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, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the transition period from to
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Commission file number 1-8661
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THE CHUBB CORPORATION
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(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, 2001 was
169,790,975.
THE CHUBB CORPORATION
INDEX
Page Number
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 2001 and 2000.................................. 2
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 2001 and 2000.................................. 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000................ 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 9
Part II. Other Information:
Item 1 - Legal Proceedings...................................... 19
Item 6 - Exhibits and Reports on Form 8-K....................... 19
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31,
2001 2000
-------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 556.3 $ 605.6
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $1,345.2
and $1,564.7)..................................... 1,268.7 1,496.1
Available-for-Sale
Tax Exempt (cost $8,085.5 and $8,053.8)........... 8,555.9 8,380.5
Taxable (cost $6,236.4 and $5,666.6).............. 6,407.2 5,687.8
Equity Securities (cost $821.3 and $839.8)........... 771.6 830.6
--------- ---------
TOTAL INVESTED ASSETS......................... 17,559.7 17,000.6
Cash................................................... 19.5 22.4
Securities Lending Collateral.......................... 395.9 451.1
Accrued Investment Income.............................. 245.6 246.8
Premiums Receivable.................................... 1,592.3 1,409.8
Reinsurance Recoverable on Unpaid Claims
and Claim Expenses.................................... 4,198.4 1,853.3
Prepaid Reinsurance Premiums........................... 321.8 246.0
Deferred Policy Acquisition Costs...................... 904.2 842.0
Real Estate Assets..................................... 668.4 677.1
Deferred Income Tax.................................... 568.8 501.0
Goodwill............................................... 472.4 487.3
Other Assets........................................... 1,279.7 1,289.3
--------- ---------
TOTAL ASSETS.................................. $28,226.7 $25,026.7
========= =========
Liabilities
Unpaid Claims and Claim Expenses....................... $15,094.4 $11,904.6
Unearned Premiums...................................... 3,786.6 3,516.3
Securities Lending Payable............................. 395.9 451.1
Short Term Debt........................................ 101.1 -
Long Term Debt......................................... 755.3 753.8
Dividend Payable to Shareholders....................... 57.6 57.8
Accrued Expenses and Other Liabilities................. 1,390.3 1,361.4
--------- ---------
TOTAL LIABILITIES............................. 21,581.2 18,045.0
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 179,924,569 and
178,833,278 Shares.................................... 179.9 178.8
Paid-In Surplus........................................ 532.0 466.0
Retained Earnings...................................... 6,398.6 6,492.6
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 384.5 220.1
Foreign Currency Translation Losses, Net of Tax....... (80.6) (68.5)
Receivable from Employee Stock Ownership Plan.......... (55.9) (62.5)
Treasury Stock, at Cost - 10,524,354 and
3,914,105 Shares...................................... (713.0) (244.8)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 6,645.5 6,981.7
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $28,226.7 $25,026.7
========= =========
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months
-------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Revenues
Premiums Earned....................... $1,684.4 $1,550.1 $4,945.5 $4,561.9
Investment Income..................... 244.4 240.8 737.5 712.3
Real Estate and Other Revenues........ 25.0 31.8 66.5 77.6
Realized Investment Gains............. 2.5 35.8 12.8 47.7
-------- -------- -------- --------
Total Revenues................. 1,956.3 1,858.5 5,762.3 5,399.5
-------- -------- -------- --------
Claims and Expenses
Insurance Claims and Claim Expenses... 1,772.4 1,032.6 3,996.5 3,056.8
Amortization of Deferred Policy
Acquisition Costs.................... 433.9 410.7 1,317.1 1,219.9
Other Insurance Operating Costs
and Expenses......................... 130.4 116.6 364.0 329.8
Real Estate and Other Expenses........ 25.2 19.4 65.1 66.9
Investment Expenses................... 3.6 3.0 11.8 11.5
Corporate Expenses.................... 18.2 19.1 59.6 59.2
-------- -------- -------- --------
Total Claims and Expenses...... 2,383.7 1,601.4 5,814.1 4,744.1
-------- -------- -------- --------
Income (Loss) Before Federal
and Foreign Income Tax................. (427.4) 257.1 (51.8) 655.4
Federal and Foreign Income Tax (Credit). (188.4) 49.2 (134.6) 109.2
-------- -------- -------- --------
Net Income (Loss)....................... $ (239.0) $ 207.9 $ 82.8 $ 546.2
======== ======== ======== ========
Average Common Shares Outstanding....... 170.6 173.6 173.3 174.5
Average Common and Potentially Dilutive
Shares Outstanding..................... 170.6 177.9 177.0 178.1
Net Income (Loss) Per Share
Basic.................................. $(1.40) $1.20 $ .48 $3.13
Diluted................................ (1.40) 1.17 .47 3.06
Dividends Declared Per Share............ .34 .33 1.02 .99
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Net Income (Loss)........................ $(239.0) $207.9 $ 82.8 $546.2
------- ------ ------ ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation or
Depreciation of Investments,
Net of Tax............................ 151.2 99.2 164.4 174.6
Foreign Currency Translation Gains
(Losses), Net of Tax ................. .8 (15.3) (12.1) (27.0)
------- ------ ------ ------
152.0 83.9 152.3 147.6
------- ------ ------ ------
Comprehensive Income (Loss).............. $ (87.0) $291.8 $235.1 $693.8
======= ====== ====== ======
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
2001 2000
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................ $ 82.8 $ 546.2
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims and Claim Expenses, Net.. 844.7 228.0
Increase in Unearned Premiums, Net................. 194.5 165.8
Increase in Premiums Receivable.................... (182.5) (117.3)
Increase in Reinsurance Premiums Payable........... 73.9 32.3
Increase in Deferred Policy Acquisition Costs...... (62.2) (46.5)
Change in Deferred Federal Income Tax.............. (151.2) (15.9)
Depreciation....................................... 68.6 60.1
Realized Investment Gains.......................... (12.8) (47.7)
Other, Net......................................... 44.6 (40.7)
--------- ---------
Net Cash Provided by Operating Activities............. 900.4 764.3
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities............... 2,794.5 1,475.2
Proceeds from Maturities of Fixed Maturities.......... 963.7 645.0
Proceeds from Sales of Equity Securities.............. 229.2 291.9
Proceeds from Sale of Interest in
Associated Aviation Underwriters, Inc................ - 55.0
Purchases of Fixed Maturities......................... (4,129.3) (2,564.8)
Purchases of Equity Securities........................ (210.6) (396.2)
Decrease in Short Term Investments, Net............... 49.3 97.8
Increase in Net Payable from Security
Transactions Not Settled............................. 41.0 24.8
Purchases of Property and Equipment, Net.............. (127.5) (95.9)
Other, Net............................................ (3.3) (4.5)
--------- ----------
Net Cash Used in Investing Activities................. (393.0) (471.7)
--------- ---------
Cash Flows from Financing Activities
Increase in Short Term Debt, Net...................... 101.1 -
Repayment of Long Term Debt........................... (2.1) (5.3)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans......................... 115.6 68.8
Repurchase of Shares.................................. (554.5) (189.7)
Dividends Paid to Shareholders........................ (177.0) (171.5)
Other, Net............................................ 6.6 8.6
--------- ---------
Net Cash Used in Financing Activities................. (510.3) (289.1)
--------- ---------
Net Increase (Decrease) in Cash......................... (2.9) 3.5
Cash at Beginning of Year............................... 22.4 22.7
--------- ---------
Cash at End of Period................................. $ 19.5 $ 26.2
========= =========
See Notes to Consolidated Financial Statements.
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 2000 Annual Report to Shareholders.
2) Adoption of New Accounting Pronouncements
Effective January 1, 2001, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities, and SFAS No. 138 provides additional guidance
related to accounting and reporting for certain derivative instruments and
hedging activities. SFAS No. 133 requires that all derivatives be
recognized in the balance sheet as assets or liabilities and be measured at
fair value. The Statements may not be applied retroactively to financial
statements of prior periods. Currently, the Corporation's use of
derivatives is not significant. Thus, the adoption of SFAS No. 133 and SFAS
No. 138 did not have a significant effect on the Corporation's financial
position or results of operations.
Effective April 1, 2001, the Corporation adopted the Emerging Issues
Task Force (EITF) consensus on Issue No. 99-20, Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. EITF Issue No. 99-20 requires that investors
in certain asset-backed securities recognize changes in a security's
estimated yield prospectively. EITF Issue No. 99-20 also requires that if
the carrying value of any such asset-backed security exceeds its current
fair value, investors determine whether the excess represents an other than
temporary decline in value and recognize any such decline as a loss in the
income statement. The adoption of EITF Issue No. 99-20 did not have a
significant effect on the Corporation's financial position or results of
operations.
3) Accounting Pronouncements Not Yet Adopted
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method.
Page 6
Under SFAS No. 142, goodwill will no longer be amortized but rather
will be tested at least annually for impairment. The provisions of SFAS No.
142 shall be effective for the Corporation for the year beginning January
1, 2002. The Statement shall be applied to all goodwill recognized in the
Corporation's financial statements at that date. SFAS No. 142 may not be
applied retroactively to financial statements of prior periods. The
elimination of goodwill amortization is expected to result in an increase
in net income in 2002 of approximately $20 million. The Corporation is in
the process of assessing the effect, if any, that the implementation of the
other provisions of SFAS No. 142 will have on its financial position or
results of operations.
4) Investments
Short term investments, which have an original maturity of one year or
less, are carried at amortized cost which approximates market value. Fixed
maturities classified as held-to-maturity are carried at amortized cost.
Fixed maturities classified as available-for-sale and equity securities are
carried at market value as of the balance sheet date.
The net change in unrealized appreciation or depreciation of
investments carried at market value was as follows:
Periods Ended September 30
-------------------------------------
Third Quarter Nine Months
-------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Change in unrealized appreciation or
depreciation of equity securities... $(17.5) $ (.1) $(40.5) $(22.2)
Change in unrealized appreciation or
depreciation of fixed maturities.... 250.0 132.7 293.3 230.2
------ ------ ------ ------
232.5 132.6 252.8 208.0
Deferred income tax.................. 81.3 46.4 88.4 72.8
Decrease in valuation allowance...... - (13.0) - (39.4)
------ ------ ------ ------
Change in unrealized appreciation or
depreciation of investments, net.... $151.2 $ 99.2 $164.4 $174.6
====== ====== ====== ======
Page 7
5) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Periods Ended September 30
-----------------------------------
Third Quarter Nine Months
-------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
(in millions,
except per share amounts)
Basic earnings per share:
Net income (loss)....................... $(239.0) $207.9 $ 82.8 $546.2
======= ====== ====== ======
Weighted average number of common
shares outstanding..................... 170.6 173.6 173.3 174.5
======= ====== ====== ======
Basic earnings (loss) per share......... $ (1.40) $ 1.20 $ .48 $ 3.13
======= ====== ====== ======
Diluted earnings per share:
Net income (loss)....................... $(239.0) $207.9 $ 82.8 $546.2
======= ====== ====== ======
Weighted average number of common
shares outstanding..................... 170.6 173.6 173.3 174.5
Additional shares from assumed exercise
of stock-based compensation awards..... - 4.3 3.7 3.6
------- ------ ------ ------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share..................... 170.6 177.9 177.0 178.1
======= ====== ====== ======
Diluted earnings (loss) per share....... $ (1.40) $ 1.17 $ .47 $ 3.06
======= ====== ====== ======
6) Segments Information
The property and casualty operations include three reportable
underwriting segments and the investment function. The underwriting
segments are personal insurance, commercial insurance and specialty
insurance. The personal segment targets the personal insurance market. The
personal classes include automobile, homeowners and other personal
coverages. The commercial segment includes those classes of business that
are generally available in broad markets and are of a more commodity
nature. Commercial classes include multiple peril, casualty, workers'
compensation and property and marine. The specialty segment includes those
classes of business that are available in more limited markets since they
require specialized underwriting and claim settlement. Specialty classes
include executive protection, financial institutions and other specialty
coverages.
The property and casualty underwriting segments reflect certain
reclassifications to present results in a manner more consistent with the
way the business is now managed. Prior period amounts have been restated to
conform to the new presentation.
Page 8
Revenues and income before income tax of the operating segments were
as follows:
Periods Ended September 30
--------------------------------------------
Third Quarter Nine Months
------------------ --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance............... $ 471.4 $ 414.0 $1,362.5 $1,198.7
Commercial insurance............. 577.9 583.7 1,757.7 1,768.3
Specialty insurance.............. 635.1 552.4 1,825.3 1,594.9
-------- -------- -------- --------
1,684.4 1,550.1 4,945.5 4,561.9
Investment income.................. 229.5 223.7 684.2 662.7
-------- -------- -------- --------
Total property and casualty
insurance....................... 1,913.9 1,773.8 5,629.7 5,224.6
Corporate and other.................. 39.9 48.9 119.8 127.2
Realized investment gains............ 2.5 35.8 12.8 47.7
-------- -------- -------- --------
Total revenues................... $1,956.3 $1,858.5 $5,762.3 $5,399.5
======== ======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance............... $ (33.7) $ 31.4 $ (73.5) $ 48.9
Commercial insurance............. (122.7) (72.4) (245.6) (223.9)
Specialty insurance.............. (504.2) 31.5 (433.0) 123.4
-------- -------- -------- --------
(660.6) (9.5) (752.1) (51.6)
Increase in deferred policy
acquisition costs............... 32.3 14.4 62.2 46.5
-------- -------- -------- --------
Underwriting income (loss)....... (628.3) 4.9 (689.9) (5.1)
Investment income.................. 226.2 220.8 673.8 652.9
Amortization of goodwill and
other charges..................... (24.0) (14.7) (42.2) (39.5)
-------- -------- -------- --------
Total property and casualty
insurance....................... (426.1) 211.0 (58.3) 608.3
Corporate and other.................. (3.8) 10.3 (6.3) (.6)
Realized investment gains............ 2.5 35.8 12.8 47.7
-------- -------- -------- --------
Total income (loss) before
income tax...................... $ (427.4) $ 257.1 $ (51.8) $ 655.4
======== ======== ======== ========
Property and casualty results in the third quarter of 2001 included an
underwriting loss of $635.0 million from the September 11 attack in the
United States, comprising $20.0 million in personal insurance, $99.0
million in commercial insurance and $516.0 million in specialty insurance.
Page 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
AND FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
SUMMARY OF FINANCIAL RESULTS
The Corporation's operating results deteriorated significantly in 2001
compared with the prior year due to costs of $645 million, or $420 million after
tax, in the third quarter related to the September 11 attack in the United
States. The following is a summary of our operating results for the nine months
and third quarter ended September 30, 2001 and 2000. The summary also presents
our 2001 operating results excluding the impact of the September 11 attack and
shows the impact of the September 11 attack separately.
Nine Months Ended September 30
------------------------------------------
2001 2000
------------------------------- ----
Excluding
Impact of Impact of
Sept. 11 Sept. 11
Total Attack Attack Total
------ --------- --------- ------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written........... $5,140.0 $ 30.0 $5,110.0 $4,727.7
Increase in Unearned Premiums.. (194.5) (194.5) (165.8)
-------- -------- -------- --------
Premiums Earned............. 4,945.5 30.0 4,915.5 4,561.9
-------- -------- -------- --------
Claims and Claim Expenses...... 3,996.5 665.0 3,331.5 3,056.8
Operating Costs and Expenses... 1,680.0 1,680.0 1,536.8
Increase in Deferred Policy
Acquisition Costs............. (62.2) (62.2) (46.5)
Dividends to Policyholders..... 21.1 21.1 19.9
-------- -------- -------- --------
Underwriting Loss.............. (689.9) (635.0) (54.9) (5.1)
-------- -------- -------- --------
Investments
Investment Income Before
Expenses...................... 684.2 684.2 662.7
Investment Expenses............ 10.4 10.4 9.8
-------- -------- -------- --------
Investment Income.............. 673.8 673.8 652.9
-------- -------- -------- --------
Amortization of Goodwill and
Other Charges.................. (42.2) (10.0) (32.2) (39.5)
-------- --------- -------- --------
Property and Casualty Income
(Loss)......................... (58.3) (645.0) 586.7 608.3
CORPORATE AND OTHER.............. (6.3) (6.3) (.6)
--------- --------- -------- --------
CONSOLIDATED OPERATING INCOME
(LOSS) BEFORE INCOME TAX........ (64.6) (645.0) 580.4 607.7
Federal and Foreign Income Tax
(Credit)....................... (139.1) (225.0) 85.9 92.5
-------- --------- -------- --------
CONSOLIDATED OPERATING INCOME.... 74.5 (420.0) 494.5 515.2
REALIZED INVESTMENT GAINS
AFTER INCOME TAX................ 8.3 8.3 31.0
-------- -------- -------- --------
CONSOLIDATED NET INCOME.......... $ 82.8 $ (420.0) $ 502.8 $ 546.2
======== ======== ======== ========
PROPERTY AND CASUALTY INVESTMENT
INCOME AFTER INCOME TAX......... $ 559.9 $ 546.8
======== ========
Page 10
Three Months Ended September 30
--------------------------------------------
2001 2000
--------------------------------- -----
Excluding
Impact of Impact of
Sept. 11 Sept. 11
Total Attack Attack Total
---------- --------- --------- -------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written........... $1,769.1 $ 30.0 $1,739.1 $1,607.8
Increase in Unearned Premiums.. (84.7) (84.7) (57.7)
-------- -------- -------- --------
Premiums Earned............. 1,684.4 30.0 1,654.4 1,550.1
-------- -------- -------- --------
Claims and Claim Expenses...... 1,772.4 665.0 1,107.4 1,032.6
Operating Costs and Expenses... 565.7 565.7 520.4
Increase in Deferred Policy
Acquisition Costs............. (32.3) (32.3) (14.4)
Dividends to Policyholders..... 6.9 6.9 6.6
-------- -------- -------- --------
Underwriting Income (Loss)..... (628.3) (635.0) 6.7 4.9
-------- -------- -------- --------
Investments
Investment Income Before
Expenses...................... 229.5 229.5 223.7
Investment Expenses............ 3.3 3.3 2.9
-------- -------- -------- --------
Investment Income.............. 226.2 226.2 220.8
-------- -------- -------- --------
Amortization of Goodwill and
Other Charges.................. (24.0) (10.0) (14.0) (14.7)
-------- -------- -------- --------
Property and Casualty Income
(Loss)......................... (426.1) (645.0) 218.9 211.0
CORPORATE AND OTHER.............. (3.8) (3.8) 10.3
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME
(LOSS) BEFORE INCOME TAX........ (429.9) (645.0) 215.1 221.3
Federal and Foreign Income Tax
(Credit)....................... (189.3) (225.0) 35.7 36.7
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME....
(LOSS)......................... (240.6) (420.0) 179.4 184.6
REALIZED INVESTMENT GAINS
AFTER INCOME TAX................ 1.6 1.6 23.3
-------- -------- -------- --------
CONSOLIDATED NET INCOME (LOSS)... $ (239.0) $(420.0) $ 181.0 $ 207.9
======== ======= ======== ========
PROPERTY AND CASUALTY INVESTMENT
INCOME AFTER INCOME TAX......... $ 187.3 $ 184.7
======== ========
Page 11
PROPERTY AND CASUALTY INSURANCE
Our property and casualty business incurred an operating loss before taxes
of $58.3 million in the first nine months of 2001 and $426.1 million in the
third quarter due to the costs of $645 million related to the September 11
attack.
Excluding the costs related to the September 11 attack, earnings from our
property and casualty business were modestly lower in the first nine months of
2001 compared with the same period in 2000 due to a deterioration in
underwriting results caused in large part by higher catastrophe losses.
Investment income increased modestly in 2001 compared with 2000. Earnings in the
third quarter of 2001 were slightly higher than the comparable period in 2000.
Excluding the impact of the September 11 attack, property and casualty income
before taxes amounted to $586.7 million in the first nine months of 2001 and
$218.9 million in the third quarter compared with $608.3 million and $211.0
million, respectively, in 2000.
The following is a summary of our underwriting results during 2001 and 2000
by class of business. Results for 2001 are presented both in total and excluding
the impact of the September 11 attack.
Net Premiums Combined Loss and
Written Expense Ratios
--------------------------- ----------------------------
2001 2000 2001 2000
------------------- ---- ----------------- --------
Excluding Excluding
Impact of Impact of
Sept. 11 Sept. 11
Total Attack Total Total Attack Total
------- --------- ----- ----- --------- ---------
(in millions)
NINE MONTHS ENDED SEPTEMBER 30
PERSONAL INSURANCE
Automobile............. $ 358.9 $ 358.9 $ 297.9 99.9% 98.4% 94.8%
Homeowners............. 799.5 799.5 696.4 114.9 112.8 102.0
Other.................. 332.0 332.0 297.7 75.1 75.1 71.6
-------- -------- -------- ----- ----- -----
Total Personal 1,490.4 1,490.4 1,292.0 102.3 100.9 93.3
-------- -------- -------- ----- ----- -----
COMMERCIAL INSURANCE
Multiple Peril......... 558.1 563.1 537.8 112.8 102.8 114.8
Casualty............... 571.3 571.3 584.0 116.7 111.6 117.5
Workers' Compensation.. 258.2 258.2 239.4 94.6 93.7 103.6
Property and Marine.... 402.5 402.5 375.6 120.7 117.5 110.3
-------- -------- -------- ----- ----- -----
Total Commercial 1,790.1 1,795.1 1,736.8 113.4 107.7 113.4
-------- -------- -------- ----- ----- -----
SPECIALTY INSURANCE
Executive Protection... 984.0 984.0 952.4 93.8 93.8 85.6
Financial Institutions. 397.4 437.4 385.2 224.2 94.0 90.4
Other.................. 478.1 403.1 361.3 111.0 97.8 103.3
-------- -------- -------- ----- ----- -----
Total Specialty 1,859.5 1,824.5 1,698.9 123.3 94.8 90.4
-------- -------- -------- ----- ----- -----
TOTAL $5,140.0 $5,110.0 $4,727.7 114.0% 101.1% 99.9%
======== ======== ======== ===== ===== =====
Page 12
Net Premiums Combined Loss and
Written Expense Ratios
--------------------------- -------------------------
2001 2000 2001 2000
------------------- ---- ----------------- -----
Excluding Excluding
Impact of Impact of
Sept. 11 Sept. 11
Total Attack Total Total Attack Total
-------- --------- ----- ----- --------- ------
(in millions)
THREE MONTHS ENDED SEPTEMBER 30
PERSONAL INSURANCE
Automobile............. $ 127.2 $ 127.2 $ 105.9 104.5% 100.1% 94.7%
Homeowners............. 292.4 292.4 253.1 113.6 107.6 93.8
Other.................. 114.2 114.2 101.3 75.3 75.3 70.1
-------- -------- -------- ----- ----- -----
Total Personal 533.8 533.8 460.3 102.8 98.6 88.6
-------- -------- -------- ----- ----- -----
COMMERCIAL INSURANCE
Multiple Peril......... 184.7 189.7 179.7 128.9 98.0 121.8
Casualty............... 189.9 189.9 190.1 128.7 113.0 119.5
Workers' Compensation.. 78.0 78.0 73.7 95.3 92.7 101.7
Property and Marine.... 130.0 130.0 121.4 114.3 104.7 98.8
-------- -------- -------- ----- ----- -----
Total Commercial 582.6 587.6 564.9 121.1 103.8 113.6
-------- -------- -------- ----- ----- -----
SPECIALTY INSURANCE
Executive Protection... 335.4 335.4 325.7 96.9 96.9 89.2
Financial Institutions. 104.5 144.5 128.7 561.4 95.3 95.3
Other.................. 212.8 137.8 128.2 128.8 98.8 99.3
-------- -------- -------- ----- ----- -----
Total Specialty 652.7 617.7 582.6 179.0 97.2 92.7
-------- -------- -------- ----- ----- -----
TOTAL $1,769.1 $1,739.1 $1,607.8 137.8% 99.9% 99.4%
======== ======== ======== ===== ===== =====
The pre-tax costs of $645 million related to the September 11 attack had
three components. First, in our insurance business, we incurred estimated net
claims and claim expenses of $555 million plus reinsurance restatement costs of
$50 million, for an aggregate cost of $605 million. Most of the claims were from
property exposure and business interruption losses. We also had significant
workers' compensation losses. Each of our underwriting segments was affected by
the September 11 attack. However, the impact was by far the greatest on our
financial institutions business. Second, in our reinsurance business written
through Chubb Re, which is included in other specialty results, we incurred
estimated net claims and claim expenses of $110 million and recognized
reinstatement premium revenue of $80 million, for a net cost of $30 million.
Finally, we recorded a $10 million charge, included in other charges, as our
share of the losses publicly estimated by Hiscox plc, a U.K. insurer in which we
have a 27% interest.
We estimate that our gross claims and claim expenses from the September 11
attack were about $3 billion. Our net claims and claim expenses of $665 million
were significantly lower than the gross amount due to various reinsurance
agreements. Our property exposures were protected by facultative reinsurance, a
property per risk treaty that limited our net loss per risk, and our property
catastrophe treaty. Our workers' compensation losses were protected by a
casualty catastrophe reinsurance treaty and a casualty clash treaty. We have
reviewed our reinsurance programs and have modeled how the estimated losses will
aggregate to individual reinsurers. Based on this analysis, we estimate that 99%
of our reinsurance is with reinsurers or markets rated investment grade or rated
A or better by A.M. Best Company.
Page 13
While it is possible that our estimate of ultimate net losses related to
the September 11 attack may change in the future, we do not expect that any such
change would have a material effect on the Corporation's overall financial
condition.
The remaining discussion and analysis of our underwriting results relates
to our results excluding the impact of the September 11 attack, unless otherwise
noted. ---------
Net premiums written, excluding reinsurance reinstatement premiums, were
$5.1 billion in the first nine months of 2001 and $1.7 billion in the third
quarter, representing increases of 8.1% and 8.2%, respectively, compared with
the comparable periods in 2000. U.S. premiums grew 7.2% in the first nine months
of 2001 and 5.2% in the third quarter. Substantial premium growth was achieved
outside the United States in 2001. Non-U.S. premiums grew about 17% in local
currencies in both the first nine months and third quarter.
Premium growth in personal lines remained strong. In our commercial
classes, which include multiple peril, casualty, workers' compensation and
property and marine, competition in the worldwide marketplace has made
profitable premium growth difficult. However, our strategy to increase the
pricing in these classes continued to show success, resulting in modest premium
growth for these classes in 2001 despite renewal retention levels that remained
below historical levels. Premium growth in the specialty lines was restricted in
2001, primarily due to the lack of growth in our executive protection business
caused by our writing fewer multi-year policies as well as our pricing and
pruning initiative.
The tragic event of September 11 and its aftermath have accelerated changes
in insurance markets. In the wake of heavy insurance industry losses, many
insurance companies have demanded huge price increases, raised deductibles,
reduced coverage limits or declined outright to renew coverage. In this
environment, we believe that agents and customers will show a strong preference
for the stable, conservatively capitalized insurers. We expect that these
factors will give us an opportunity to write new, high quality accounts at
attractive rates. In particular, we expect our reinsurance and surplus lines
businesses to see new opportunities created by these market changes. We have
already seen an increase in submission activity for new business.
Similarly, as a result of the substantial losses incurred by reinsurers, we
expect that the future cost of reinsurance will increase significantly and
reinsurance capacity for certain coverages, such as terrorism, will be limited.
In many cases, we will have to retain a larger share of a loss before
reinsurance applies. The potential increase in our net risk concentrations from
a catastrophic event that would result from these changes to our reinsurance
arrangements may be offset to some degree by changes to our gross risk profile.
A shortage of reinsurance capacity could affect our ability to respond to
business opportunities. Commercial property markets will be particularly
affected, but the issues will spread to all classes of business.
Underwriting results were unprofitable in the first nine months of 2001 and
near breakeven in the third quarter compared with near breakeven results in the
first nine months and third quarter of 2000. Our combined loss and expense
ratio, excluding the impact of the September 11 attack, was 101.1% in the first
nine months of 2001 and 99.9% in the third quarter compared with 99.9% and
99.4%, respectively, in 2000.
Page 14
The loss ratio was 68.1% for the first nine months of 2001 and 67.2% for
the third quarter compared with 67.3% and 66.9%, respectively, in the prior
year. The adverse effect of catastrophe losses on the loss ratio was greater in
2001. Excluding the September 11 attack, catastrophe losses during the first
nine months of 2001 amounted to $106.5 million which represented 2.2 percentage
points of the loss ratio compared with $62.6 million or 1.4 percentage points in
2000. Catastrophe losses for the third quarter of 2001 amounted to $14.7 million
or 0.9 of a percentage point of the loss ratio compared with $8.0 million or 0.5
of a percentage point in 2000. The catastrophe losses in both years resulted
primarily from storms in the United States, particularly tropical storm Allison
in the second quarter of 2001.
Our expense ratio was 33.0% for the first nine months of 2001 and 32.7% for
the third quarter compared with 32.6% and 32.5%, respectively, in the prior
year. The increase in the expense ratio in 2001 was due to overhead expenses
growing at a somewhat higher rate than written premiums as well as slightly
higher commission expenses.
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 29% of the
premiums written by our property and casualty subsidiaries, increased by 15.4%
in the first nine months of 2001 and 16.0% in the third quarter compared with
the similar periods in 2000. Our in-force policy count for automobile,
homeowners and other personal coverages continued to grow significantly.
Our personal insurance business produced near breakeven underwriting
results in 2001 compared with highly profitable results in 2000. The combined
loss and expense ratios were 100.9% for the first nine months of 2001 and 98.6%
for the third quarter compared with 93.3% and 88.6%, respectively, in 2000.
Homeowners results were unprofitable in the first nine months of 2001 and
2000, but more so in 2001. The deterioration in 2001 was due to a higher
frequency of non-catastrophe losses, particularly large losses, as well as rate
deficiencies in a number of states. We have had rate increases approved in
several of these states, but not all of the increases have taken effect yet.
Catastrophe losses represented 6.1 percentage points of the loss ratio for this
class in the first nine months of 2001 and 4.3 percentage points in the third
quarter compared with 8.6 percentage points and 2.9 percentage points,
respectively, in 2000. Homeowners results outside the United States remained
unprofitable in 2001 as we are still building the critical mass necessary to
absorb the costs of operating the franchise.
Our automobile business produced somewhat less profitable results in 2001
compared with 2000 due to an increase in the frequency of losses.
Other personal coverages, which include insurance for personal valuables
and excess liability, produced highly profitable results in both years due to
continued favorable loss experience.
Page 15
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent 35% of our total
writings, increased by 3.4% in the first nine months of 2001 and 4.0% in the
third quarter compared with the similar periods in 2000. In late 1998, we put in
place a strategy to renew good business at adequate prices and not renew
underperforming accounts where we could not attain price adequacy. The pruning
process is near completion. Renewal retention levels in the first six months of
2001 improved modestly from year ago levels. Retention levels in the third
quarter were significantly higher than those in the first six months and those
in the third quarter of 2000 but remained below historical levels. On the
business that was renewed, rate increases have remained firm but the level of
rate increases has flattened during the year. Renewal rates in the U.S. were up
approximately 14% in the third quarter of 2001, similar to the rate increases in
the first two quarters. Exposure growth, however, has been minimal in 2001 due
to the weak economy.
Our commercial insurance underwriting results remained unprofitable in 2001
but showed significant improvement compared with 2000, despite substantially
higher catastrophe losses in the first half of the year. The combined loss and
expense ratio was 107.7% for the first nine months of 2001 and 103.8% for the
third quarter compared with 113.4% and 113.6%, respectively, in 2000. Results
improved in all segments of this business other than property and marine. Such
improvement was due in large part to the cumulative effect of the pricing
increases and more stringent risk selection in recent years.
Multiple peril results were modestly unprofitable in the first nine months
of 2001, but improved considerably compared with the results in 2000. Both the
liability and property components of this business improved in 2001. In the
property component, an increase in catastrophe losses in 2001 was more than
offset by a reduction in non-catastrophe losses. Catastrophe losses represented
4.1 percentage points of the loss ratio for this class in the first nine months
of 2001. There were virtually no catastrophe losses for this class in the third
quarter of 2001 or in either comparable period of 2000.
Results for our casualty business also improved considerably in 2001
compared with the prior year, but remained unprofitable. The improvement was
primarily in the automobile component of the casualty coverages due to a lower
frequency of losses. Results in the primary liability component also improved
significantly. The excess liability component produced unprofitable results in
both years. Casualty results were adversely affected in both years, but more so
in 2001, by incurred losses related to asbestos and toxic waste claims.
Workers' compensation results were profitable in 2001 compared with
modestly unprofitable results in 2000. The substantial improvement in 2001 was
due to a lower frequency of losses.
Property and marine results were highly unprofitable in the first nine
months of both years, but more so in 2001 due in large part to higher
catastrophe losses. Results in both years were adversely affected by large
losses in the first half of the year, both in the United States and overseas.
Catastrophe losses represented 7.3 percentage points of the loss ratio for this
class in the first nine months of 2001 and 3.2 percentage points in the third
quarter compared with 1.5 percentage points and 0.7 of a percentage point,
respectively, in 2000.
Page 16
SPECIALTY INSURANCE
Premiums from specialty commercial insurance, which represent 36% of our
total writings, increased by 7.4% in the first nine months of 2001 and 6.0% in
the third quarter compared with the same periods in 2000. Our strategy of
working closely with our customers and our ability to differentiate our products
continue to enable us to renew a considerable percentage of our executive
protection and financial institutions business. Financial institutions had solid
premium growth of 13.6% in the first nine months of 2001 and 12.3% in the third
quarter. Executive protection, however, had premium growth of only 3.3% in the
first nine months of 2001 and 3.0% in the third quarter due to our writing fewer
multi-year policies and the intentional shrinking of our employment practice
liability and large company directors and officers liability business. Recent
trends in claim severity on this business indicated a need for higher rates and
improved policy terms. As a result, we have implemented a program to increase
the pricing on this business and to not renew accounts where we cannot attain
price adequacy. Growth in our other specialty insurance business was primarily
from our reinsurance assumed and surety businesses.
Our specialty commercial business produced less profitable underwriting
results in 2001 compared with the highly profitable results in 2000. The
combined loss and expense ratio was 94.8% for the first nine months of 2001 and
97.2% for the third quarter compared with 90.4% and 92.7%, respectively, in
2000.
Executive protection results were profitable in 2001 and 2000 due to
favorable development of prior year loss reserves, particularly in the directors
and officers liability and fiduciary liability components. However, profit
margins have narrowed in the most recent accident years. Employment practice
liability results were unprofitable in both years. Overseas results were
unprofitable in 2001 due to several large directors and officers liability
losses in the third quarter.
Our financial institutions business produced profitable results in the
first nine months of 2001 and 2000, but more so in 2000. Both years benefited
from favorable loss experience in the fidelity component.
Results in our other specialty classes were profitable in the first nine
months of 2001 compared with unprofitable results in 2000. The improvement was
primarily in our surety business. Surety results in 2000 were adversely affected
by one large loss. Our reinsurance assumed business produced a modest
underwriting loss in 2001 and 2000.
LOSS RESERVES
Gross loss reserves were $15,094.4 million and $11,904.6 million at
September 30, 2001 and December 31, 2000, respectively. Reinsurance recoverables
on such loss reserves were $4,198.4 million and $1,853.3 million at September
30, 2001 and December 31, 2000, respectively. At September 30, 2001, gross loss
reserves of $2,982.0 million and reinsurance recoverable of $2,365.0 million
related to the September 11 attack.
Excluding the loss reserves related to the September 11 attack, loss
reserves, net of reinsurance recoverable, increased by $227.7 million during the
first nine months of 2001. Loss reserves for personal insurance and specialty
insurance increased during the period while loss reserves for commercial
insurance decreased by $163.9 million. Such decrease reflects the significant
exposure reductions of the past three years and improved accident year results.
Page 17
Losses incurred related to asbestos and toxic waste claims were $44.4
million in the first nine months of 2001 and $22.6 million for the same period
in 2000.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased by 2.4% in the first nine months of
2001 and 1.4% in the third quarter compared with the same periods in 2000. The
growth in investment income in 2001 was due to an increase in invested assets
since the third quarter of 2000 offset in part by lower investment yields. The
effective tax rate on investment income increased to 16.9% in the first nine
months of 2001 from 16.2% in the comparable period in 2000 due to holding a
somewhat larger proportion of our investment portfolio in taxable fixed income
securities.
During the first nine months of 2001, new cash available for investment was
invested in taxable bonds.
We have evaluated our expected cash needs related to the settlement of
claims from the September 11 attack. We currently expect to fund our obligations
related to such claims from a combination of operating cash flows, maturity of
fixed maturity securities and anticipated recovery of reinsurance. The period
over which the payment of claims from the September 11 attack will be made is
not yet determinable. The property and casualty subsidiaries maintain
investments in highly liquid, short-term and other marketable securities to
provide for immediate cash needs. Should the need for additional liquidity
develop, the Corporation could either sell a portion of its investment portfolio
or draw down under its existing commercial paper or bank credit facilities.
CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate invested
assets, interest expense and other expenses not allocable to the operating
subsidiaries, and the results of our real estate and other non-insurance
subsidiaries. Corporate and other produced a loss before taxes of $6.3 million
in the first nine months of 2001 compared with a loss of $.6 million in the
first nine months of 2000. In the third quarter of 2000, corporate and other
included income of $9.9 million before taxes from a noncompete payment related
to the sale of the Corporation's 50% interest in Associated Aviation
Underwriters, Inc. (AAU). Excluding this one-time item, the improvement in
corporate and other in 2001 was primarily due to higher investment income on
corporate assets.
In August 2001, the Corporation entered into a cancelable interest rate
swap in order to monetize the value of the call option embedded in the
outstanding $125 million 8.675% capital securities of Executive Risk Capital
Trust, which is wholly owned by Chubb Executive Risk Inc., a wholly owned
subsidiary of the Corporation. These capital securities are callable in 2007.
Under the terms of the interest rate swap, the Corporation receives 8.675% and
pays the AA rated counterparty the 3-month LIBOR rate plus 204 basis points. As
a result of entering into the swap, interest costs related to this portion of
our debt will float with short term interest rates. At current interest rates,
this transaction would reduce our interest expense by about $5 million in 2002.
Page 18
INVESTMENT GAINS AND LOSSES
Decisions to sell securities are governed principally by considerations of
investment opportunities and tax consequences. As a result, realized investment
gains and losses may vary significantly from period to period. Net realized
investment gains before taxes were $12.8 million in the first nine months of
2001 compared with net gains of $47.7 million for the same period in 2000. Net
realized investment gains in the third quarter of 2000 included a gain of $44.9
million before taxes related to the sale of AAU.
CAPITAL RESOURCES
In July 1998, the Board of Directors authorized the purchase of up to
12,500,000 shares of the Corporation's common stock. In June 2001, the Board of
Directors authorized the purchase of up to an additional 16,000,000 shares. The
1998 authorization has no expiration while the 2001 authorization will expire on
June 30, 2003. In the first nine months of 2001, the Corporation purchased
7,954,600 shares in open-market transactions at a cost of $554.5 million. As of
September 30, 2001, 3,287,100 shares remained under the 1998 share purchase
authorization and 10,383,300 shares remained under the 2001 authorization.
Management continuously monitors the amount of capital resources that the
Corporation maintains both for itself and its operating subsidiaries. In
connection with our long-term capital strategy and the capital needs relating to
the September 11 attack and to facilitate our ability to make strategic
investments in light of market opportunities, the Corporation plans to
contribute capital to its property and casualty subsidiaries. Also, subject to
favorable market and interest rate conditions, the Corporation may offer debt
and/or equity securities under its shelf registration statement.
FORWARD LOOKING INFORMATION
Certain statements in this communication 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 words or phrases "will
result," "is expected to," "will continue," "is anticipated," "estimates," 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
insurance losses from the September 11 attack or with respect to related
reinsurance recoverables, as well as its expectations with respect to the
availability of primary and reinsurance coverage and with respect to
legislation, or with respect to premium price increases and profitability or
growth estimates overall or by line of business, and its related expectations
with respect to cash flow projections and investment, operating or other income;
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 weather-related or other natural or human-made disasters, the
inability to reinsure certain risks economically, the adequacy of loss reserves,
as well as general market conditions, competition, pricing and restructurings.
Page 19
PART II. OTHER INFORMATION
--------------------------
Item 1 - Legal Proceedings
--------------------------
The Corporation and its Directors have been named as defendants in a purported
shareholder derivative action, which was filed on October 18, 2001 in the United
States District Court for the District of New Jersey. The derivative action
alleges that the Directors breached their fiduciary duties, engaged in gross
mismanagement, and failed properly to exercise control over the dissemination of
information regarding the Corporation's operations and performance, which
allegations are based on substantially the same allegations made in the
previously reported purported class action complaint filed in the United States
District Court for the District of New Jersey on August 31, 2000 by the
California Public Employees' Retirement System, as amended on September 4, 2001.
The Corporation is defending the purported class action vigorously.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended September 30, 2001.
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: Henry B. Schram
---------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: November 14, 2001