<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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>
<CAPTION>
<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, 1998 was
162,943,162.
<PAGE> 2
The Chubb Corporation hereby amends Item 2 of Part I of its Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998, to add
to Management's Discussion and Analysis of Financial Condition and Results of
Operations the section entitled "Year 2000 Readiness Disclosure."
<PAGE> 3
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, 1998 and December 31, 1997..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1998 and 1997.................................. 2
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 1998 and 1997.................................. 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997................ 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 8
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K....................... 19
</TABLE>
<PAGE> 4
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
--------- ---------
(in millions)
<S> <C> <C>
Assets
Invested Assets
Short Term Investments .......................... $ 559.9 $ 725.1
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,195.4
and $2,347.2) ................................ 2,046.4 2,200.6
Available-for-Sale
Tax Exempt (cost $6,456.2 and $5,408.4) ...... 6,924.7 5,766.9
Taxable (cost $4,043.3 and $4,366.0) ......... 4,165.1 4,485.9
Equity Securities (cost $1,013.7 and $733.9) .... 1,002.0 871.1
--------- ---------
TOTAL INVESTED ASSETS .................... 14,698.1 14,049.6
Cash .............................................. 17.0 11.5
Accrued Investment Income ......................... 197.0 203.8
Premiums Receivable ............................... 1,165.8 1,144.4
Reinsurance Recoverable on Unpaid Claims .......... 1,304.0 1,207.9
Prepaid Reinsurance Premiums ...................... 133.3 115.2
Funds Held for Asbestos-Related Settlement ........ 604.9 599.5
Deferred Policy Acquisition Costs ................. 720.3 676.9
Real Estate Assets ................................ 741.6 790.0
Deferred Income Tax ............................... 346.0 317.0
Other Assets ...................................... 701.5 499.8
--------- ---------
TOTAL ASSETS ............................. $20,629.5 $19,615.6
========= =========
Liabilities
Unpaid Claims ..................................... $10,331.6 $ 9,772.5
Unearned Premiums ................................. 2,884.3 2,696.6
Long Term Debt .................................... 637.6 398.6
Dividend Payable to Shareholders .................. 50.3 49.0
Accrued Expenses and Other Liabilities ............ 1,182.9 1,041.8
--------- ---------
TOTAL LIABILITIES ........................ 15,086.7 13,958.5
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 175,992,839 and
176,037,850 Shares ............................... 176.0 176.0
Paid-In Surplus ................................... 556.1 593.0
Retained Earnings ................................. 5,496.7 5,101.7
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax 376.1 400.1
Foreign Currency Translation Losses, Net of Tax .. (37.8) (25.7)
Receivable from Employee Stock Ownership Plan ..... (91.6) (96.7)
Treasury Stock, at Cost - 13,065,903 and
7,320,410 Shares ................................. (932.7) (491.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 5,542.8 5,657.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,629.5 $19,615.6
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
1998 1997 1998 1997
--------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Revenues
Premiums Earned ...................... $ 1,328.4 $ 1,293.0 $ 3,966.9 $ 3,863.0
Investment Income .................... 205.4 200.4 613.8 580.0
Real Estate .......................... 23.1 46.3 70.7 138.1
Realized Investment Gains ............ 36.3 29.1 126.7 74.2
--------- --------- --------- ---------
Total Revenues ................ 1,593.2 1,568.8 4,778.1 4,655.3
--------- --------- --------- ---------
Claims and Expenses
Insurance Claims ..................... 889.2 839.3 2,589.4 2,464.9
Amortization of Deferred Policy
Acquisition Costs ................... 368.5 348.2 1,096.3 1,047.4
Other Insurance Operating Costs
and Expenses ........................ 93.1 85.3 277.2 247.0
Real Estate Cost of Sales and Expenses 24.0 46.1 73.4 146.7
Investment Expenses .................. 2.3 2.7 10.2 8.6
Corporate Expenses ................... 8.9 .7 22.7 9.3
Restructuring Charge ................. -- -- 40.0 --
--------- --------- --------- ---------
Total Claims and Expenses ..... 1,386.0 1,322.3 4,109.2 3,923.9
--------- --------- --------- ---------
Income Before Federal and Foreign
Income Tax ............................ 207.2 246.5 668.9 731.4
Federal and Foreign Income Tax ......... 33.8 52.5 119.5 156.6
--------- --------- --------- ---------
Net Income ............................. $ 173.4 $ 194.0 $ 549.4 $ 574.8
========= ========= ========= =========
Average Common Shares Outstanding ...... 164.2 171.7 166.7 172.3
Average Common and Potentially Dilutive
Shares Outstanding .................... 167.0 174.8 169.9 177.3
NET INCOME PER SHARE
Basic .................................. $ 1.05 $ 1.12 $ 3.29 $ 3.33
Diluted ................................ 1.04 1.10 3.24 3.26
Dividends Declared Per Share ........... .31 .29 .93 .87
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 6
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Net Income ............................. $173.4 $194.0 $549.4 $574.8
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation
of Investments, Net of Tax .......... (38.3) 89.7 (24.0) 131.4
Change in Foreign Currency Translation
Losses, Net of Tax .................. (5.6) (1.1) (12.1) (6.0)
------ ------ ------ ------
Other Comprehensive Income (Loss) . (43.9) 88.6 (36.1) 125.4
------ ------ ------ ------
Comprehensive Income ................... $129.5 $282.6 $513.3 $700.2
====== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 7
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ....................................... $ 549.4 $ 574.8
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net ................. 463.0 689.4
Increase in Unearned Premiums, Net ............. 169.6 270.0
Increase in Premiums Receivable ................ (21.4) (139.0)
Increase in Deferred Policy Acquisition Costs .. (43.4) (70.9)
Change in Deferred Federal Income Tax .......... (8.0) (65.6)
Depreciation ................................... 40.6 44.6
Realized Investment Gains ...................... (126.7) (74.2)
Other, Net ..................................... 4.8 72.1
-------- --------
Net Cash Provided by Operating Activities ........ 1,027.9 1,301.2
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .......... 1,411.7 2,649.3
Proceeds from Maturities of Fixed Maturities ..... 602.1 479.2
Proceeds from Sales of Equity Securities ......... 296.3 250.6
Proceeds from Sale of Discontinued Operations, Net -- 861.2
Purchases of Fixed Maturities .................... (2,553.8) (3,698.8)
Purchases of Equity Securities ..................... (484.6) (263.5)
Decrease (Increase) in Short Term Investments, Net . 165.2 (841.2)
Increase (Decrease) in Net Payable from
Security Transactions Not Settled ............... (14.8) 35.8
Other, Net ....................................... (42.7) (58.9)
-------- --------
Net Cash Used in Investing Activities ............ (620.6) (586.3)
-------- --------
Cash Flows from Financing Activities
Proceeds from Issuance of Long Term Debt ......... 400.3 10.0
Repayment of Long Term Debt ...................... (161.3) (34.5)
Increase in Short Term Debt, Net ................. -- 57.5
Dividends Paid to Shareholders ................... (153.1) (146.9)
Repurchase of Shares ............................. (534.7) (641.1)
Other, Net ....................................... 47.0 47.7
-------- --------
Net Cash Used in Financing Activities ............ (401.8) (707.3)
-------- --------
Net Increase in Cash ............................... 5.5 7.6
Cash at Beginning of Year .......................... 11.5 4.7
-------- --------
Cash at End of Period ............................ $ 17.0 $ 12.3
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 8
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The amounts included in this report are unaudited but include those
adjustments, consisting of normal recurring items, which management
considers necessary for a fair presentation. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes in the 1997 Annual Report to Shareholders.
2) Adoption of New Accounting Pronouncement
In the first quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components. Comprehensive
income is defined as all changes in shareholders' equity, except those
arising from transactions with shareholders. For the Corporation,
comprehensive income includes net income, changes in unrealized
appreciation or depreciation of investments carried at market value and
changes in foreign currency translation gains or losses. SFAS No. 130 only
requires the presentation of additional information in the financial
statements; therefore, the adoption of SFAS No. 130 has no effect on the
Corporation's financial position or results of 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
1998 1997 1998 1997
------- ------ ------- ------
(in millions)
<S> <C> <C> <C> <C>
Change in unrealized appreciation or
depreciation of equity securities . $(193.8) $ 14.7 $(148.9) $ 51.6
Change in unrealized appreciation of
fixed maturities .................. 134.9 123.6 111.9 150.6
------- ------ ------- ------
(58.9) 138.3 (37.0) 202.2
Deferred income tax (credit) ....... (20.6) 48.6 (13.0) 70.8
------- ------ ------- ------
Change in unrealized appreciation of
investments, net .................. $(38.3) $ 89.7 $(24.0) $131.4
====== ====== ====== ======
</TABLE>
<PAGE> 9
Page 6
4) Property and Casualty Unpaid Claims
A discussion of the 1993 Fibreboard asbestos-related settlement is
presented in Note 13 of the notes to consolidated financial statements in
the 1997 Annual Report to Shareholders. The following developments during
1998 relate to the settlement.
In January 1998, the United States Court of Appeals for the Fifth
Circuit again affirmed the approval by a lower court of 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. In April 1998, the objectors to the global settlement
agreement petitioned the United States Supreme Court to review the
decision. In June 1998, the Supreme Court announced it would review the
decision of the lower court. A decision by the Supreme Court is not
expected until 1999.
The trilateral agreement among Pacific Indemnity, Continental Casualty
and Fibreboard was never appealed to the United States Supreme Court and is
final. The trilateral agreement will be triggered if the global settlement
agreement is ultimately disapproved. As a result, 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.
5) Debt Arrangements
In August of 1998, the Corporation sold $300 million of unsecured
6.15% notes due in 2005 and $100 million of unsecured 6.60% debentures due
in 2018.
The Corporation filed a shelf registration statement which the
Securities and Exchange Commission declared effective in September 1998,
under which up to $600 million of various types of securities may be
issued by the Corporation or Chubb Capital Corporation. No securities have
been issued under this registration statement.
6) Restructuring Charge
During the fourth quarter of 1997, the Corporation began an activity
value analysis process to identify and then eliminate low-value activities
and to improve operational efficiency in order to reduce expenses and
redirect resources to those current activities and new initiatives that
have the greatest potential to contribute to the future results of the
Corporation. Implementation began in the first quarter of 1998 and will be
substantially completed by the end of the year. The cost control initiative
will result in approximately 500 job reductions in the home office and the
branch network through a combination of early retirements, terminations and
attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
In the first quarter of 1998, the Corporation recorded a restructuring
charge of $40 million related to the implementation of the cost control
initiative. The restructuring charge relates primarily to costs associated
with providing enhanced pension benefits to employees who accepted an early
retirement incentive offer, severance costs and other costs.
<PAGE> 10
Page 7
7) Earnings Per Share
Earnings per share amounts for 1997 have been restated to reflect
the changes prescribed by SFAS No. 128, Earnings per Share. SFAS No.
128 requires presentation of basic earnings per share and diluted
earnings per share.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Periods Ended September 30
----------------------------------------------------
Third Quarter Nine Months
1998 1997 1998 1997
------- ------- ------- -------
(in millions,
except per share amounts)
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income ................................ $ 173.4 $ 194.0 $ 549.4 $ 574.8
======= ======= ======= =======
Weighted average number of common
shares outstanding ....................... 164.2 171.7 166.7 172.3
======= ======= ======= =======
Basic earnings per share .................. $ 1.05 $ 1.12 $ 3.29 $ 3.33
======= ======= ======= =======
Diluted earnings per share:
Net income ................................ $ 173.4 $ 194.0 $ 549.4 $ 574.8
After-tax interest expense on 6%
exchangeable subordinated notes .......... -- -- -- 3.3
------- ------- ------- -------
Net income for computing diluted
earnings per share ....................... $ 173.4 $ 194.0 $ 549.4 $ 578.1
======= ======= ======= =======
Weighted average number of common
shares outstanding ....................... 164.2 171.7 166.7 172.3
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 ............ -- -- -- 2.4
Additional shares from assumed exercise
of stock-based compensation awards ....... 2.8 3.1 3.2 2.6
------- ------- ------- -------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share ....................... 167.0 174.8 169.9 177.3
======= ======= ======= =======
Diluted earnings per share ................ $ 1.04 $ 1.10 $ 3.24 $ 3.26
======= ======= ======= =======
</TABLE>
<PAGE> 11
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for the
third quarter and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Periods Ended September 30
----------------------------------------------------
Third Quarter Nine Months
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written .......... $ 1,366.7 $ 1,344.5 $ 4,136.5 $ 4,133.0
Increase in Unearned Premiums . (38.3) (51.5) (169.6) (270.0)
---------- ---------- ---------- ----------
Premiums Earned ............ 1,328.4 1,293.0 3,966.9 3,863.0
---------- ---------- ---------- ----------
Claims and Claim Expenses ..... 889.2 839.3 2,589.4 2,464.9
Operating Costs and Expenses .. 463.0 435.2 1,390.4 1,341.8
Increase in Deferred Policy
Acquisition Costs ............ (10.3) (10.1) (43.4) (70.9)
Dividends to Policyholders .... 8.9 8.4 26.5 23.5
---------- ---------- ---------- ----------
Underwriting Income (Loss)
Before Income Tax ............ (22.4) 20.2 4.0 103.7
Federal and Foreign
Income Tax (Credit) .......... (7.4) 7.0 1.0 36.9
---------- ---------- ---------- ----------
Underwriting Income (Loss) .... (15.0) 13.2 3.0 66.8
---------- ---------- ---------- ----------
Investments
Investment Income Before
Expenses and Income Tax ...... 189.8 181.9 566.5 535.0
Investment Expenses ........... 2.1 2.4 8.5 7.3
---------- ---------- ---------- ----------
Investment Income Before
Income Tax ................... 187.7 179.5 558.0 527.7
Federal and Foreign Income Tax 28.0 30.3 85.9 88.4
---------- ---------- ---------- ----------
Investment Income ............. 159.7 149.2 472.1 439.3
---------- ---------- ---------- ----------
Property and Casualty Income ... 144.7 162.4 475.1 506.1
CORPORATE AND OTHER, Net of Tax . 5.1 12.7 17.9 20.5
---------- ---------- ---------- ----------
CONSOLIDATED OPERATING INCOME
BEFORE RESTRUCTURING CHARGE .... 149.8 175.1 493.0 526.6
Restructuring Charge, Net of Tax -- -- (26.0) --
---------- ---------- ---------- ----------
CONSOLIDATED OPERATING INCOME ... 149.8 175.1 467.0 526.6
REALIZED INVESTMENT GAINS,
Net of Tax ..................... 23.6 18.9 82.4 48.2
---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME ......... $ 173.4 $ 194.0 $ 549.4 $ 574.8
========== ========== ========== ==========
</TABLE>
<PAGE> 12
Page 9
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were lower in the first
nine months of 1998 compared with the same period of 1997. The decrease in 1998
was due in large part to substantially higher catastrophe losses which adversely
affected underwriting results. Investment income increased 7.5% in the first
nine months of 1998 compared with 1997. Property and casualty income after taxes
amounted to $475.1 million in the first nine months of 1998 and $144.7 million
in the third quarter compared with $506.1 million and $162.4 million,
respectively, in 1997.
Reported net premiums written were $4.1 billion in the first nine months of
1998, approximately the same level as reported for the comparable period in
1997. Growth in reported premiums written in the first nine months of 1998 was
affected by the termination, effective January 1, 1997, of the agreements
pertaining to the exchange of reinsurance on a quota share basis with the Royal
& Sun Alliance Insurance Group plc. Net premiums written in the first quarter of
1997 included the effect of the portfolio transfers of unearned premiums as of
January 1, 1997 resulting from the termination of the agreements.
A comparison of reported net premiums written with net premiums written
adjusted to reflect the termination of the reinsurance agreements with Sun
Alliance follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
---------- ----------
(in millions)
<S> <C> <C>
Reported net premiums written $ 4,136.5 $ 4,133.0
Portfolio transfer of unearned premiums 174.6
Premiums assumed from Sun Alliance (3.8)
---------- ----------
Adjusted net premiums written $ 4,136.5 $ 3,962.2
========== ==========
</TABLE>
Net premiums written, as adjusted, increased 4.4% in the first nine months
of 1998 compared with the same period in 1997. Net premiums written were $1.4
billion in the third quarter of 1998, an increase of 1.7% over the comparable
period of 1997. Third quarter premium growth was unaffected by the termination
of the reinsurance agreements with Sun Alliance. The worldwide marketplace
continued to be competitive, particularly in the standard commercial classes.
Competitors continued to place significant pressure on pricing and coverage
terms as they attempted to maintain or increase market share. Strong growth in
the first nine months of 1998 was achieved in foreign premiums, particularly in
Europe, our largest international market.
In view of the continuing unprofitability of the standard commercial
classes, we are accelerating actions to achieve price increases which may result
in our losing some of this business. Our priorities in the coming months will be
to renew good business at adequate prices and not renew underperforming accounts
where we cannot attain price adequacy.
<PAGE> 13
Page 10
Underwriting results were near breakeven in the first nine months of 1998
compared with profitable results in the same period in 1997. Underwriting
results were unprofitable in the third quarter of 1998 compared with profitable
results for the same period in 1997. Our combined loss and expense ratio was
99.2% in the first nine months of 1998 and 101.2% in the third quarter compared
with 96.4% and 97.5%, respectively, in 1997.
The loss ratio was 65.7% for the first nine months of 1998 and 67.4% for
the third quarter compared with 64.2% and 65.3%, 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
1998 loss ratios were adversely affected by higher catastrophe losses. The
significant catastrophes affecting results in 1998 include the winter ice storms
in Canada in the first quarter, the wind and hail storms in the United States in
the second quarter and Hurricane Georges in Puerto Rico in the third quarter.
Catastrophe losses, net of reinsurance, during the first nine months of 1998
amounted to $160.8 million which represented 4.1 percentage points of the loss
ratio compared with $56.5 million or 1.5 percentage points in 1997. Catastrophe
losses for the third quarter of 1998 amounted to $68.8 million or 5.2 percentage
points of the loss ratio compared with $28.0 million or 2.2 percentage points in
1997.
Our expense ratio was 33.5% for the first nine months of 1998 and 33.8% for
the third quarter compared with 32.2% in both periods in 1997. The increase in
the ratio in 1998 was due primarily to an increase in commission expense caused
in part by higher contingent payments and also to written premiums growing at a
somewhat lesser rate than overhead expenses.
Underwriting results during 1998 and 1997 by class of business were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
----------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
1998 1997 1998 1997
---------- ---------- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile .................. $ 233.1 $ 228.5 87.7% 86.5%
Homeowners .................. 551.1 533.1 93.3 92.1
Other ....................... 242.9 239.5 67.8 66.5
---------- ---------- ----- -----
Total Personal .......... 1,027.1 1,001.1 86.0 84.7
---------- ---------- ----- -----
Commercial Insurance
Multiple Peril .............. 576.9 611.6 122.1 115.2
Casualty .................... 673.3 687.3 114.9 112.4
Workers' Compensation ....... 238.0 225.6 113.1 106.4
Property and Marine ......... 414.5 447.5 112.0 105.7
Executive Protection ........ 709.1 663.1 75.6 73.4
Financial Institutions ...... 296.2 300.2 83.8 89.1
Other ....................... 201.4 200.4 102.3 83.8
---------- ---------- ----- -----
Total Commercial ........ 3,109.4 3,135.7 103.5 99.4
---------- ---------- ----- -----
Total Before Reinsurance
Assumed ................ 4,136.5 4,136.8 99.2 96.0
Reinsurance Assumed ........... -- (3.8) -- N/M
---------- ---------- ----- -----
Total ................... $ 4,136.5 $ 4,133.0 99.2% 96.4%
========== ========== ===== =====
</TABLE>
<PAGE> 14
Page 11
<TABLE>
<CAPTION>
Quarter Ended September 30
--------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
1998 1997 1998 1997
---------- ---------- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Personal Insurance
Automobile ................... $ 80.9 $ 75.5 88.1% 87.8%
---------- ---------- ----- -----
Homeowners ................... 199.2 180.5 92.3 90.5
Other ........................ 82.7 75.8 74.9 69.0
---------- ---------- ----- -----
Total Personal ........... 362.8 331.8 87.2 84.8
---------- ---------- ----- -----
Commercial Insurance
Multiple Peril ............... 187.1 198.5 126.3 122.8
Casualty ..................... 212.6 215.3 109.9 108.6
Workers' Compensation ........ 68.5 68.5 119.8 110.4
Property and Marine .......... 129.2 144.6 116.8 103.4
Executive Protection ......... 241.4 226.9 77.6 74.8
Financial Institutions ....... 96.4 95.7 87.9 101.9
Other ........................ 68.7 63.2 116.3 86.2
---------- ---------- ----- -----
Total Commercial ......... 1,003.9 1,012.7 105.9 101.4
---------- ---------- ----- -----
Total .................... $ 1,366.7 $ 1,344.5 101.2% 97.5%
========== ========== ===== =====
</TABLE>
PERSONAL INSURANCE
Reported premiums from personal insurance coverages, which represent
approximately 25% of the premiums written by our property and casualty
subsidiaries, increased 2.6% in the first nine months of 1998 compared with the
same period in 1997. In the first quarter of 1997, net premiums written for the
personal classes included $65.8 million due to the effect of the portfolio
transfer of unearned premiums as of January 1, 1997 resulting from the
termination of the reinsurance agreement with Sun Alliance.
Excluding the effects of the termination of the reinsurance agreement with
Sun Alliance, premium growth for the personal classes was 9.8% in the first nine
months of 1998. Net premiums written increased 9.3% in the third quarter of 1998
compared with the similar period in 1997. We continued to grow our homeowners
and other non-automobile business in non-catastrophe prone areas. Personal
automobile premiums also increased as a result of an increase in the number of
in-force policies for high value automobiles.
Our personal insurance business produced highly profitable underwriting
results in 1998 and 1997. The combined loss and expense ratios were 86.0% for
the first nine months of 1998 and 87.2% for the third quarter compared with
84.7% and 84.8%, respectively, in 1997.
Homeowners results were profitable by a similar margin in 1998 and 1997 as
a reduction in non-catastrophe related losses substantially offset an increase
in catastrophe losses. Catastrophe losses represented 10.9 percentage points of
the loss ratio for this class in the first nine months of 1998 and 8.5
percentage points in the third quarter compared with 3.8 percentage points and
5.1 percentage points, respectively, in 1997.
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Other personal coverages, which include insurance for personal valuables
and excess liability, produced highly profitable results in 1998 and 1997 due to
continued favorable loss experience. Our automobile business produced profitable
results in both years due primarily to stable loss frequency and severity.
COMMERCIAL INSURANCE
Reported premiums from commercial insurance, which represent approximately
75% of our total writings, decreased by less than 1% in the first nine months of
1998 compared with the same period a year ago. In the first quarter of 1997, net
premiums written for the commercial classes included $108.8 million due to the
effect of the portfolio transfer of unearned premiums as of January 1, 1997
resulting from the termination of the reinsurance agreement with Sun Alliance.
Excluding the effects of the termination of the reinsurance agreement with
Sun Alliance, premium growth for the commercial classes was 2.7% in the first
nine months of 1998. Net premiums written decreased by approximately 1% in the
third quarter of 1998 compared with the same period in 1997. We achieved modest
growth in our executive protection business due to an emphasis on new products.
Financial services consolidation together with competition has constrained
growth in our financial institutions business. Growth in the standard commercial
classes continues to be hindered by intense competition that is driving prices
to increasingly unprofitable levels.
Our commercial insurance business produced unprofitable underwriting
results in the first nine months of 1998 compared with near breakeven results
for the same period a year ago. Underwriting results were more unprofitable in
the third quarter of 1998 compared with the same period in 1997. The combined
loss and expense ratios were 103.5% for the first nine months of 1998 and 105.9%
for the third quarter compared with 99.4% and 101.4%, respectively, in 1997.
Multiple peril results were extremely unprofitable in 1998 and 1997 due, in
large part, to competitive pressure on prices. Results in 1998 deteriorated in
the property component of this business due primarily to higher catastrophes
losses. Catastrophe losses represented 10.8 percentage points of the loss ratio
for this class in the first nine months of 1998 and 18.1 percentage points in
the third quarter compared with only 2.0 percentage points and 3.0 percentage
points, respectively, in 1997. In the liability component, an increase in the
frequency of large losses in 1998 was offset by fewer increases in loss reserves
for asbestos-related and toxic waste claims compared with 1997.
Results for our casualty business were unprofitable in 1998 and 1997.
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 produced breakeven underwriting results in
the first nine months of 1998 compared with profitable results in 1997 due to
declining prices and an increase in the frequency of losses. Excess liability
results in the third quarter of 1998 benefited from favorable development on
several old case reserves. Results for the primary liability component were
unprofitable in both years but more so in 1997. Results in the automobile
component were more unprofitable in 1998 than in 1997 due to an unusually high
frequency of large losses.
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Workers' compensation results were more unprofitable in 1998 than in 1997.
Results in both periods reflect the cumulative effect of price reductions that
have occurred over the past several years. Results deteriorated in 1998 due to
an increase in the frequency of large losses.
Property and marine results were more unprofitable in 1998 than in 1997.
Results in both periods were adversely affected by an increase in the frequency
of large losses, including several large overseas losses. Results were also
adversely affected in both years, but more so in 1998, by high catastrophe
losses. Catastrophe losses represented 8.1 percentage points of the loss ratio
for this class in the first nine months of 1998 and 14.7 percentage points in
the third quarter compared with 6.5 percentage points and 9.6 percentage points,
respectively, in 1997.
Results for our executive protection business were highly profitable in
1998 and 1997 due to favorable loss experience. Our financial institutions
business produced more profitable results in 1998 than in 1997. Results in 1997
were adversely affected by several large losses in the third quarter. Results in
our other commercial classes deteriorated in 1998, particularly in the third
quarter, due to an unusually high frequency of large losses.
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. This was
offset by a $93.6 million reduction in net premiums written in the first quarter
of 1997 due to the effect of the portfolio transfer of unearned premiums back to
Sun Alliance as of January 1, 1997.
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.
LOSS RESERVES
Gross loss reserves were $10,331.6 million and $9,772.5 million at
September 30, 1998 and December 31, 1997, respectively. Reinsurance recoverables
on such loss reserves were $1,304.0 million and $1,207.9 million at September
30, 1998 and December 31, 1997, respectively.
Loss reserves, net of reinsurance recoverable, increased by $463.0 million
during the first nine months of 1998. 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. The increase in net loss reserves during the first nine
months of 1998 included $75 million of unpaid claims related to catastrophes.
Losses incurred related to asbestos and toxic waste claims were $51.0
million in the first nine months of 1998 and $95.2 million for the same period
in 1997.
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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, 1997. The following developments during 1998 relate to
the settlement.
In January 1998, the United States Court of Appeals for the Fifth Circuit
again affirmed the approval by a lower court of 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. In April
1998, the objectors to the global settlement agreement petitioned the United
States Supreme Court to review the decision. In June 1998, the Supreme Court
announced it would review the decision of the lower court. A decision by the
Supreme Court is not expected until 1999.
The trilateral agreement among Pacific Indemnity, Continental Casualty and
Fibreboard was never appealed to the United States Supreme Court and is final.
The trilateral agreement will be triggered if the global settlement agreement is
ultimately disapproved. As a result, 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 7.5% in
the first nine months of 1998 and by 7.0% in the third quarter compared with the
same periods in 1997. The growth was due to an increase in invested assets since
the third quarter of 1997, reflecting strong cash flow from operations over the
period, partially offset by lower average yields on new investments. The
effective tax rate on investment income decreased to 15.4% in the first nine
months of 1998 from 16.8% in 1997 due to holding a larger proportion of our
investment portfolio in tax-exempt securities.
New cash available for investment in the first nine months of 1998 was
invested primarily in tax-exempt bonds. The property and casualty subsidiaries
maintain sufficient investments in highly liquid, short term securities to
provide for immediate cash needs.
CORPORATE AND OTHER
Corporate and other includes the results of our real estate subsidiary,
investment income earned on corporate invested assets and interest and other
expenses not allocable to the operating subsidiaries. Corporate and other income
after taxes was $17.9 million in the first nine months of 1998 compared with
$20.5 million in the first nine months of 1997. The decrease in corporate and
other income in 1998 was due primarily to higher interest expense.
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In June 1997, a definitive agreement was reached to sell a substantial
portion of our commercial real estate properties. 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. We are continuing to
explore the sale of certain of the remaining properties held by our real estate
subsidiary.
COST REDUCTION PROGRAM AND RESTRUCTURING CHARGE
During the fourth quarter of 1997, the Corporation began an activity value
analysis process to identify and then eliminate low-value activities and to
improve operational efficiency in order to reduce expenses and redirect
resources to those current activities and new initiatives that have the greatest
potential to contribute to the future results of the Corporation. Implementation
began in the first quarter of 1998 and will be substantially completed by the
end of the year. The cost control initiative is expected to result in annual
pre-tax savings of approximately $150 million, beginning in 1999. This
initiative will result in approximately 500 job reductions in the home office
and the branch network through a combination of early retirements, terminations
and attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
In the first quarter of 1998, the Corporation recorded a restructuring
charge of $40 million, or $26 million after taxes, related to the implementation
of the cost control initiative. The restructuring charge relates primarily to
costs associated with providing enhanced pension benefits to employees who
accepted an early retirement incentive offer, severance costs and other costs.
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 $126.7 million were realized in the first nine months of
1998 compared with net gains of $74.2 million for the same period in 1997.
CAPITAL RESOURCES
On March 7, 1997, the Board of Directors replaced a prior share repurchase
program with a new program, which authorized the repurchase of up to 17,500,000
shares of common stock. On July 24, 1998, the Board of Directors authorized
management to increase the share repurchase program by 12,500,000 shares.
Through September 30, 1998, the Corporation repurchased 16,897,700 shares under
the 1997 share repurchase program, including 7,105,800 shares repurchased in
open-market transactions in the first nine months of 1998 at a cost of $534.7
million. As of September 30, 1998, up to 13,102,300 shares of common stock can
be repurchased under the remaining share repurchase authorizations.
In August 1998, the Corporation sold $300 million of unsecured 6.15% notes
due in 2005 and $100 million of unsecured 6.60% debentures due in 2018. A
substantial portion of the proceeds were used for general corporate purposes,
which included the repurchase of shares of our common stock.
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The Corporation filed a shelf registration statement which the Securities
and Exchange Commission declared effective in September 1998, under which up to
$600 million of various types of securities may be issued by the Corporation or
Chubb Capital Corporation. No securities have been issued under this
registration statement.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue relates to the inability of certain information
technology (IT) systems and applications as well as non-IT systems, such as
equipment with imbedded chips and microprocessors, to properly process data
containing dates beginning with the year 2000. The issue exists because many
systems used two digits rather than four to define the applicable year. Such
systems may recognize the date "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
normal business activities or other unforeseen problems.
In 1995, we initiated a project to ensure Year 2000 readiness of the
Corporation's systems and applications. We put in place a team responsible for
bringing our systems and equipment into Year 2000 compliance.
The team performed an inventory and assessment of our mainframe systems to
determine which must be retired, renovated or rewritten as a result of Year
2000 issues. As of September 30, 1998, we completed remediation and testing
procedures on 90% of our mainframe IT systems. All mission critical systems
except one are expected to be Year 2000 ready by year-end 1998. We expect to
complete the remediation and testing of all remaining systems by June 1999.
We have also completed an inventory and assessment of all our personal
computers, servers and other non-mainframe computers. We expect that all such
computers and related software will be Year 2000 ready by the third quarter of
1999. We have also assessed our non-IT systems and believe that the failure of
any of these systems would have minimal impact on our operations.
The Corporation has interaction with many third parties, including
producers, reinsurers, financial institutions, vendors, suppliers and others. We
have initiated contact with these parties regarding their plans for Year 2000
readiness. We are in the process of evaluating the responses and following up
with those parties from whom we have received no response. The information
obtained will be used to develop business contingency plans to address any
mission critical operations that may be adversely impacted by the noncompliance
of a third party with whom we interact. We have electronic data interchanges
with some third parties. We are physically testing such interchanges for Year
2000 compliance. We expect that such testing will be completed by June 1999.
While we have identified those third parties that are critical to our
operations and we are assessing risks with respect to the potential failure of
such parties to be Year 2000 ready, we do not have control over these third
parties and are unable to determine whether all such third parties will address
the Year 2000 issue successfully, including third parties located outside the
United States where it is believed that Year 2000 remediation efforts in
general may be less advanced. Management cannot determine the effect on the
Corporation's future operating results of the failure of third parties to be
Year 2000 ready.
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Our Year 2000 plans have been developed with the intention of minimizing
the need for actual implementation of contingency activities. We anticipate
that a substantial portion of 1999 will be used to monitor systems already
remediated for Year 2000 for any unidentified problems and to perform
additional remediation and testing as necessary. Nonetheless, in order to
address any unexpected difficulties that may arise, we will keep our core Year
2000 readiness team intact until June 2000. Additionally, we are studying the
development of contingency plans to continue business in the unlikely event
that one or more of our critical systems fail.
We believe that we are taking the necessary measures to address Year 2000
issues that may arise and that our internal systems will be compliant.
Notwithstanding such efforts, significant Year 2000 problems could arise. In
particular, the prolonged failure of power and telecommunications systems could
have a material adverse effect on our operations. Similarly, Year 2000 related
difficulties experienced by our producers or financial institutions have the
potential to materially disrupt our business. Given the uncertain nature of
Year 2000 problems that may arise, management cannot determine at this time
whether the consequences of Year 2000 related problems will have a material
impact on the Corporation's financial condition or results of operations.
The Year 2000 team has included employees of the Corporation and software
consultants. A portion of the remediation effort has been accomplished by
redirecting existing systems resources to the Year 2000 effort. However, we do
not believe that this has had a significant adverse effect on other systems
initiatives.
We expect that the total cost to address the Year 2000 IT systems issue,
including compensation of employees and the cost of consultants, will
approximate $36 million. Approximately $27 million was incurred as of September
30, 1998, of which $11 million was incurred in the first nine months of 1998.
These amounts do not include the cost of computer equipment purchased to replace
equipment that would have been upgraded in the normal course of business, but
not necessarily prior to January 2000.
An additional concern to the Corporation is the potential future impact of
the Year 2000 issue on insurance coverage written by our property and casualty
subsidiaries. The Year 2000 issue is a risk for some of our insureds and needs
to be considered during the underwriting process similar to any other risk to
which our customers may be exposed. It is possible that Year 2000 related losses
may emerge that would adversely affect operating results in future periods. At
this time, in the absence of any significant claims experience, management
cannot determine the nature and extent of any losses, the availability of
coverage for such losses or the likelihood of significant claims.
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FORWARD LOOKING INFORMATION
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities Litigation
Reform Act of 1995, such as statements that include the words or phrases "will
result in", "is expected to", "are continuing to", "is anticipated", "estimate",
"project", or similar expressions. Such statements are subject to certain risks
and uncertainties. The factors which could cause actual results to differ
materially from those suggested by any such statements include, but are not
limited to, those discussed or identified from time to time in the Corporation's
public filings with the Securities and Exchange Commission and specifically to:
risks or uncertainties associated with the Corporation's expectations with
respect to its activity value analysis program, its share repurchase program,
investment or cash flow projections, or with respect to premium price increases
or the non-renewal of underpriced insurance accounts or its announced real
estate plans; and, more generally, to: general economic conditions including
changes in interest rates and the performance of the financial markets, changes
in domestic and foreign laws, regulations and taxes, changes in competition and
pricing environments, regional or general changes in asset valuations, the
occurrence of significant natural disasters, the development of major year 2000
liabilities, the inability to reinsure certain risks economically, the adequacy
of loss reserves, as well as general market conditions, competition, pricing and
restructurings.
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PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
A. Reports on Form 8-K - The Registrant filed a current report on Form 8-K dated
October 29, 1998 with respect to the announcement on October 29, 1998 of its
financial results for the third quarter and first nine months of 1998.
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: February 26, 1999
