loss experience in this class. Results in the automobile component
were also profitable in the first nine months of 1996 and 1995.
Workers' compensation results were breakeven in the first nine months of
1996 compared with profitable results for the same period in 1995. Results in
the third quarter of 1996 were unprofitable compared with profitable results in
the same quarter in 1995. Results deteriorated in 1996, particularly in the
<PAGE> 13
Page 11
third quarter, due in part to an increase in claim frequency and the impact of
price reductions. Results in 1995 benefited from reform of the benefit
provisions of workers' compensation laws in many states and the impact of
medical cost containment and disability management activities. Results from
our share of the involuntary pools and mandatory business in which we must
participate by law have also benefited from these positive factors.
Property and marine results were somewhat less profitable in 1996 than
in 1995 due in part to an increase in catastrophe losses. Results in both
years benefited from stable loss frequency.
Executive protection results were highly profitable in 1996 and 1995 due
to favorable loss experience. Our financial institutions business produced
more profitable results in the first nine months of 1996 than in 1995. The
financial fidelity portion of this business was highly profitable in both
years. The non-fidelity results were adversely affected in 1995 by catastrophe
losses in the second quarter. Results in our other commercial classes improved
in 1996 compared with 1995, but remained modestly unprofitable. The
improvement was in surety results which were highly profitable in 1996 compared
with unprofitable results in 1995 due to several large losses.
REINSURANCE ASSUMED
Reinsurance assumed is treaty reinsurance assumed primarily from Sun
Alliance. The substantial decrease in premiums written in the first nine
months of 1996 compared with the same period in 1995 was due to the effects of
the changes in the reinsurance agreement with Sun Alliance whereby the
Corporation's property and casualty subsidiaries assume less reinsurance from
Sun Alliance. The decrease in net written premiums included the first quarter
effect of the $65 million portfolio transfer of unearned premiums back to Sun
Alliance as of January 1, 1996.
Underwriting results for this segment were near breakeven in the first
nine months of 1996 and 1995.
LOSS RESERVES
Loss reserves, net of reinsurance recoverable, increased by $135.7
million during the first nine months of 1996. The increase would have been
greater except that loss reserves were reduced by $384.2 million in the first
nine months of 1996 as the result of payments in that amount related to the
1993 Fibreboard asbestos-related settlement. Substantial reserve growth
continued to occur in those liability coverages, 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 $115.4
million in the first nine months of 1996 and $137.0 million for the same period
in 1995.
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, 1995. The following developments during 1996 relate to
the settlement. In July 1996, the United States Court of Appeals for the Fifth
<PAGE> 14
Page 12
Circuit affirmed the 1995 judgment of the United States District Court of the
Eastern District of Texas, which approved the global settlement agreement among
Pacific Indemnity Company (a subsidiary of the Corporation), Continental
Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard
Corporation and attorneys representing claimants against Fibreboard for all
future asbestos-related bodily injury claims against Fibreboard, which are
claims that were not filed in court before August 27, 1993. The Court also
affirmed the approval of the trilateral agreement among Pacific Indemnity,
Continental Casualty and Fibreboard to settle all pending and future
asbestos-related bodily injury claims resulting from insurance policies that
were, or may have been, issued to Fibreboard by the two insurers. The
trilateral agreement will be triggered if the global settlement agreement is
disapproved. The affirmation of these agreements had no effect on the amount
of loss reserves provided for the settlement. A petition for re-hearing the
global settlement agreement before the entire Fifth Circuit Court is pending.
Should the petition for re-hearing be denied, an appeal to the United States
Supreme Court by the objectors to the settlement is expected. No petition for
re-hearing the trilateral agreement by the entire Fifth Circuit Court was
filed. Management believes that the period during which an appeal of the
trilateral agreement to the United States Supreme Court had to be filed expired
on October 24, 1996 and that the agreement is therefore final. On that basis,
management believes that the uncertainty of our exposure with respect to
asbestos-related bodily injury claims against Fibreboard has been eliminated.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 7.2%
in the first nine months of 1996 and 7.0% in the third quarter compared with
the same periods in 1995. The growth was due to an increase in invested assets
since the third quarter of 1995, reflecting strong cash flow from operations.
The effective tax rate on investment income was 15.5% and 15.8% for the first
nine months of 1996 and 1995, respectively.
In the first nine months of 1996, new cash was invested primarily in
taxable and tax-exempt bonds. We maintain investments in highly liquid, short
term securities at all times to provide for immediate cash needs.
LIFE AND HEALTH INSURANCE
Life and health insurance earnings after taxes were $27.4 million for
the first nine months of 1996 compared with $21.8 million in 1995.
Premiums and policy charges for personal insurance amounted to $252.5
million in the first nine months of 1996, an increase of 9.8% over the
comparable period in 1995. Earnings from personal insurance were $28.4 million
in the first nine months of 1996 compared with $29.4 million in 1995. The
earnings decrease was due to higher mortality costs in 1996, particularly in
the second quarter; this was offset in part by operating efficiencies realized
from the consolidation of service centers in 1995.
In the second quarter of 1996, the Corporation announced a plan to exit
the group health insurance business. A definitive agreement was reached on May
31 with Healthsource Inc. under which Healthsource will acquire the
Corporation's 85% interest in ChubbHealth, Inc., a health maintenance
organization, for
<PAGE> 15
Page 13
$25 million. The sale is subject to regulatory approvals and is expected to be
completed no later than the second quarter of 1997. Also, the life and health
insurance subsidiaries discontinued the marketing of traditional group health
indemnity business. Due to various contractual and regulatory requirements,
group health indemnity coverages will be renewed in certain jurisdictions until
an orderly transition to another carrier or termination of coverage can occur.
The group health insurance operations have been accounted for as
discontinued operations. However, the Corporation's results of operations for
periods prior to the second quarter of 1996 have not been restated since
amounts attributable to the group health insurance business were not
significant. It is expected that the sale of ChubbHealth will result in an
after tax gain of approximately $15 million which will be substantially offset
by costs relating to our exit from the traditional indemnity business. The
discontinued group health business had no effect on net income subsequent to
March 31, 1996. Results of the discontinued group health insurance operations
included in the consolidated statements of income were as follows:
<TABLE>
<CAPTION>
Periods Ended September 30
------------------------------------
Third Quarter Nine Months
------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Premiums earned.......... - $64.3 $57.5 $250.9
Net loss................. - (1.5) (1.0) (7.6)
</TABLE>
Gross investment income increased by 3.4% in the first nine months of
1996 compared with the same period in 1995. Excluding investment income
related to the discontinued group health insurance operations, gross investment
income increased by 7.0% in the first nine months of 1996. Such growth was due
to an increase in invested assets since the third quarter of 1995. The new
cash available for investment was due primarily to increases in deposits
credited to policyholder funds. In the first nine months of 1996, new cash was
invested primarily in corporate bonds. To provide for liquidity, funds
believed to be sufficient to meet any immediate needs for cash have been
maintained in short term securities.
REAL ESTATE
Real estate earnings after taxes were $10.0 million for the first nine
months of 1996 compared with $3.5 million in 1995. Real estate earnings in
1996 benefited from the sale of several rental properties in the first quarter.
Results in 1995 reflect a first quarter charge of $6.5 million after taxes
resulting from the initial application of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, which
established new criteria for measuring impairment of a loan.
Revenues were $269.8 million in the first nine months of 1996 compared
with $225.0 million in 1995. The increase in 1996 was due to the sale of
rental properties.
<PAGE> 16
Page 14
INVESTMENT GAINS AND LOSSES
Decisions to sell securities are governed principally by considerations
of investment opportunities and tax consequences. As a result, realized
investment gains and losses may vary significantly from period to period. Net
investment gains before taxes of $37.6 million were realized in the first nine
months of 1996 compared with net gains of $74.0 million for the same period in
1995.
CORPORATE
During the first nine months of 1996, the Corporation repurchased
1,200,000 shares of its common stock in open-market transactions at a cost of
$56.4 million.
SUBSEQUENT EVENTS
In October 1996, the Corporation announced that it is evaluating
strategic alternatives with respect to its life insurance subsidiaries,
including the possible sale or spin-off of the business. At the same time, the
Corporation announced that it is considering strategic alternatives with
respect to its real estate subsidiary, which could include the sale of some or
all properties.
In October 1996, the Corporation's property and casualty subsidiaries
and Sun Alliance agreed that the agreements pertaining to the exchange of
reinsurance on a quota share basis will be terminated, effective as of January
1, 1997. The impact on underwriting results in 1997 is not expected to be
significant.
FORWARD LOOKING INFORMATION
Any statements in this communication which may be considered to be
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995 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, more generally, to: general economic
conditions including changes in interest rates and the performance of the
financial markets, changes in domestic and foreign laws, regulations and taxes,
changes in competition and pricing environments, regional or general changes in
asset valuations, the occurrence of significant natural disasters, the
inability to reinsure certain risks economically, the adequacy of loss
reserves, as well as general market conditions, competition, pricing and
restructurings.
<PAGE> 17
Page 15
PART II. OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit 11.1 - Computation of earnings per share.
B. Reports on Form 8-K - The Registrant filed a current report on Form 8-K
dated October 29, 1996 with respect to the announcement on October 29,
1996 that the Registrant (1) has retained Goldman, Sachs & Co. to assist
it in the process of evaluating its strategic alternatives with respect
to the Registrant's life insurance companies and (2) is considering its
strategic alternatives with respect to its real estate subsidiary,
Bellemead Development Corporation.
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 13, 1996
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO DESCRIPTION
11.1 - Computation of earnings per share.
27.1 - 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
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net income.................................. $165.2 $171.4 $490.9 $503.1
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes............ 2.4 2.4 7.3 7.3
------ ------ ------ ------
Net income for computing earnings per share. $167.6 $173.8 $498.2 $510.4
====== ====== ====== ======
Average number of common shares outstanding. 174.2 174.2 174.5 174.0
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 23.256 shares of common stock........ 5.8 5.8 5.8 5.8
------ ------ ------ ------
Average number of common and common
equivalent shares assumed outstanding for
computing earnings per share.............. 180.0 180.0 180.3 179.8
====== ====== ====== ======
Net income per share........................ $ .93 $ .97 $ 2.76 $ 2.84
</TABLE>
The number of shares and per share amounts have been retroactively adjusted to
reflect the two-for-one stock split effective April 19, 1996.
<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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 10,472<F1>
<DEBT-CARRYING-VALUE> 2,881<F2>
<DEBT-MARKET-VALUE> 3,011<F3>
<EQUITIES> 696
<MORTGAGE> 10
<REAL-ESTATE> 0
<TOTAL-INVEST> 14,937
<CASH> 10
<RECOVER-REINSURE> 50<F4>
<DEFERRED-ACQUISITION> 1,284
<TOTAL-ASSETS> 23,582
<POLICY-LOSSES> 12,717<F5>
<UNEARNED-PREMIUMS> 2,632<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,329<F7>
<COMMON> 176
0
0
<OTHER-SE> 5,235<F8>
<TOTAL-LIABILITY-AND-EQUITY> 23,582
3,702
<INVESTMENT-INCOME> 705
<INVESTMENT-GAINS> 38
<OTHER-INCOME> 270<F9>
<BENEFITS> 2,524
<UNDERWRITING-AMORTIZATION> 989
<UNDERWRITING-OTHER> 302
<INCOME-PRETAX> 613
<INCOME-TAX> 123
<INCOME-CONTINUING> 491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 491
<EPS-PRIMARY> 2.76
<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 ($1,790) AND POLICY LIABILITIES ($190), AS PRESCRIBED BY
SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($348), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $251 AND LONG-TERM DEBT OF $1,078.
<F8>OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY
TRANSLATION LOSSES, 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>
