<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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
-------------- -----------------
Commission file number 1-8661
THE CHUBB CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
- ------------------------------- --------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 903-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------------- -----------------
The number of shares of common stock outstanding as of October 31, 1997
was 170,165,040.
<PAGE> 2
THE CHUBB CORPORATION
INDEX
Page Number
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1997 and 1996.................................. 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996................ 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
<PAGE> 3
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1997 1996
--------- ---------
(in millions)
<S> <C> <C>
Assets
Invested Assets
Short Term Investments .............................. $ 1,117.1 $ 275.9
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,406.5
and $2,573.4) .................................... 2,266.0 2,443.6
Available-for-Sale
Tax Exempt (cost $5,189.9 and $4,415.1) .......... 5,491.2 4,622.6
Taxable (cost $4,027.3 and $4,038.7) ............. 4,138.1 4,092.7
Equity Securities (cost $607.4 and $540.5) .......... 764.8 646.3
--------- ---------
TOTAL INVESTED ASSETS ........................ 13,777.2 12,081.1
Cash .................................................. 12.3 4.7
Accrued Investment Income ............................. 185.5 195.3
Premiums Receivable ................................... 1,123.9 984.9
Reinsurance Recoverable on Unpaid Claims .............. 1,209.9 1,767.8
Prepaid Reinsurance Premiums .......................... 114.7 326.7
Funds Held for Asbestos-Related Settlement ............ 596.0 599.9
Deferred Policy Acquisition Costs ..................... 672.1 601.2
Real Estate Assets .................................... 1,624.1 1,604.0
Deferred Income Tax ................................... 358.2 365.6
Other Assets .......................................... 564.6 564.3
Net Assets of Discontinued Operations ................. -- 843.4
--------- ---------
TOTAL ASSETS ................................. $20,238.5 $19,938.9
========= =========
Liabilities
Unpaid Claims ......................................... $ 9,655.2 $ 9,523.7
Unearned Premiums ..................................... 2,675.5 2,617.5
Short Term Debt ....................................... 247.0 189.5
Long Term Debt ........................................ 817.4 1,070.5
Dividend Payable to Shareholders ...................... 49.6 47.2
Accrued Expenses and Other Liabilities ................ 1,134.3 1,027.6
--------- ---------
TOTAL LIABILITIES ............................ 14,579.0 14,476.0
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 176,051,138 and
176,084,173 Shares ................................... 176.1 176.1
Paid-In Surplus ....................................... 601.5 695.7
Retained Earnings ..................................... 4,956.0 4,530.5
Foreign Currency Translation Losses,
Net of Income Tax .................................... (21.6) (15.6)
Unrealized Appreciation of Investments, Net ........... 370.1 238.7
Receivable from Employee Stock Ownership Plan ......... (101.6) (106.3)
Treasury Stock, at Cost - 4,982,177 and
1,223,182 Shares ..................................... (321.0) (56.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ................... 5,659.5 5,462.9
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $20,238.5 $19,938.9
========= =========
</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
1997 1996 1997 1996
----------- ----------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
Revenues
Premiums Earned ...................... $ 1,293.0 $ 1,126.6 $ 3,863.0 $ 3,392.4
Investment Income .................... 200.4 178.0 580.0 527.1
Real Estate .......................... 46.3 52.4 138.1 269.8
Realized Investment Gains (Losses) ... 29.1 (0.1) 74.2 31.2
----------- ----------- ----------- -----------
Total Revenues ................ 1,568.8 1,356.9 4,655.3 4,220.5
----------- ----------- ----------- -----------
Claims and Expenses
Insurance Claims ..................... 839.3 732.7 2,464.9 2,233.0
Amortization of Deferred Policy
Acquisition Costs ................... 348.2 302.4 1,047.4 919.3
Other Insurance Operating Costs and
Expenses ............................ 85.3 76.8 247.0 216.9
Real Estate Cost of Sales and
Expenses ............................ 46.1 47.5 146.7 253.5
Investment Expenses .................. 2.7 2.6 8.6 10.1
Corporate Expenses ................... 0.7 6.3 9.3 21.0
----------- ----------- ----------- -----------
Total Claims and Expenses ..... 1,322.3 1,168.3 3,923.9 3,653.8
----------- ----------- ----------- -----------
Income from Continuing Operations
Before Federal and Foreign Income Tax.. 246.5 188.6 731.4 566.7
Federal and Foreign Income Tax ......... 52.5 34.4 156.6 107.3
----------- ----------- ----------- -----------
Income from Continuing Operations ...... 194.0 154.2 574.8 459.4
Income from Discontinued Operations,
Net of Tax ............................ -- 11.0 -- 31.5
----------- ----------- ----------- -----------
Net Income ............................. $ 194.0 $ 165.2 $ 574.8 $ 490.9
=========== =========== =========== ===========
Average Common and Common Equivalent
Shares Outstanding (In Thousands) ..... 172,000 180,001 175,044 180,291
PER SHARE DATA
Income from Continuing Operations ...... $ 1.12 $ .87 $ 3.30 $ 2.59
Income from Discontinued Operations .... -- .06 -- .17
----------- ----------- ----------- -----------
Net Income ............................. $ 1.12 $ .93 $ 3.30 $ 2.76
=========== =========== =========== ===========
Dividends Declared ..................... $ .29 $ .27 $ .87 $ .81
</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>
1997 1996
-------- --------
(in millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ....................................... $ 574.8 $ 490.9
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net ................. 689.4 135.7
Increase in Unearned Premiums, Net ............. 270.0 197.0
Increase in Premiums Receivable ................ (139.0) (104.1)
Decrease in Medical Malpractice Reinsurance
Related Receivable ............................ -- 191.2
Decrease in Funds Held for Asbestos-Related
Settlement .................................... 3.9 367.4
Increase in Deferred Policy Acquisition Costs .. (70.9) (43.0)
Change in Deferred Federal Income Tax .......... (65.6) (15.2)
Depreciation ................................... 44.6 43.4
Realized Investment Gains ...................... (74.2) (31.2)
Income from Discontinued Operations,
Net of Tax .................................... -- (31.5)
Other, Net ..................................... 68.2 87.0
-------- --------
Net Cash Provided by Operating Activities ........ 1,301.2 1,287.6
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .......... 2,649.3 2,288.6
Proceeds from Maturities of Fixed Maturities ..... 479.2 584.7
Proceeds from Sales of Equity Securities ......... 250.6 150.9
Proceeds from Sale of Discontinued
Operations, Net ................................. 861.2 --
Purchases of Fixed Maturities .................... (3,698.8) (3,711.3)
Purchases of Equity Securities ................... (263.5) (222.8)
Increase in Short Term Investments, Net .......... (841.2) (176.9)
Increase in Net Payable from Security
Transactions Not Settled ........................ 35.8 86.9
Other, Net ....................................... (58.9) (106.6)
-------- --------
Net Cash Used in Investing Activities ............ (586.3) (1,106.5)
-------- --------
Cash Flows from Financing Activities
Proceeds from Issuance of Long Term Debt ......... 10.0 5.0
Repayment of Long Term Debt ...................... (34.5) (82.4)
Increase in Short Term Debt, Net ................. 57.5 62.9
Dividends Paid to Shareholders ................... (146.9) (137.2)
Repurchase of Shares ............................. (641.1) (56.4)
Other, Net ....................................... 47.7 25.0
-------- --------
Net Cash Used in Financing Activities ............ (707.3) (183.1)
-------- --------
Net Increase (Decrease) in Cash .................... 7.6 (2.0)
Cash at Beginning of Year .......................... 4.7 11.9
-------- --------
Cash at End of Period ............................ $ 12.3 $ 9.9
======== ========
</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 1996
Annual Report to Shareholders.
2) Discontinued Operations
On May 13, 1997, the Corporation completed the sale of Chubb
Life Insurance Company of America and its subsidiaries to
Jefferson-Pilot Corporation for $875 million in cash, subject to
closing related adjustments. The life and health insurance subsidiaries
have been classified as discontinued operations.
3) Investments
Short term investments, which have an original maturity of one
year or less, are carried at amortized cost which approximates market
value. Fixed maturities classified as held-to-maturity are carried at
amortized cost. Fixed maturities classified as available-for-sale and
equity securities are carried at market value as of the balance sheet
date.
The net change in unrealized appreciation of investments
carried at market value was as follows:
<TABLE>
<CAPTION>
Periods Ended September 30
-----------------------------------------------
Third Quarter Nine Months
------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Continuing Operations
Change in unrealized appreciation of
equity securities ................ $ 14.7 $ (2.2) $ 51.6 $ 8.3
Change in unrealized appreciation of
fixed maturities ................. 123.6 53.6 150.6 (199.1)
------ ------ ------ ------
138.3 51.4 202.2 (190.8)
Deferred income tax (credit) ....... 48.6 17.9 70.8 (66.8)
------ ------ ------ ------
Change in unrealized appreciation .. 89.7 33.5 131.4 (124.0)
Discontinued operations, net ............ -- 3.1 -- (30.7)
------ ------ ------ ------
Change in unrealized appreciation of
investments, net ....................... $ 89.7 $ 36.6 $131.4 $(154.7)
====== ====== ====== ======
</TABLE>
<PAGE> 7
Page 5
4) Real Estate
In June 1997, a definitive agreement was reached to sell a
substantial portion of the Corporation's commercial real estate
properties. The sale is subject to various closing adjustments and
other customary conditions. The carrying value of certain real estate
assets was reduced by $10.2 million in the second quarter of 1997 to
reflect the terms of the agreement. This charge is included in real
estate cost of sales and expenses in the consolidated statements of
income.
On November 7, 1997, the sale of almost all of the properties
covered by the agreement reached in June was closed for $737 million,
which includes $628 million in cash and the assumption of $109 million
in debt. The buyer is a joint venture formed by Paine Webber Real
Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and
Gale & Wentworth, L.L.C. Closing on the few remaining properties under
the agreement is expected to occur in 1998. Revenues from the sale will
be recognized at the time of the closings.
The Corporation is continuing to explore the sale of certain
of its residential, retail and remaining commercial properties.
5) 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 1996 Annual Report to Shareholders. The
following development during 1997 relates to the settlement.
In June 1997, the United States Supreme Court set aside the
ruling by the United States Court of Appeals for the Fifth Circuit that
had 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. The Supreme Court
ordered the Fifth Circuit Court to reconsider its approval of the
global settlement agreement in light of a June 1997 ruling by the
Supreme Court rejecting an unrelated settlement that included several
former asbestos manufacturers.
The trilateral agreement among Pacific Indemnity, Continental
Casualty and Fibreboard was not appealed to the Supreme Court and is
now final. The trilateral agreement will be triggered if the global
settlement agreement is ultimately disapproved. Since the trilateral
agreement is unaffected by the Supreme Court's recent action,
management continues to believe that the uncertainty of Pacific
Indemnity's exposure with respect to asbestos-related bodily injury
claims against Fibreboard has been eliminated.
6) Reinsurance
Effective January 1, 1997, the agreements pertaining to the
exchange of reinsurance on a quota share basis with Royal & Sun
Alliance Insurance Group plc were terminated. As a result, there were
portfolio transfers of unpaid claims, unearned premiums, reinsurance
recoverable on unpaid claims and prepaid reinsurance premiums. The
effect of the portfolio transfers, which were recorded in the first
quarter of 1997, was to decrease unpaid claims and unearned premiums by
$183.8 million and $93.6 million, respectively, and reinsurance
recoverable on unpaid claims and prepaid reinsurance premiums by $470.0
million and $174.6 million, respectively.
<PAGE> 8
Page 6
7) Exchangeable Subordinated Notes
At January 1, 1997, Chubb Capital Corporation had outstanding
$229.3 million of 6% exchangeable subordinated notes due May 15, 1998.
In 1997, the holders of $228.6 million of the notes elected the option
to exchange each $1,000 of principal amount into 23.256 shares of
common stock of the Corporation, resulting in the issuance of 5,316,565
shares of common stock. The remaining notes were redeemed at 101.7% of
the principal amount plus accrued interest.
The exchange of the notes into common stock of the Corporation
is considered a noncash transaction which has been excluded from the
consolidated statements of cash flows.
8) Per Share Data
Earnings per share amounts are based on the weighted average
number of common and common equivalent shares outstanding. The 6%
exchangeable subordinated notes were considered to be common equivalent
shares during the period they were outstanding. The computation assumes
the addition to income of the after-tax interest expense applicable to
such notes.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share, which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 requires presentation of
basic and diluted earnings per share on the face of the statements of
income. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires restatement of all
prior periods presented. Earlier adoption is not permitted. The
adoption of SFAS. No. 128 is not expected to have a significant effect
on the Corporation's earnings per share.
<PAGE> 9
Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were substantially
higher in the first nine months of 1997 compared with the same period of 1996.
The increase in 1997 was due to a significant improvement in underwriting
results together with strong growth in investment income. Underwriting results
in 1996 were adversely affected by substantially higher catastrophe losses in
the first quarter. Property and casualty income after taxes amounted to $506.1
million in the first nine months of 1997 and $162.4 million in the third quarter
compared with $415.7 million and $145.8 million, respectively, in 1996.
Net premiums written were $4.1 billion in the first nine months of 1997
and $1.3 billion in the third quarter, representing increases of 15.1% and
11.5%, respectively, over the comparable periods of 1996. A portion of the
increase in premiums written in the first nine months of both 1996 and 1997 was
due to changes to the agreements pertaining to the exchange of reinsurance on a
quota share basis with the Sun Alliance Group plc. Effective January 1, 1996,
these agreements were amended to reduce the portion of each company's business
reinsured with the other. As a result of the 1996 merger of Sun Alliance with
Royal Insurance Holdings plc, these agreements were terminated effective January
1, 1997. The Corporation's property and casualty subsidiaries now retain a
greater portion of the business they write directly and no longer assume any
reinsurance from Sun Alliance.
Excluding the effects of the 1996 changes to the reinsurance agreements
with Sun Alliance and the 1997 termination of such agreements, net premiums
written increased by 9.1% in the first nine months of 1997 and 9.2% in the third
quarter over the comparable periods in 1996. Personal lines premium growth was
particularly strong. Premium growth was also due in part to modifications to our
casualty excess of loss reinsurance program, principally for excess liability
and executive protection coverages. The changes, effective January 1, 1997,
included an increase in the initial retention for each loss from $10 million to
$25 million. These changes in our casualty reinsurance program increased net
premiums written in the first nine months of 1997 by approximately $50 million.
The marketplace continued to be competitive, particularly in the
commercial classes. Competitors continued to place significant pressure on
pricing as they attempted to maintain or increase market share. As a result,
price increases continued to be difficult to achieve.
Underwriting results were profitable in 1997 and 1996. Our combined
loss and expense ratio was 96.4% in the first nine months of 1997 and 97.5% in
the third quarter compared with 98.3% and 97.2%, respectively, in 1996.
The loss ratio was 64.2% for the first nine months of 1997 and 65.3%
for the third quarter compared with 66.2% 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. The
loss ratio in the first nine months of 1996 was adversely affected by
catastrophe losses in the first quarter, resulting primarily from the winter
<PAGE> 10
Page 8
storms in the eastern part of the United States. Catastrophe losses in the first
nine months of 1997 amounted to $56.5 million which represented 1.5 percentage
points of the loss ratio compared with $107.8 million or 3.2 percentage points
in 1996. Catastrophe losses for the third quarter of 1997 amounted to $28.0
million or 2.2 percentage points of the loss ratio compared with $23.9 million
or 2.1 percentage points in 1996.
Our expense ratio was 32.2% for both the first nine months and the
third quarter of 1997 compared with 32.1% for the first nine months of 1996 and
31.8% for the third quarter.
Underwriting results during 1997 and 1996 by class of business were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile ................. $ 228.5 $ 184.9 86.5% 86.2%
Homeowners ................. 533.1 413.8 92.1 107.8
Other ...................... 239.5 192.1 66.5 67.5
-------- -------- -------- --------
Total Personal ......... 1,001.1 790.8 84.7 93.0
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ............. 611.6 496.1 115.2 117.8
Casualty ................... 687.3 620.3 112.4 111.8
Workers' Compensation ...... 225.6 183.8 106.4 100.1
Property and Marine ........ 447.5 377.9 105.7 95.3
Executive Protection ....... 663.1 578.2 73.4 78.4
Other ...................... 500.6 407.0 87.0 88.2
-------- -------- -------- --------
Total Commercial ....... 3,135.7 2,663.3 99.4 99.2
-------- -------- -------- --------
Total Before Reinsurance
Assumed ............... 4,136.8 3,454.1 96.0 97.7
Reinsurance Assumed .......... (3.8) 135.3 N/M N/M
-------- -------- -------- --------
Total .................. $4,133.0 $3,589.4 96.4% 98.3%
======== ======== ======== ========
</TABLE>
<PAGE> 11
Page 9
<TABLE>
<CAPTION>
Quarter Ended September 30
------------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
----------------------- ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile ................. $ 75.5 $ 63.0 87.8% 87.4%
Homeowners ................. 180.5 139.1 90.5 98.4
Other ...................... 75.8 61.8 69.0 67.4
-------- -------- -------- --------
Total Personal ......... 331.8 263.9 84.8 88.3
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ............. 198.5 170.4 122.8 117.0
Casualty ................... 215.3 198.5 108.6 113.1
Workers' Compensation ...... 68.5 55.8 110.4 108.4
Property and Marine ........ 144.6 122.7 103.4 99.8
Executive Protection ....... 226.9 196.6 74.8 72.2
Other ...................... 158.9 131.2 95.2 89.8
-------- -------- -------- --------
Total Commercial ....... 1,012.7 875.2 101.4 99.4
-------- -------- -------- --------
Total Before Reinsurance
Assumed ............... 1,344.5 1,139.1 97.5 97.0
Reinsurance Assumed .......... -- 66.7 -- 102.9
-------- -------- -------- --------
Total .................. $1,344.5 $1,205.8 97.5% 97.2%
======== ======== ======== ========
</TABLE>
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 24% of the premiums written by our property and casualty
subsidiaries, increased by $210.3 million or 26.6% in the first nine months of
1997 and $67.9 million or 25.7% in the third quarter compared with the same
periods in 1996. Of these increases, $104.8 million in the first nine months of
1997 and $37.1 million in the third quarter were due to the increase in our
retention percentage for these classes resulting from the termination of the
reinsurance agreement with Sun Alliance. In addition, net premiums written for
the personal classes included $65.8 million and $30.6 million in the first
quarter of 1997 and 1996, respectively, due to the effect of the portfolio
transfer of unearned premiums as of January 1 of each year resulting from the
termination of the reinsurance agreement.
Excluding the effects of the termination of the reinsurance agreement
with Sun Alliance, premium growth for the personal classes was 9.3% in the first
nine months of 1997 and 11.7% in the third quarter. We continued to grow our
homeowners and other non-automobile business in non-catastrophe prone areas.
Personal automobile premiums increased as a result of an increase in the number
of in-force policies for high value automobiles.
Underwriting results for our personal insurance business were
substantially more profitable in the first nine months of 1997 than in the prior
year. Underwriting results in 1996 were adversely affected by significant
catastrophe losses in the first quarter. Underwriting results were highly
profitable in the third quarter of both years. The combined loss and expense
ratios were 84.7% for the first nine months of 1997 and 84.8% for the third
quarter compared with 93.0% and 88.3%, respectively, in 1996.
<PAGE> 12
Page 10
Homeowners results were profitable in 1997, benefiting from stable loss
frequency and modest catastrophe losses. Results for the first nine months of
1996 for this class were adversely affected by significant weather-related
catastrophe losses in the first quarter. Catastrophe losses represented 3.8
percentage points of the loss ratio for this class in the first nine months of
1997 and 5.1 percentage points in the third quarter compared with 17.9
percentage points and 6.5 percentage points, respectively, in 1996. Other
personal coverages, which include insurance for personal valuables and excess
liability, produced highly profitable results in 1997 and 1996 due to continued
favorable loss experience. Our automobile business produced profitable results
in 1997 and 1996 due primarily to stable loss frequency and severity.
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent approximately 76%
of our total writings, increased by $472.4 million or 17.7% in the first nine
months of 1997 and $137.5 million or 15.7% in the third quarter compared with
the same periods a year ago. Of these increases, $188.2 million in the first
nine months of 1997 and $63.7 million in the third quarter were due to the
increase in our retention percentage for these classes resulting from the
termination of the reinsurance agreement with Sun Alliance. In addition, net
premiums written for the commercial classes included $108.8 million and $61.0
million in the first quarter of 1997 and 1996, respectively, due to the effect
of the portfolio transfer of unearned premiums as of January 1 of each year
resulting from the termination of the reinsurance agreement.
Excluding the effects of the termination of the reinsurance agreement
with Sun Alliance, premium growth for the commercial classes was 9.1% in the
first nine months of 1997 and 8.4% in the third quarter. Premium growth for the
excess liability component of our casualty coverages and for our executive
protection coverages benefited from the changes to our casualty excess of loss
reinsurance program. Premium growth was also due to the selective writing of new
accounts, exposure growth on existing business and the purchase of additional
coverages by current customers. Growth continues to be hindered by intense
competition which has resulted in declining rate levels for several classes of
business.
Our commercial insurance business produced marginally profitable
underwriting results in the first nine months of 1997 and 1996. Results were
modestly unprofitable in the third quarter of 1997 compared with profitable
results in the same period in 1996. The combined loss and expense ratios were
99.4% for the first nine months of 1997 and 101.4% for the third quarter
compared with 99.2% and 99.4%, respectively, in 1996.
Multiple peril results improved somewhat in the first nine months of
1997 compared with 1996 but remained unprofitable. Results in both years were
adversely affected by inadequate prices and an increase in the frequency of
large losses. The improvement in 1997 was due to lower catastrophe losses.
Catastrophes losses in the first nine months of 1997 represented 2.0 percentage
points of the loss ratio for this class compared with 4.8 percentage points in
1996.
<PAGE> 13
Page 11
Results for our casualty business were similarly unprofitable in the
first nine months of 1997 and 1996. Casualty results were adversely affected in
both years by increases in loss reserves for 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 unprofitable in 1997 compared with profitable results
in 1996 due to an increase in the frequency of large losses for this class.
Workers' compensation results were unprofitable in the first nine
months of 1997 compared with breakeven results in 1996. Results were
unprofitable in the third quarter of both years. Results have deteriorated due
primarily to the cumulative effect of price reductions over the past several
years.
Property and marine results were unprofitable in 1997 compared with
profitable results in 1996. Results in 1997 were adversely affected by an
increase in the frequency of large losses, including several large overseas
losses. Catastrophe losses represented 6.5 percentage points of the loss ratio
for this class in the first nine months of 1997 and 9.6 percentage points in the
third quarter compared with 4.8 percentage points and 6.9 percentage points,
respectively, in 1996.
Results for our executive protection business were highly profitable in
1997 and 1996 due to favorable loss experience. Our financial institutions
business produced less profitable results in 1997 than in 1996. Results in the
financial fidelity portion of this business remained highly profitable. The
non-fidelity results deteriorated in 1997, particularly in the third quarter due
to several large losses. Results in our other commercial classes were profitable
in 1997 compared with modestly unprofitable results in 1996.
REINSURANCE ASSUMED
Reinsurance assumed is treaty reinsurance that was assumed from Sun
Alliance. The reinsurance agreement with Sun Alliance was terminated effective
January 1, 1997. However, due to the lag in our reporting of such business, net
premiums written in the first quarter of 1997 included $89.8 million related to
business we assumed from Sun Alliance for the second half of 1996. Net premiums
written for this segment were reduced by $93.6 million and $65.2 million in the
first quarter of 1997 and 1996, respectively, due to the effect of the portfolio
transfer of unearned premiums back to Sun Alliance as of January 1 of each year.
Underwriting results for this segment in 1997, which represent our
share of the Sun Alliance business for the last six months of 1996, were near
breakeven. Results for this segment were near breakeven in the first nine months
of 1996. The combined loss and expense ratio for this business was not
meaningful for the first nine months of both years due to the effect on the
expense ratio of the portfolio transfer of unearned premiums as of January 1 of
each year.
LOSS RESERVES
Gross loss reserves were $9,655.2 million and $9,523.7 million at
September 30, 1997 and December 31, 1996, respectively. Reinsurance recoverables
on such loss reserves were $1,209.9 million and $1,767.8 million at September
30, 1997 and December 31, 1996, respectively. As a result of the termination of
the reinsurance agreements with Sun Alliance, there were portfolio transfers of
gross loss reserves and reinsurance recoverables as of January 1, 1997. The
effect of these portfolio transfers was a decrease in gross loss reserves of
$183.8 million and a decrease in reinsurance recoverables of $470.0 million.
<PAGE> 14
Page 12
Excluding the effects of the portfolio transfers, loss reserves, net of
reinsurance recoverable, increased by $403.2 million during the first nine
months of 1997. Substantial reserve growth continued to occur in those liability
classes, primarily excess liability and executive protection, that are
characterized by delayed loss reporting and extended periods of settlement.
Losses incurred related to asbestos and toxic waste claims were $95.2
million in the first nine months of 1997 and $115.4 million for the same period
in 1996.
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, 1996. The following development during 1997 relates to
the settlement. In June 1997, the United States Supreme Court set aside the
ruling by the United States Court of Appeals for the Fifth Circuit that had
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. The Supreme Court ordered the Fifth Circuit Court
to reconsider its approval of the global settlement agreement in light of a June
1997 ruling by the Supreme Court rejecting an unrelated settlement that included
several former asbestos manufacturers.
The trilateral agreement among Pacific Indemnity, Continental Casualty
and Fibreboard was not appealed to the Supreme Court and is now final. The
trilateral agreement will be triggered if the global settlement agreement is
ultimately disapproved. Since the trilateral agreement is unaffected by the
Supreme Court's recent action, management continues to believe that the
uncertainty of Pacific Indemnity's exposure with respect to asbestos-related
bodily injury claims against Fibreboard has been eliminated.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 8.9%
in both the first nine months and the third quarter of 1997 compared with the
same periods in 1996. The growth was due to an increase in invested assets since
the third quarter of 1996, reflecting strong cash flow from operations, which
was partially offset by lower yields on new investments. The effective tax rate
on investment income increased to 16.8% in the first nine months of 1997 from
15.5% in the comparable period of 1996 due to holding a larger proportion of our
investment portfolio in taxable securities.
New cash available for investment in the first nine months of 1997
included approximately $330 million received in late March as the net result of
the portfolio transfers of unearned premiums and loss reserves as of January 1,
1997 related to the termination of the reinsurance agreements with Sun Alliance.
New cash available for investment, together with the proceeds from the sale of
approximately $250 million of foreign bonds in the first quarter, was invested
in tax-exempt bonds and, to a lesser extent, mortgage-backed securities and
corporate bonds. The foreign bonds were sold due to the reduction in foreign
liabilities resulting from the termination of the reinsurance agreements with
Sun Alliance. We maintain investments in highly liquid, short term securities at
all times to provide for immediate cash needs.
<PAGE> 15
Page 13
REAL ESTATE
Real estate operations resulted in a loss after taxes of $5.1 million
in the first nine months of 1997 compared with income of $10.0 million in 1996.
The loss in 1997 reflects the $6.6 million after tax charge discussed below.
Earnings in 1996 benefited from the sale of several rental properties in the
first quarter. Revenues were $138.1 million in the first nine months of 1997
compared with $269.8 million in 1996, which included the revenues from the sale
of the rental properties.
In June 1997, a definitive agreement was reached to sell a substantial
portion of our commercial real estate properties. The sale is subject to various
closing adjustments and other customary conditions. To reflect the terms of the
agreement, the carrying value of certain assets was reduced by $10.2 million, or
$6.6 million after tax, in the second quarter of 1997.
On November 7, 1997, the sale of almost all of the properties covered
by the agreement reached in June was closed for $737 million, which includes
$628 million in cash and the assumption of $109 million in debt. The buyer is a
joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley
Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few
remaining properties under the agreement is expected to occur in 1998. Revenues
from the sale will be recognized at the time of the closings.
We are continuing to explore the sale of certain of our residential,
retail and remaining commercial properties.
CORPORATE
Investment income earned on corporate invested assets and interest and
other expenses not allocated to the operating subsidiaries are reflected in the
corporate segment. Corporate income after taxes was $25.6 million in the first
nine months of 1997 compared with $13.4 million in the same period of 1996. The
increase was due primarily to a reduction in interest expense.
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 $74.2 million were realized in the first nine
months of 1997 compared with net gains of $31.3 million for the same period in
1996.
DISCONTINUED OPERATIONS - LIFE AND HEALTH INSURANCE
On May 13, 1997, the Corporation completed the sale of Chubb Life
Insurance Company of America to Jefferson-Pilot Corporation for $875 million in
cash, subject to closing related adjustments. The life and health insurance
subsidiaries have been classified as discontinued operations. The discontinued
life and health insurance operations did not affect the Corporation's net income
in the first nine months of 1997 and will not affect net income in future
periods. Earnings from the discontinued life and health insurance operations
were $31.5 million in the first nine months of 1996, including realized
investment gains of $4.1 million.
<PAGE> 16
Page 14
CAPITAL RESOURCES
In February 1994, the Board of Directors authorized the repurchase of
up to 10,000,000 shares of common stock. Through March 6, 1997, the Corporation
repurchased 6,851,600 shares under the 1994 share repurchase program, including
3,148,600 shares repurchased in the first quarter of 1997. On March 7, 1997, the
Board of Directors replaced the 1994 program with a new share repurchase
program, which authorized the repurchase of up to 17,500,000 shares of common
stock. Through September 30, 1997, the Corporation repurchased 7,200,200 shares
under the new repurchase program. In the aggregate, the Corporation repurchased
10,348,800 shares in open-market transactions in the first nine months of 1997
at a cost of $641.1 million. At September 30, 1997, an additional 10,299,800
shares may be repurchased under the new authorization. The net proceeds from the
sale of Chubb Life Insurance Company of America are being used to repurchase
shares of common stock.
At January 1, 1997, Chubb Capital Corporation had outstanding $229.3
million of 6% exchangeable subordinated notes due May 15, 1998. In the first
quarter of 1997, the holders of $14.1 million of the notes elected the option to
exchange them into shares of common stock of the Corporation, resulting in the
issuance of 327,207 shares of common stock. Chubb Capital called for redemption
on May 14, 1997 the remaining $215.2 million of the notes. Prior to the
redemption date, the holders of $214.5 million of the notes elected the option
to exchange them, resulting in the issuance of 4,989,358 shares of common stock
in the second quarter.
The cash proceeds from the sale of real estate properties to the joint
venture are expected to be used to further reduce debt.
FORWARD LOOKING INFORMATION
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities Litigation
Reform Act of 1995, such as statements that include the words or phrases "will
likely result", "expected to", "will continue", "is anticipated", "estimate",
"project", "intends to" or similar expressions. Such statements are subject to
certain risks and uncertainties. The factors which could cause actual results to
differ materially from those suggested by any such statements include, but are
not limited to, those discussed or identified from time to time in the
Corporation's public filings with the Securities and Exchange Commission and
specifically to: risks or uncertainties associated with the Corporation's
expectations of litigation developments or its ongoing announced sale activities
relating to portions of its non-property and casualty businesses, or associated
with its expectations of proceeds deployment 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 - There were no reports on Form 8-K filed for the three
months ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
The Chubb Corporation has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: /s/ Henry B. Schram
-------------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: November 12, 1997
<PAGE> 1
Exhibit 11.1
THE CHUBB CORPORATION
COMPUTATION OF EARNINGS PER SHARE
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Net income ................................. $ 194.0 $ 165.2 $ 574.8 $ 490.9
After-tax interest expense on 6%
exchangeable subordinated notes ........... -- 2.4 3.3 7.3
------- ------- ------- -------
Net income for computing earnings
per share ................................. $ 194.0 $ 167.6 $ 578.1 $ 498.2
======= ======= ======= =======
Weighted average number of common shares
outstanding ............................... 172.0 174.2 172.6 174.5
Additional shares from assumed conversion
of 6% 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 2.4 5.8
------- ------- ------- -------
Weighted average number of common and common
equivalent shares assumed outstanding for
computing earnings per share ............. 172.0 180.0 175.0 180.3
======= ======= ======= =======
Net income per share ....................... $ 1.12 $ .93 $ 3.30 $ 2.76
</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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 9,629<F1>
<DEBT-CARRYING-VALUE> 2,266<F2>
<DEBT-MARKET-VALUE> 2,407<F3>
<EQUITIES> 765
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,777
<CASH> 12
<RECOVER-REINSURE> 56<F4>
<DEFERRED-ACQUISITION> 672
<TOTAL-ASSETS> 20,239
<POLICY-LOSSES> 9,655<F5>
<UNEARNED-PREMIUMS> 2,676<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,064<F7>
<COMMON> 176
0
0
<OTHER-SE> 5,483<F8>
<TOTAL-LIABILITY-AND-EQUITY> 20,239
3,863
<INVESTMENT-INCOME> 580
<INVESTMENT-GAINS> 74
<OTHER-INCOME> 138<F9>
<BENEFITS> 2,465
<UNDERWRITING-AMORTIZATION> 1,047
<UNDERWRITING-OTHER> 247
<INCOME-PRETAX> 731
<INCOME-TAX> 157
<INCOME-CONTINUING> 575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 575
<EPS-PRIMARY> 3.30
<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 (1,210) AS PRESCRIBED BY SFAS NO. 113. THIS AMOUNT IS
INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($115), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $247 AND LONG-TERM DEBT OF $817.
<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>
