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 March 31, 2002
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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
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 903-2000
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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
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The number of shares of common stock outstanding as of April 30, 2002
was 171,435,848.
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001......................... 1
Consolidated Statements of Income for the
Three Months Ended March 31, 2002 and 2001................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2002 and 2001........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001................... 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 4 - Submission of Matters to a Vote of
Security Holders...................................... 17
Item 6 - Exhibits and Reports on Form 8-K....................... 18
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
2002 2001
-------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 750.3 $ 956.8
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $1,183.7
and $1,282.5)..................................... 1,127.7 1,218.5
Available-for-Sale
Tax Exempt (cost $8,038.8 and $8,053.8)........... 8,339.2 8,372.9
Taxable (cost $7,072.3 and $6,408.2).............. 7,082.4 6,525.3
Equity Securities (cost $716.0 and $757.9)........... 688.0 710.4
--------- ----------
TOTAL INVESTED ASSETS......................... 17,987.6 17,783.9
Cash................................................... 23.3 25.8
Securities Lending Collateral.......................... 735.3 417.5
Accrued Investment Income.............................. 248.4 247.7
Premiums Receivable.................................... 1,844.6 1,692.8
Reinsurance Recoverable on Unpaid Claims
and Claim Expenses.................................... 4,339.0 4,505.2
Prepaid Reinsurance Premiums........................... 511.4 340.8
Deferred Policy Acquisition Costs...................... 1,015.0 928.8
Real Estate Assets..................................... 640.0 646.6
Investments in Partially Owned Companies............... 383.2 386.2
Deferred Income Tax.................................... 661.6 674.8
Goodwill............................................... 467.4 467.4
Other Assets........................................... 1,516.0 1,331.5
--------- ----------
TOTAL ASSETS.................................. $30,372.8 $29,449.0
========= ==========
Liabilities
Unpaid Claims and Claim Expenses....................... $15,454.3 $15,514.9
Unearned Premiums...................................... 4,417.0 3,916.2
Securities Lending Payable............................. 735.3 417.5
Short Term Debt........................................ 99.0 199.0
Long Term Debt......................................... 1,344.1 1,351.0
Dividend Payable to Shareholders....................... 59.8 57.8
Accrued Expenses and Other Liabilities................. 1,621.9 1,467.3
--------- ----------
TOTAL LIABILITIES............................. 23,731.4 22,923.7
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 180,149,781 and
180,131,238 Shares.................................... 180.1 180.1
Paid-In Surplus........................................ 513.8 527.0
Retained Earnings...................................... 6,507.7 6,369.3
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 183.6 252.6
Foreign Currency Translation Losses, Net of Tax....... (78.3) (73.0)
Receivable from Employee Stock Ownership Plan.......... (48.9) (48.9)
Treasury Stock, at Cost - 9,102,100 and 10,059,857
Shares...................................... (616.6) (681.8)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 6,641.4 6,525.3
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $30,372.8 $29,449.0
========= ==========
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
2002 2001
---- ----
(in millions)
Revenues
Premiums Earned..................................... $1,855.4 $1,620.6
Investment Income................................... 242.5 244.7
Real Estate and Other Revenues...................... 16.6 22.7
Realized Investment Gains (Losses).................. (9.3) 3.5
-------- --------
Total Revenues............................... 2,105.2 1,891.5
-------- --------
Claims and Expenses
Insurance Claims and Claim Expenses................. 1,190.5 1,081.0
Amortization of Deferred Policy Acquisition Costs... 473.0 439.2
Other Insurance Operating Costs and Expenses........ 145.3 118.4
Real Estate and Other Expenses...................... 18.1 18.5
Investment Expenses................................. 5.6 5.4
Corporate Expenses.................................. 27.8 19.6
-------- --------
Total Claims and Expenses.................... 1,860.3 1,682.1
-------- --------
Income Before Federal and Foreign Income Tax.......... 244.9 209.4
Federal and Foreign Income Tax........................ 46.7 34.4
-------- --------
Net Income............................................ $ 198.2 $ 175.0
======== ========
Average Common Shares Outstanding..................... 169.8 174.8
Average Common and Potentially Dilutive
Shares Outstanding................................... 172.9 179.0
Net Income Per Share
Basic................................................ $1.17 $1.00
Diluted.............................................. 1.15 .97
Dividends Declared Per Share.......................... .35 .34
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
2002 2001
---- ----
(in millions)
Net Income............................................ $198.2 $175.0
------ ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation or Depreciation
of Investments, Net of Tax......................... (69.0) 101.1
Foreign Currency Translation Losses, Net of Tax..... (5.3) (10.3)
------ ------
(74.3) 90.8
------ ------
Comprehensive Income.................................. $123.9 $265.8
====== ======
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
2002 2001
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................ $ 198.2 $ 175.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase (Decrease) in Unpaid Claims
and Claim Expenses, Net........................... 105.6 (65.3)
Increase in Unearned Premiums, Net................. 335.5 112.3
Increase in Premiums Receivable.................... (151.8) (45.8)
Increase in Deferred Policy Acquisition Costs...... (87.4) (28.2)
Change in Deferred Federal Income Tax.............. 52.5 6.4
Depreciation....................................... 25.4 23.9
Realized Investment Losses (Gains)................. 9.3 (3.5)
Other, Net......................................... (70.9) (10.6)
--------- ---------
Net Cash Provided by Operating Activities............. 416.4 164.2
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities............... 1,487.0 904.6
Proceeds from Maturities of Fixed Maturities.......... 374.9 290.5
Proceeds from Sales of Equity Securities.............. 113.5 51.4
Purchases of Fixed Maturities......................... (2,415.3) (1,079.1)
Purchases of Equity Securities........................ (91.0) (79.3)
Decrease (Increase) in Short Term Investments, Net.... 206.5 (192.5)
Increase in Net Payable from Security
Transactions Not Settled............................. 61.8 5.6
Purchases of Property and Equipment, Net.............. (33.9) (39.1)
Other, Net............................................ 2.8 (6.0)
--------- ---------
Net Cash Used in Investing Activities................. (293.7) (143.9)
--------- ---------
Cash Flows from Financing Activities
Decrease in Short Term Debt, Net...................... (100.0) -
Repayment of Long Term Debt........................... (3.7) (.7)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans......................... 36.3 76.5
Repurchase of Shares.................................. - (37.7)
Dividends Paid to Shareholders........................ (57.8) (57.8)
--------- ---------
Net Cash Used in Financing Activities................. (125.2) (19.7)
--------- ---------
Net Increase (Decrease) in Cash......................... (2.5) .6
Cash at Beginning of Year............................... 25.8 22.4
--------- ---------
Cash at End of Period................................. $ 23.3 $ 23.0
========= =========
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 2001 Annual
Report to Shareholders.
2) Adoption of New Accounting Pronouncement
Effective January 1, 2002, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. The Statement addresses how intangible assets should
be accounted for upon their acquisition and how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. In accordance with SFAS No. 142,
goodwill is no longer amortized but rather is tested at least annually
for impairment. SFAS No. 142 may not be applied retroactively to
financial statements of prior periods. In the first quarter of 2002, the
Corporation completed a transitional goodwill impairment test under SFAS
No. 142. As a result of the test, management determined that there was
no impairment of goodwill.
Adoption of SFAS No. 142 as of January 1, 2001 would have
increased net income for the first quarter of 2001 by $5.0 million, or
$0.03 per share.
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 or depreciation of
investments carried at market value was as follows:
Three Months Ended
March 31
---------------------
2002 2001
---- ----
(in millions)
Change in unrealized depreciation
of equity securities................................ $ 19.5 $ (.3)
Change in unrealized appreciation
of fixed maturities................................. (125.7) 155.7
------- ------
(106.2) 155.4
Deferred income tax (credit)......................... (37.2) 54.3
------- ------
Change in unrealized appreciation or
depreciation of investments, net.................... $ (69.0) $101.1
======= ======
Page 6
4) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended
March 31
-----------------------
2002 2001
---- ----
(in millions,
except per share amounts)
Basic earnings per share:
Net income..................................... $198.2 $175.0
====== ======
Weighted average number of common
shares outstanding............................ 169.8 174.8
====== ======
Basic earnings per share....................... $ 1.17 $ 1.00
====== ======
Diluted earnings per share:
Net income..................................... $198.2 $175.0
====== ======
Weighted average number of common
shares outstanding............................ 169.8 174.8
Additional shares from assumed exercise
of stock-based compensation awards............ 3.1 4.2
------ ------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share............................ 172.9 179.0
====== ======
Diluted earnings per share..................... $ 1.15 $ .97
====== ======
5) 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.
Page 7
Revenues and income before income tax of the operating segments
were as follows:
Three Months Ended
March 31
-------------------------
2002 2001
-------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance....................... $ 502.2 $ 437.5
Commercial insurance..................... 649.8 589.1
Specialty insurance...................... 703.4 594.0
-------- --------
1,855.4 1,620.6
Investment income.......................... 230.2 225.4
-------- --------
Total property and casualty insurance.... 2,085.6 1,846.0
Corporate and other.......................... 28.9 42.0
Realized investment gains (losses)........... (9.3) 3.5
-------- --------
Total revenues........................... $2,105.2 $1,891.5
======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance....................... $ 13.0 $ (.7)
Commercial insurance..................... (49.8) (65.1)
Specialty insurance...................... 6.5 30.0
-------- --------
(30.3) (35.8)
Increase in deferred policy
acquisition costs....................... 87.4 28.2
-------- --------
Underwriting income (loss)............... 57.1 (7.6)
Investment income.......................... 225.2 220.8
Other charges (a).......................... (10.5) (10.4)
-------- --------
Total property and casualty insurance.... 271.8 202.8
Corporate and other.......................... (17.6) 3.1
Realized investment gains (losses)........... (9.3) 3.5
-------- --------
Total income before income tax........... $ 244.9 $ 209.4
======== ========
(a) Other charges for the three months ended March 31, 2001 included goodwill
amortization of $5.0 million.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for
the first quarter of 2002 and 2001:
Quarter Ended
March 31
-------------------
2002 2001
---- ----
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written................................. $2,190.9 $1,732.9
Increase in Unearned Premiums........................ (335.5) (112.3)
-------- --------
Premiums Earned................................... 1,855.4 1,620.6
-------- --------
Claims and Claim Expenses............................ 1,190.5 1,081.0
Operating Costs and Expenses......................... 686.6 568.4
Increase in Deferred Policy Acquisition Costs........ (87.4) (28.2)
Dividends to Policyholders........................... 8.6 7.0
-------- --------
Underwriting Income (Loss)........................... 57.1 (7.6)
-------- --------
Investments
Investment Income Before Expenses.................... 230.2 225.4
Investment Expenses.................................. 5.0 4.6
-------- --------
Investment Income.................................... 225.2 220.8
-------- --------
Other Charges......................................... (10.5) (10.4)
-------- --------
Property and Casualty Income.......................... 271.8 202.8
CORPORATE AND OTHER.................................... (17.6) 3.1
-------- --------
CONSOLIDATED OPERATING INCOME BEFORE INCOME TAX........ 254.2 205.9
Federal and Foreign Income Tax......................... 49.9 33.2
-------- --------
CONSOLIDATED OPERATING INCOME.......................... 204.3 172.7
REALIZED INVESTMENT GAINS (LOSSES) AFTER INCOME TAX.... (6.1) 2.3
-------- --------
CONSOLIDATED NET INCOME................................ $ 198.2 $ 175.0
======== ========
PROPERTY AND CASUALTY INVESTMENT INCOME
AFTER INCOME TAX...................................... $ 185.6 $ 184.6
======== ========
Page 9
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were significantly
higher in the first quarter of 2002 compared with the same period of 2001 due
primarily to a substantial improvement in underwriting results. Investment
income increased slightly in the first quarter of 2002 compared with 2001.
Property and casualty income before taxes amounted to $271.8 million in the
first quarter of 2002 compared with $202.8 million in 2001.
Net premiums written were $2.2 billion in the first quarter of 2002, an
increase of 26% compared with the first quarter of 2001. U.S. premiums grew 26%.
Substantial premium growth was also achieved outside the United States in the
first quarter of 2002. Non-U.S. premiums grew approximately 29% both on a
reported basis and in local currencies.
Premium growth was strong in all segments of our business due primarily
to higher rates. Growth in the commercial classes, which include multiple peril,
casualty, workers' compensation and property and marine, was exceptionally
strong. In the wake of heavy insurance industry losses in recent years,
exacerbated by the tragic event of September 11, 2001, many insurance companies
have sought substantial price increases, raised deductibles, reduced coverage
limits or declined outright to renew coverage. In this environment, we are
seeing more opportunities to write new, high quality accounts and we are
retaining more of our business. We are getting substantial rate increases on
business we write, often with more restrictive policy terms and conditions. We
expect that this trend will continue throughout 2002.
At the same time, as a result of the substantial losses incurred by
reinsurers, the cost of reinsurance in the marketplace is increasing
significantly and reinsurance capacity for certain coverages, such as terrorism,
is limited. The insurance industry has asked for a government backstop for any
future terrorist attacks. However, Congress has not enacted a legislative
solution to terrorism related losses.
Our casualty reinsurance program renewed in January 2002. The combined
casualty risk and clash structure is similar to the expiring program, but at an
additional annual cost of approximately $20 million. We did not renew a workers'
compensation catastrophe treaty that had substantially reduced our net losses
from the September 11 attack because the terms and cost that were offered were
unreasonable.
Our property reinsurance program was renewed in April 2002. The property
per risk treaty and property catastrophe treaties in the aggregate will cost
approximately $120 million more on an annualized basis, with more restrictive
terms, including terrorism exclusions. Our property per risk retention increased
from $10 million to $15 million. Our catastrophe treaty for events in the United
States was modified to increase our initial retention, to increase the
reinsurance coverage at the top and to reduce our participation in the various
layers of the program. The program now provides coverage for individual
catastrophic events of approximately 87% of losses between $150 million and $650
million.
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.
In particular, we are making a concerted effort to reduce terrorism risk
aggregations. However, our future operating results could be more volatile.
Page 10
Underwriting results were highly profitable in the first quarter of 2002
compared with breakeven results in 2001. Our combined loss and expense ratio was
95.9% in the first quarter of 2002 compared with 99.9% in 2001.
The loss ratio was 64.4% for the first quarter of 2002 compared with
67.0% in 2001. Catastrophe losses during the first quarter of 2002 amounted to
$13.3 million which represented 0.7 of a percentage point of the loss ratio
compared with $11.5 million or 0.7 of a percentage point in 2001.
Our expense ratio was 31.5% for the first quarter of 2002 compared with
32.9% in 2001. The decrease in the expense ratio was due primarily to premiums
written growing at a substantially higher rate than overhead expenses.
Underwriting results during 2002 and 2001 by class of business were as
follows:
Quarter Ended March 31
---------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
--------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
(in millions)
PERSONAL INSURANCE
Automobile........................ $ 119.1 $ 106.6 100.5% 96.6%
Homeowners........................ 272.4 223.5 102.6 114.3
Other............................. 111.0 98.5 80.9 73.9
-------- -------- ----- -----
Total Personal................ 502.5 428.6 97.4 100.8
-------- -------- ----- -----
COMMERCIAL INSURANCE
Multiple Peril.................... 247.0 204.5 99.9 104.6
Casualty.......................... 300.8 205.5 100.3 110.1
Workers' Compensation............. 142.8 108.2 91.5 94.1
Property and Marine............... 202.3 145.0 87.5 112.7
-------- ------ ----- ------
Total Commercial.............. 892.9 663.2 95.7 106.6
-------- ------ ----- -----
SPECIALTY INSURANCE
Executive Protection.............. 388.6 329.8 99.3 90.4
Financial Institutions............ 178.2 160.1 94.4 101.5
Other............................. 228.7 151.2 88.3 88.8
-------- -------- ----- -----
Total Specialty............... 795.5 641.1 95.4 92.6
-------- -------- ----- ------
TOTAL......................... $2,190.9 $1,732.9 95.9% 99.9%
======== ======== ===== =====
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 23% of total
premiums written, increased by 17% in the first quarter of 2002 compared with
the same quarter in 2001. Although premium growth was strong, growth in our
in-force policy count slowed, as planned. Growth occurred in all personal
classes, but was most significant in our homeowners business due primarily to
higher rates and increased insurance-to-value.
Our personal insurance business produced profitable underwriting results
in the first quarter of 2002 compared with near breakeven results in 2001. The
combined loss and expense ratio was 97.4% in the first quarter of 2002 compared
with 100.8% in 2001.
Page 11
Homeowners results improved significantly in 2002 but remained modestly
unprofitable. The improvement in 2002 was due to a decrease in the frequency of
non-catastrophe losses, largely the result of the mild winter weather in the
eastern half of the United States and fewer fire losses. Catastrophe losses
represented 4.5 percentage points of the loss ratio for this class in the first
quarter of 2002 compared with 2.8 percentage points in 2001. Homeowners results
remained somewhat unprofitable outside the United States in 2002 as we are still
building the critical mass necessary to absorb the costs of operating the
franchise.
Our remediation plan relating to our homeowners business is on track. We
have made substantial progress in implementing rate increases in states where
rates have been deficient. We are also in the process of filing mold exclusions
in our largest states, and we are pursuing a number of other underwriting
strategies designed to deal with escalating water damage claims.
Our automobile business produced breakeven results in 2002 compared with
profitable results in 2001 due to a higher allocation of overhead expenses,
which resulted from the updating of our cost allocation formulas. Other personal
coverages, which include insurance for personal valuables and excess liability,
produced highly profitable results in 2002 and 2001 due to continued favorable
loss experience.
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent 41% of our total
writings, increased by 35% in the first quarter of 2002 compared with the same
period a year ago. The substantial premium growth in all segments of this
business was due in large part to substantially higher rates and also to an
increase in our in-force policy count. Retention levels in the first quarter of
2002 improved significantly from year ago levels. On the business that was
renewed, rate increases continued to accelerate in the first quarter of 2002.
New business in the quarter was three times that in the first quarter of 2001.
During the quarter, we wrote more than two dollars of new business for every
dollar of business we lost. The substantial growth was produced with the same
tightened underwriting discipline that existed over the past three years when we
were shrinking the book of business.
Our commercial insurance business produced profitable underwriting
results in the first quarter of 2002 compared with unprofitable results in 2001.
Results improved in all segments of this business due in large part to the
cumulative effect of price increases, better terms and conditions and more
stringent risk selection in recent years. The combined loss and expense ratio
was 95.7% for the first quarter of 2002 compared with 106.6% in 2001.
Commercial insurance results, particularly in the casualty classes, were
adversely affected in each year by incurred losses related to asbestos and toxic
waste claims. Such losses were $22 million and $15 million in the first quarter
of 2002 and 2001, respectively.
Multiple peril produced breakeven results in 2002 compared with
unprofitable results in 2001. The improvement in 2002 was in the property
component of this business due to fewer losses both in the United States and
overseas. Catastrophe losses were not significant for this class in the first
quarter of 2002 or 2001.
Page 12
Our casualty business improved considerably in 2002, producing breakeven
results compared with unprofitable results in the prior year. The improvement in
2002 was primarily in the automobile component of this business due to higher
rates and the culling of loss prone business, which resulted in a lower
frequency of losses. Results in the primary liability component also improved
significantly. The excess liability component produced similarly unprofitable
results in 2002 and 2001. The severity of the large losses that are prevalent in
this class has increased in recent years. As noted above, casualty results were
adversely affected in both years, but more so in 2002, by incurred losses
related to asbestos and toxic waste claims.
Workers' compensation results were similarly profitable in 2002 and 2001
due in large part to our disciplined risk selection during the past several
years.
Property and marine results were highly profitable in 2002 compared with
unprofitable results in 2001. Results in 2002 benefited from a significant
reduction in the number of severe losses both in the United States and overseas.
Catastrophe losses for this class were not significant in either year.
SPECIALTY INSURANCE
Premiums from specialty insurance, which represent 36% of our total
writings, increased by 24% in the first quarter of 2002 compared with the same
period a year ago. 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. The growth in executive protection and the professional liability
component of our financial institutions business was primarily attributable to
higher rates. In response to claim severity trends, we initiated a program in
the second half of 2001 to increase pricing and improve policy terms and to not
renew business that no longer met our underwriting criteria. We have implemented
tighter terms and conditions, including lower policy limits and higher
deductibles. New business is coming from the small to mid-size market. In the
standard commercial component of our financial institutions business, rates were
higher as well. Growth of this business was somewhat restrained by our
management of terrorism exposure concentrations. Growth in our other specialty
business was primarily from Chubb Re, our reinsurance business that began
operations in 1999. Premiums produced by Chubb Re grew 67% in the first quarter
of 2002 due in part to one large transaction.
Our specialty business produced less profitable underwriting results in
the first quarter of 2002 compared with 2001. The combined loss and expense
ratio was 95.4% for the first quarter of 2002 compared with 92.6% in 2001.
Our executive protection business produced near breakeven results in
2002 compared with profitable results in the prior year. Profit margins have
narrowed in the most recent accident years. In addition, development of prior
year loss reserves in the directors and officers liability component was less
favorable in 2002. Overseas results were modestly unprofitable in 2002 due to
several large directors and officers liability losses, compared with profitable
results in 2001.
Financial institutions results were profitable in 2002 compared with
near breakeven results in 2001. The fidelity component of this business was
profitable in both years due to favorable loss experience. Results for the
professional liability component were unprofitable in 2002, compared with
Page 13
profitable results in 2001, due to an increase in high severity losses. The
standard commercial business written on financial institutions was highly
profitable in 2002 compared with unprofitable results in 2001. The 2001 results
were adversely affected by one $10 million property loss.
Our other specialty results were similarly profitable in 2002 and 2001.
Our surety business in particular produced highly profitable results in both
years.
LOSS RESERVES
Loss reserves at March 31, 2002 and December 31, 2001 included
significant amounts related to the September 11 attack and to our surety
exposure arising from the bankruptcy of Enron Corp. The components of loss
reserves were as follows:
March 31, December 31,
2002 2001
--------- -------------
(in millions)
Gross loss reserves
Total, per balance sheet $15,454 $15,515
Less:
Related to September 11 attack 2,650 2,775
Related to Enron surety exposure 206 333
------- -------
Total, as adjusted $12,598 $12,407
======= =======
Reinsurance recoverable
Total, per balance sheet $ 4,339 $ 4,505
Less:
Related to September 11 attack 2,116 2,239
Related to Enron surety exposure 13 121
------- -------
Total, as adjusted $ 2,210 $ 2,145
======= =======
Net loss reserves
Total $11,115 $11,010
Total, as adjusted 10,388 10,262
Adjusted to exclude the loss reserves related to the September 11 attack
and the Enron surety losses, loss reserves, net of reinsurance recoverable,
increased by $126 million during the first quarter of 2002. Loss reserves for
personal insurance and specialty insurance increased during the quarter while
loss reserves for commercial insurance decreased. Such decrease reflects the
significant exposure reductions of the past several years and the improved
accident year results due to more stringent risk selection.
Business interruption claims from the September 11 attack will take some
time to settle, while potential liability claims, if initiated, could take years
to settle. Our loss reserve estimates are thus subject to considerable
uncertainty. Given that, we have no evidence of any emerging issues that would
cause us to change our reserve estimates. While it is possible that our estimate
of ultimate losses related to the September 11 attack, as well as the
collectibility of related reinsurance recoverables, may change in the future, we
do not expect that any such change would have a material effect on the
Corporation's consolidated financial condition or liquidity.
Page 14
INVESTMENTS
Property and casualty investment income after taxes increased by 0.5% in
the first quarter of 2002 compared with the same period in 2001. Invested assets
increased since the first quarter of 2001 due to substantial cash flow from
operations over the period as well as capital contributed to the property and
casualty subsidiaries by the Corporation in the fourth quarter of 2001. Growth
in investment income in 2002 was hindered, however, by lower available
reinvestment rates on fixed maturities that matured over the past year. The
effective tax rate on investment income increased to 17.6% in the first quarter
of 2002 from 16.4% in the comparable period in 2001 due to our holding a smaller
proportion of our investment portfolio in tax-exempt securities.
During the first quarter of 2002, new cash available for investment was
invested in taxable bonds.
The property and casualty subsidiaries maintain sufficient investments
in highly liquid, short term and other marketable securities to provide for
immediate cash needs.
CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate
invested assets, interest expense and other expenses not allocated to the
operating subsidiaries, and the results of Chubb Financial Solutions and our
real estate and other non-insurance subsidiaries. Corporate and other produced a
loss before taxes of $17.6 million in the first quarter of 2002 compared with
income of $3.1 million in the first quarter of 2001. The change was due to
several factors. Investment income was lower in 2002 due to the decrease in
corporate invested assets resulting from the capital contributions to the
property and casualty subsidiaries in the fourth quarter of 2001. Interest
expense was higher in 2002 due to the issuance of debt in the fourth quarter of
2001. Results for Chubb Financial Solutions were near breakeven in the first
quarter of 2002 compared with earnings of $5 million in 2001.
INVESTMENT GAINS AND LOSSES
Net realized investment losses before taxes were $9.3 million in the
first quarter of 2002 compared with net gains of $3.5 million for the same
period in 2001. Decisions to sell securities are governed principally by
considerations of investment opportunities and tax consequences. As a result,
realized investment gains and losses on the sale of investments may vary
significantly from period to period. If a decline in the fair value of an
individual security is deemed to be other than temporary, the difference between
cost and estimated fair value is charged to income as a realized investment
loss. In 2002 and 2001, realized investment gains and losses reflected
writedowns of $24.8 million and $15.2 million, respectively, due to the
recognition of other than temporary impairment on certain securities.
CAPITAL RESOURCES
In July 1998, the Board of Directors authorized the repurchase of up to
12,500,000 shares of the Corporation's common stock. In June 2001, the Board of
Directors authorized the repurchase 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. There were no share repurchases in the first quarter
Page 15
of 2002. As of March 31, 2002, 3,287,100 shares remained under the 1998 share
repurchase authorization and 10,366,300 shares remained under 2001
authorization.
On April 4, 2002, the shelf registration statement that the Corporation
filed in December 2001 was declared effective by the Securities and Exchange
Commission. Under the registration statement, up to $1 billion of various types
of securities may be issued by the Corporation.
CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 2002, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer amortized. SFAS No. 142 may
not be applied retroactively to financial statements of prior periods. The
elimination of goodwill amortization resulted in an increase in net income of $5
million in the first quarter of 2002 compared with the same period in 2001. The
adoption of SFAS No. 142 is discussed further in Note 2 of the Notes to
Consolidated Financial Statements included in Item 1 of this report.
Page 16
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", or similar
expressions. Such statements are subject to certain risks, uncertainties and
assumptions about our business. 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 availability of primary and reinsurance coverage, including the
implications relating to the absence of terrorism legislation;
- global political conditions and the occurrence of any terrorist attacks,
including any nuclear, biological or chemical events;
- premium price increases and profitability or growth estimates overall or by
lines of business, and related expectations with respect to the timing and
terms of any required regulatory approvals;
- our expectations with respect to cash flow projections and investment income
and with respect to other income;
- the adequacy of loss reserves including:
- our expectations relating to insurance losses from the September 11 attack
and related reinsurance recoverables;
- any impact from the bankruptcy protection sought by various asbestos
producers and other related businesses;
- any changes in judicial or legislative decisions relating to coverage and
liability for asbestos and toxic waste claims;
- Enron-related effects, including:
- the effects on the energy markets and the companies that participate in
them;
- the effects on the capital markets and the markets for directors and
officers and error and omissions insurance;
- claims and litigation arising out of accounting disclosures by other
companies;
- any legislative or regulatory proposals or changes;
- changes in management;
- 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;
- changes in the litigation environment; and
- general market conditions.
Page 17
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of The Chubb Corporation was held on April
30, 2002. Matters submitted to Shareholders at the meeting were as follows:
Votes were cast in the following manner in connection with the election of each
Director to serve until the next Annual Meeting of Shareholders.
Votes Against
Director Votes For or Withheld
-------- --------- -------------
Zoe Baird 128,934,058 13,011,097
John C. Beck 141,586,175 358,980
Sheila P. Burke 140,893,218 1,051,937
James I. Cash, Jr. 129,045,586 12,899,569
Joel J. Cohen 140,868,872 1,076,283
James M. Cornelius 129,762,774 12,182,381
David H. Hoag 141,582,175 362,980
Klaus K. Mangold 141,575,044 370,111
Dean R. O'Hare 141,483,015 462,140
Warren B. Rudman 141,546,374 398,781
David G. Scholey 105,154,386 36,790,769
Raymond G. H. Seitz 140,297,574 1,647,581
Lawrence M. Small 141,590,036 355,119
Karen Hastie Williams 140,890,476 1,054,679
James M. Zimmerman 141,590,859 354,296
Alfred W. Zollar 140,902,917 1,042,238
There were no broker non-votes cast.
Votes were cast in the following manner in connection with the proposal to
approve the selection of Ernst & Young LLP as the independent auditors of the
Registrant for the year 2002.
Votes For Votes Against
--------- -------------
135,223,568 6,463,311
There were 258,276 abstaining votes and no broker non-votes cast.
Page 18
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 March 31, 2002.
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: May 15, 2002