UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended March 31, 2003
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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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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
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The number of shares of common stock outstanding as of April 30, 2003 was
171,613,600.
Explanatory Note
This Quarterly Report on Form 10-Q/A amends the Registrant's Form 10-Q for the
quarterly period ended March 31, 2003. This Quarterly Report on Form 10-Q/A for
the quarterly period ended March 31, 2003 is being filed solely to eliminate
the Registrant's reference to operating income in Management's Discussion and
Analysis.
THE CHUBB CORPORATION
INDEX
Page Number
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Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and 2002................... 1
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002......................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2003 and 2002........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 9
Item 4 - Controls and Procedures................................ 27
Part II. Other Information:
Item 4 - Submission of Matters to a Vote of
Security Holders...................................... 28
Item 6 - Exhibits and Reports on Form 8-K....................... 29
Signatures......................................................... 29
Certifications..................................................... 30
Page 1
Part I. Financial Information
Item 1 - Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
2003 2002
---- ----
(in millions)
Revenues
Premiums Earned..................................... $2,325.2 $1,855.4
Investment Income................................... 257.0 242.5
Other Revenues...................................... 29.2 16.6
Realized Investment Gains (Losses).................. 4.5 (9.3)
-------- --------
Total Revenues............................... 2,615.9 2,105.2
-------- --------
Claims and Expenses
Insurance Claims and Claim Expenses................. 1,505.5 1,190.5
Amortization of Deferred Policy Acquisition Costs... 580.1 473.0
Other Insurance Operating Costs and Expenses........ 177.0 145.3
Other Expenses...................................... 17.0 18.1
Investment Expenses................................. 10.2 5.6
Corporate Expenses.................................. 43.9 27.8
-------- --------
Total Claims and Expenses.................... 2,333.7 1,860.3
-------- --------
Income Before Federal and Foreign Income Tax.......... 282.2 244.9
Federal and Foreign Income Tax........................ 57.6 46.7
-------- --------
Net Income............................................ $ 224.6 $ 198.2
======== ========
Net Income Per Share
Basic................................................ $1.32 $1.17
Diluted.............................................. 1.31 1.15
Dividends Declared Per Share.......................... .36 .35
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
2003 2002
-------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 2,348.3 $ 1,756.7
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $740.5
and $850.7)....................................... 690.1 794.9
Available-for-Sale
Tax Exempt (cost $8,669.4 and $8,449.2)........... 9,295.2 9,082.9
Taxable (cost $8,560.3 and $8,112.5).............. 8,911.7 8,385.7
Equity Securities (cost $1,147.1 and $998.3)......... 1,135.8 992.2
--------- ---------
TOTAL INVESTED ASSETS......................... 22,381.1 21,012.4
Cash................................................... 30.8 41.9
Securities Lending Collateral.......................... 1,317.9 1,354.8
Accrued Investment Income.............................. 253.3 246.9
Premiums Receivable.................................... 2,097.4 2,040.6
Reinsurance Recoverable on Unpaid Claims
and Claim Expenses.................................... 3,895.0 4,071.5
Prepaid Reinsurance Premiums........................... 584.9 479.3
Deferred Policy Acquisition Costs...................... 1,221.0 1,150.0
Real Estate Assets..................................... 594.2 602.9
Investments in Partially Owned Companies............... 274.7 266.7
Deferred Income Tax.................................... 550.1 612.5
Goodwill............................................... 467.4 467.4
Other Assets........................................... 1,798.0 1,767.5
--------- ---------
TOTAL ASSETS.................................. $35,465.8 $34,114.4
========= =========
Liabilities
Unpaid Claims and Claim Expenses....................... $16,885.3 $16,713.1
Unearned Premiums...................................... 5,516.2 5,049.9
Securities Lending Payable............................. 1,317.9 1,354.8
Short Term Debt........................................ 257.0 -
Long Term Debt......................................... 2,356.4 1,959.1
Dividend Payable to Shareholders....................... 61.8 59.9
Accrued Expenses and Other Liabilities................. 1,952.3 2,118.4
--------- ---------
TOTAL LIABILITIES............................. 28,346.9 27,255.2
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 180,538,653 and
180,296,834 Shares.................................... 180.5 180.3
Paid-In Surplus........................................ 480.4 445.4
Retained Earnings...................................... 6,515.3 6,352.5
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 627.8 585.5
Foreign Currency Translation Losses, Net of Tax....... (47.0) (56.5)
Receivable from Employee Stock Ownership Plan.......... (34.1) (34.1)
Treasury Stock, at Cost - 8,948,393 and
9,095,162 Shares...................................... (604.0) (613.9)
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TOTAL SHAREHOLDERS' EQUITY.................... 7,118.9 6,859.2
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $35,465.8 $34,114.4
========= =========
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
2003 2002
---- ----
(in millions)
Net Income............................................ $224.6 $198.2
------ ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation of Investments,
Net of Tax......................................... 42.3 (69.0)
Foreign Currency Translation Gains (Losses),
Net of Tax......................................... 9.5 (5.3)
------ ------
51.8 (74.3)
------ ------
Comprehensive Income.................................. $276.4 $123.9
====== ======
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
2003 2002
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................ $ 224.6 $ 198.2
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims and Claim Expenses, Net... 348.7 105.6
Increase in Unearned Premiums, Net.................. 349.5 335.5
Increase in Premiums Receivable..................... (56.8) (151.8)
Increase in Deferred Policy Acquisition Costs....... (67.9) (87.4)
Change in Deferred Income Tax....................... 35.1 52.5
Depreciation........................................ 27.8 25.4
Realized Investment Losses (Gains).................. (4.5) 9.3
Other, Net.......................................... (165.3) (72.8)
--------- ---------
Net Cash Provided by Operating Activities............. 691.2 414.5
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities............... 1,403.6 1,487.0
Proceeds from Maturities of Fixed Maturities.......... 281.1 374.9
Proceeds from Sales of Equity Securities.............. 129.0 113.5
Purchases of Fixed Maturities......................... (2,215.9) (2,415.3)
Purchases of Equity Securities........................ (270.0) (91.0)
Decrease (Increase) in Short Term Investments, Net.... (591.6) 206.5
Increase (Decrease) in Net Payable from Security
Transactions Not Settled............................. (11.5) 61.8
Purchases of Property and Equipment, Net.............. (20.0) (33.9)
Other, Net............................................ - 2.8
--------- ---------
Net Cash Used in Investing Activities................. (1,295.3) (293.7)
--------- ---------
Cash Flows from Financing Activities
Increase (Decrease) in Short Term Debt, Net........... 257.0 (100.0)
Proceeds from Issuance of Long Term Debt.............. 500.0 -
Repayment of Long Term Debt........................... (100.1) (3.7)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans......................... 2.7 36.3
Dividends Paid to Shareholders........................ (59.9) (57.8)
Other, Net............................................ (6.7) 1.9
--------- ---------
Net Cash Provided by (Used in) Financing Activities... 593.0 (123.3)
--------- ---------
Net Decrease in Cash.................................... (11.1) (2.5)
Cash at Beginning of Year............................... 41.9 25.8
--------- ---------
Cash at End of Period................................. $ 30.8 $ 23.3
========= =========
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 Notes to Consolidated Financial
Statements included in the Corporation's 2002 Annual Report on Form 10-K.
2) Adoption of New Accounting Pronouncement
Effective January 1, 2003, the Corporation adopted the fair value
method of accounting for stock-based employee compensation plans, which is
the method of accounting defined in Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under
the fair value method of accounting, compensation cost is measured based
on the fair value of the award at the grant date and recognized over the
service period. The Corporation has elected to use the modified
prospective method of transition, as permitted by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure. Under this
method, stock-based employee compensation cost is recognized from the
beginning of 2003 as if the fair value method of accounting had been used
to account for all employee awards granted, modified, or settled in years
beginning after December 15, 1994. Prior period financial statements were
not restated. The adoption of the fair value method of accounting for
stock-based employee compensation plans increased compensation cost by
$19.1 million in the first quarter of 2003, which resulted in a reduction
in net income of $14.0 million or $0.08 per basic and diluted share.
The following information illustrates the effect on net income and
earnings per share as if the Corporation had accounted for stock-based
employee compensation using the fair value method.
Three Months Ended
March 31
-----------------------
2003 2002
------ -----
(in millions,
except per share amounts)
Net income, as reported............................. $224.6 $198.2
Add: stock-based employee compensation expense
included in reported net income, net of tax.... 15.8 4.0
Deduct: stock-based employee compensation
expense determined using the fair value
method, net of tax............................. (15.8) (16.9)
----- ------
Pro forma net income................................ $224.6 $185.3
====== ======
Earnings per share
Basic, as reported............................. $1.32 $1.17
Basic, pro forma............................... 1.32 1.09
Diluted, as reported........................... 1.31 1.15
Diluted, pro forma............................. 1.31 1.07
Page 6
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
--------------------
2003 2002
---- ----
(in millions)
Change in unrealized depreciation
of equity securities.............................. $ (5.2) $ 19.5
Change in unrealized appreciation
of fixed maturities............................... 70.3 (125.7)
------ -------
65.1 (106.2)
Deferred income tax (credit)........................ 22.8 (37.2)
------ -------
Change in unrealized appreciation or
depreciation of investments, net.................. $ 42.3 $ (69.0)
====== =======
4) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
---------------------
2003 2002
----- ----
(in millions, except
per share amounts)
Basic earnings per share:
Net income........................................ $224.6 $ 198.2
====== =======
Weighted average number of common
shares outstanding................................ 170.5 169.8
====== =======
Basic earnings per share............................ $ 1.32 $ 1.17
====== =======
Diluted earnings per share:
Net income........................................ $224.6 $ 198.2
====== =======
Weighted average number of common
shares outstanding................................ 170.5 169.8
Additional shares from assumed exercise
of stock-based compensation awards................ .9 3.1
------ -------
Weighted average number of common shares and
potential common shares assumed outstanding
for computing diluted earnings per share.......... 171.4 172.9
====== =======
Diluted earnings per share.......................... $ 1.31 $ 1.15
====== =======
Page 7
5) September 11 Attack
In the third quarter of 2001, net costs of $645 million were
incurred by the Corporation's property and casualty insurance subsidiaries
related to the September 11 attack in the United States. Gross claims and
claim expenses from the September 11 attack are estimated at about $3.2
billion. Most of the claims were from property exposure and business
interruption losses. There were also significant workers' compensation
losses. Net costs were estimated to be $645 million due to various
reinsurance agreements. The property exposures were protected by
facultative reinsurance, property per risk treaties that limited the net
loss per risk, and property catastrophe treaties. Workers' compensation
losses were protected by a casualty catastrophe treaty and a casualty
clash treaty.
Certain reinsurers questioned the interpretation and/or application
of some provisions of the property per risk reinsurance agreements. All of
the questions that had been raised by the property per risk reinsurers
have been resolved. That resolution will result in the collection of an
amount of reinsurance that confirms the estimate of net costs of $645
million related to the September 11 attack.
Business interruption claims from the September 11 attack will take
some time to resolve, while potential liability claims could take years to
resolve. Therefore, it is possible that the estimate of ultimate gross
losses related to the September 11 attack may change in the future, and
that the change in estimate could have a material effect on the
Corporation's results of operations. However, management does not expect
that any such change would have a material effect on the Corporation's
financial condition or liquidity.
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.
Chubb Financial Solutions' non-insurance business is primarily
structured credit derivatives, principally as a counterparty in portfolio
credit default swap contracts.
Corporate and other includes investment income earned on corporate
invested assets, corporate expenses and the Corporation's real estate and
other non-insurance subsidiaries.
Page 8
Revenues and income before income tax of the operating segments were
as follows:
Three Months Ended
March 31
-------------------------
2003 2002
-------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance....................... $ 579.8 $ 502.2
Commercial insurance..................... 878.7 649.8
Specialty insurance...................... 866.7 703.4
-------- --------
2,325.2 1,855.4
Investment income.......................... 253.6 230.2
-------- --------
Total property and casualty insurance.... 2,578.8 2,085.6
Chubb Financial Solutions non-insurance
business.................................... 17.4 3.5
Corporate and other.......................... 15.2 25.4
Realized investment gains (losses)........... 4.5 (9.3)
-------- --------
Total revenues........................... $2,615.9 $2,105.2
======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance....................... $ (15.6) $ 13.0
Commercial insurance..................... 54.2 (49.8)
Specialty insurance...................... (36.4) 6.5
-------- --------
2.2 (30.3)
Increase in deferred policy
acquisition costs....................... 67.9 87.4
-------- --------
Underwriting income...................... 70.1 57.1
Investment income.......................... 246.3 225.2
Other charges.............................. (7.5) (10.5)
-------- --------
Total property and casualty insurance.... 308.9 271.8
Chubb Financial Solutions non-insurance
business.................................... 14.0 (.1)
Corporate and other loss..................... (45.2) (17.5)
Realized investment gains (losses)........... 4.5 (9.3)
-------- --------
Total income before income tax........... $ 282.2 $ 244.9
======== ========
Page 9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Quarters Ended March 31, 2003 and 2002
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 terrorism legislation and regulation;
- global political conditions and the occurrence of any terrorist
attacks, including any nuclear, biological or chemical events;
- the effects of the war in Iraq and the outbreak of war or hostilities
in other countries or regions of the world;
- premium price increases and profitability or growth estimates overall
or by lines of business or geographic area, 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;
- our estimates relating to ultimate asbestos liabilities and
related reinsurance recoverables;
- any impact from the bankruptcy protection sought by various
asbestos producers and other related businesses;
- developments in judicial decisions or legislative actions
relating to coverage and liability for asbestos and toxic
waste claims;
- developments in judicial decisions or regulatory or
legislative actions relating to coverage and liability for
mold claims;
- the impact of the current economic climate on companies on whose behalf
we have issued surety bonds, and in particular, on those companies that
have experienced deterioration in creditworthiness;
Page 10
- the effects of disclosures by and investigations of public companies
relating to possible accounting irregularities, practices in the energy
and securities industries and other corporate governance issues,
including:
- the effects on the energy markets and the companies that
participate in them, and in particular as they may relate to
concentrations of risk in our surety business;
- the effects on the capital markets and the markets for
directors and officers and errors and omissions insurance;
- claims and litigation arising out of accounting and other
corporate governance disclosures by other companies;
- claims and litigation arising out of investment banking
practices;
- legislative or regulatory proposals or changes, including the
changes in law and regulation implemented under the
Sarbanes-Oxley Act of 2002;
- the impact of Severe Acute Respiratory Syndrome (SARS) on business and
on our ability and the ability of our agents and brokers to travel and
meet with customers and prospective customers;
- any downgrade in our claims-paying, financial strength or credit
ratings;
- general economic conditions including:
- changes in interest rates, market credit spreads and the
performance of the financial markets, generally and as they
relate to credit risks assumed by the Chubb Financial
Solutions unit in particular;
- 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.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects are uncertain. Such estimates and
judgments affect the reported amounts in the financial statements. Those
estimates and judgments that were most critical to the preparation of the
financial statements involved the adequacy of loss reserves and the
recoverability of related reinsurance recoverables, the fair value of credit
derivative obligations, the recoverability of the carrying value of real estate
properties and the realization of deferred income tax benefits. These estimates
and judgments are discussed within the following analysis of our results of
operations. If different estimates and judgments had been applied, materially
different amounts might have been reported in the financial statements.
Page 11
SUMMARY OF FINANCIAL RESULTS
Net income determined in accordance with generally accepted accounting
principles (GAAP) was $224.6 million in the first quarter of 2003 compared with
$198.2 million in the comparable period in 2002.
Results in the first quarter of 2003 included realized investment
gains of $4.5 million, or $2.9 million after tax, compared with realized
investment losses of $9.3 million, or $6.1 million after tax, in the first
quarter of 2002.
Effective January 1, 2003, the Corporation adopted the fair value
method of accounting for stock-based employee compensation plans, which is the
method of accounting defined in Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation. Prior period financial statements
were not restated. Under the fair value method of accounting, compensation cost
is measured based on the fair value of an award at the grant date and recognized
over the service period. The adoption of the fair value method of accounting for
stock-based employee compensation plans increased compensation cost by $19
million in the first quarter of 2003, which resulted in a reduction in net
income of $14 million. The adoption of the fair value method of accounting for
stock-based employee compensation plans is discussed further in Note (2) of the
Notes to Consolidated Financial Statements.
Page 12
The following is a summary of the Corporation's results for the first
quarter of 2003 and 2002:
Quarter Ended
March 31
-----------------------
2003 2002
-------- --------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written ............................... $2,674.7 $2,190.9
Increase in Unearned Premiums ...................... (349.5) (335.5)
-------- --------
Premiums Earned ................................. 2,325.2 1,855.4
-------- --------
Claims and Claim Expenses .......................... 1,505.5 1,190.5
Operating Costs and Expenses ....................... 811.5 686.6
Increase in Deferred Policy Acquisition Costs ...... (67.9) (87.4)
Dividends to Policyholders ......................... 6.0 8.6
-------- --------
Underwriting Income ................................ 70.1 57.1
-------- --------
Investments
Investment Income Before Expenses .................. 253.6 230.2
Investment Expenses .................................. 7.3 5.0
-------- --------
Investment Income .................................. 246.3 225.2
-------- --------
Other Charges ....................................... (7.5) (10.5)
-------- --------
Property and Casualty Income ........................ 308.9 271.8
CHUBB FINANCIAL SOLUTIONS NON-INSURANCE BUSINESS ..... 14.0 (.1)
CORPORATE AND OTHER .................................. (45.2) (17.5)
REALIZED INVESTMENT GAINS (LOSSES) ................... 4.5 (9.3)
-------- --------
CONSOLIDATED INCOME BEFORE INCOME TAX ................ 282.2 244.9
Federal and Foreign Income Tax ....................... 57.6 46.7
-------- --------
CONSOLIDATED NET INCOME .............................. $ 224.6 $ 198.2
======== ========
PROPERTY AND CASUALTY INVESTMENT INCOME
AFTER INCOME TAX .................................... $ 198.0 $ 185.6
======== ========
Page 13
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were higher in the
first quarter of 2003 compared with the same period of 2002. Underwriting income
was higher in the first quarter of 2003 due to the exceptionally strong results
in our commercial classes, which include multiple peril, casualty, workers'
compensation and property and marine. Investment income also increased in the
first quarter of 2003 compared with 2002. Property and casualty income before
taxes amounted to $308.9 million in the first quarter of 2003 compared with
$271.8 million in 2002.
Net premiums written were $2.7 billion in the first quarter of 2003, an
increase of 22% compared with the first quarter of 2002. U.S. premiums grew 21%.
Substantial premium growth was also achieved outside the United States in the
first quarter of 2003. Non-U.S. premiums grew 26% on a reported basis and 16% in
local currencies.
Premium growth in the first quarter was strong in all segments of our
business due primarily to higher rates. We continue to see opportunities to
write new business and we are retaining more of our accounts upon renewal. We
continue to get rate increases on much of the business we write, with favorable
policy terms and conditions. We expect that this trend will continue throughout
2003.
As a result of the substantial losses incurred by reinsurers in recent
years, the cost of reinsurance in the marketplace has increased significantly
and reinsurance capacity for certain coverages, such as terrorism, is limited
and expensive.
Our reinsurance program in 2003 will be similar to that in 2002. We
have discontinued some lower limit treaties that we believed were no longer
economical and have increased our participation in certain layers of the
treaties that we renewed. We expect that our reinsurance costs will increase in
2003 in line with the higher premiums on the policies reinsured.
Our casualty per risk and casualty clash treaties renewed in January
2003. On the clash treaty, which operates like a catastrophe treaty, we
increased our retention from $25 million to $50 million.
Our property reinsurance program was renewed in April 2003. The
property per risk retention remained at $15 million. Our property catastrophe
treaty for events in the United States was modified to increase our coverage at
the top by $200 million due to our increased exposure in certain catastrophe
prone areas. The program now provides coverage for individual catastrophic
events of approximately 86% of losses between $150 million and $850 million.
We are making a concerted effort to reduce terrorism risk aggregations.
However, our future operating results could be more volatile due to the limited
terrorism coverage in our reinsurance program.
Page 14
The Terrorism Risk Insurance Act of 2002 (the Terrorism Act)
established a program under which the federal government will share the risk of
loss from certain acts of international terrorism with the insurance industry.
The program terminates on December 31, 2005. The Terrorism Act is applicable to
almost all commercial lines of insurance. Insurance companies with direct
commercial insurance exposure in the United States are required to participate
in the program. Each insurer has a separate deductible in the event of an act of
terrorism before federal assistance becomes available. The deductible is based
on a percentage of direct commercial earned premiums from the previous calendar
year. For 2003, that deductible is 7% of direct commercial earned premiums in
2002. For losses above the deductible, the federal government will pay for 90%
of insured losses, while the insurer contributes 10%. For certain classes of
business, such as workers' compensation, terrorism coverage is mandatory. For
those classes of business where it is not mandatory, insureds may choose not to
accept the terrorism coverage, which would reduce our exposure. As expected, in
2003, most of our middle market commercial insureds have opted for terrorism
coverage. While the provisions of the Terrorism Act will serve to mitigate our
exposure in the event of a large-scale terrorist attack, our deductible is
substantial, approximately $350 million in 2003. Therefore, we continue to
monitor concentrations of risk.
The combined loss and expense ratio, expressed as a percentage, is the
key measure of underwriting profitability traditionally used in the property and
casualty business. We use the statutory definition of combined loss and expense
ratio. It is the sum of the ratio of losses to premiums earned (loss ratio) plus
the ratio of underwriting expenses to premiums written (expense ratio) after
reducing both premium amounts by dividends to policyholders. When the combined
ratio is under 100%, underwriting results are generally considered profitable;
when the combined ratio is over 100%, underwriting results are generally
considered unprofitable.
Underwriting results were highly profitable in the first quarter of
both 2003 and 2002. Our combined loss and expense ratio was 95.3% in the first
quarter of 2003 compared with 95.9% in 2002.
The loss ratio was 64.9% for the first quarter of 2003 compared with
64.4% in 2002. Catastrophe losses during the first quarter of 2003 amounted to
$94.9 million which represented 4.1 percentage points of the loss ratio compared
with $13.3 million or 0.7 of a percentage point in 2002.
Our expense ratio decreased to 30.4% for the first quarter of 2003
compared with 31.5% in 2002, despite the 0.5 of a percentage point adverse
impact of expensing stock options in 2003. The decrease in the expense ratio was
due primarily to premiums written growing at a substantially higher rate than
overhead expenses.
Page 15
Underwriting results during 2003 and 2002 by class of business were as
follows:
Quarter Ended March 31
------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
---------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in millions)
PERSONAL INSURANCE
Automobile ........... $ 132.9 $ 119.1 101.4% 100.5%
Homeowners ........... 312.5 272.4 114.1 102.6
Other ................ 119.6 111.0 77.8 80.9
-------- -------- -------- --------
Total Personal ... 565.0 502.5 103.6 97.4
-------- -------- -------- --------
COMMERCIAL INSURANCE
Multiple Peril ....... 276.5 247.0 88.0 99.9
Casualty ............. 344.1 300.8 85.2 100.3
Workers' Compensation 188.4 142.8 87.6 91.5
Property and Marine .. 273.3 202.3 87.4 87.5
-------- -------- -------- --------
Total Commercial . 1,082.3 892.9 86.5 95.7
-------- -------- -------- --------
SPECIALTY INSURANCE
Executive Protection . 521.6 388.6 103.6 99.3
Financial Institutions 223.8 178.2 110.9 94.4
Other ................ 282.0 228.7 78.8 88.3
-------- -------- -------- --------
Total Specialty .. 1,027.4 795.5 99.2 95.4
-------- -------- -------- --------
TOTAL ............ $2,674.7 $2,190.9 95.3% 95.9%
======== ======== ======== ========
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 21% of
total premiums written, increased by 12% in the first quarter of 2003 compared
with the same quarter in 2002. Premium growth occurred in all classes. However,
as planned, growth in our in-force policy count continued to slow. The
significant premium growth in our homeowners business was due to higher rates
and increased insurance-to-value; the in force policy count for this class was
flat.
Our personal insurance business produced unprofitable underwriting
results in the first quarter of 2003 compared with profitable results in 2002.
The deterioration in 2003 was due to higher catastrophe losses. The combined
loss and expense ratio was 103.6% in the first quarter of 2003 compared with
97.4% in 2002. Excluding catastrophe losses, the combined ratio was 92.7% and
95.0% in the first quarter of 2003 and 2002, respectively.
Homeowners results were highly unprofitable in 2003 compared with
modestly unprofitable results in 2002. The deterioration in 2003 was due to the
higher catastrophe losses. Catastrophe losses represented 19.6 percentage points
of the loss ratio for this class in the first quarter of 2003 compared with 4.5
percentage points in 2002. Excluding catastrophe losses, homeowners results
improved somewhat in 2003 due in part to a decline in water damage claims.
Homeowners results remained unprofitable outside the United States in 2003. We
are in the process of exiting our personal lines business in Continental Europe,
with the exception of the ultra high net worth market segment.
Page 16
Our remediation plan relating to our homeowners business in the United
States, which began in the latter part of 2001, is on track. We have made
substantial progress in implementing rate increases in states where rates have
been deficient. While the impact of losses related to water damage, including
mold, decreased somewhat in the first quarter of 2003, we remain concerned about
the potential for such claims. We have made regulatory filings in most states to
introduce contract changes that would enable us to treat mold as a separate
peril available at an appropriate price. These changes have been implemented in
26 states, including Texas, California and Florida, and approved in seven other
states. If necessary, we will take other underwriting actions to reduce our
exposures in those states where we cannot attain rate adequacy due to regulatory
constraints or adverse loss trends.
Our automobile business produced near breakeven results in 2003 and
2002. Other personal coverages, which include insurance for valuable articles
and excess liability, produced highly profitable results in 2003 and 2002 due to
continued favorable loss experience.
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent 41% of our total
writings, increased by 21% in the first quarter of 2003 compared with the same
period a year ago. The substantial premium growth in this business was due to
continued price increases and an increase in our in-force policy count. Growth
occurred in all segments of this business but was particularly strong in the
workers' compensation and property and marine classes. We are beginning to see
more competition in the marketplace. Despite this, retention levels in the first
quarter of 2003 were somewhat higher than those in the same period of 2002. On
the business that was renewed, rate increases were substantial, although the
level of rate increases has declined somewhat from 2002 levels. During the
quarter, we wrote two dollars of new business for every dollar of business we
lost. The substantial growth in new business was produced with the same
tightened underwriting discipline that has existed over the past several years.
We expect that rates will continue to rise but that the level of rate increases
will decline.
Our commercial insurance business produced profitable underwriting
results in the first quarter of 2003 and 2002. The 2003 results were
exceptionally profitable. The combined loss and expense ratio was 86.5% for the
first quarter of 2003 compared with 95.7% in 2002. The improvement in 2003 was
due in large part to the cumulative effect of price increases, better terms and
conditions and more stringent risk selection in recent years. The improvement
was most substantial in our commercial multiple peril and casualty classes of
business. The improved casualty results were due in part to the absence of
incurred losses related to asbestos and toxic waste claims. Such losses were $22
million in the first quarter of 2002.
Multiple peril produced highly profitable results in 2003 compared with
breakeven results in 2002. The improvement in 2003 was driven by the liability
component of this business which experienced significantly fewer large losses
compared with 2002. In the property component, results were similar in both
years as a reduction in non-catastrophe losses in 2003 was mostly offset by
higher catastrophe losses. Catastrophe losses represented 6.9 percentage points
of the loss ratio for this class in the first quarter of 2003. There were
virtually no catastrophe losses for this class in the comparable period in 2002.
Page 17
Our casualty business improved considerably in 2003, producing highly
profitable results compared with breakeven results in the prior year. The
improvement in 2003 was primarily in the excess liability component of this
business, which produced profitable results in 2003 compared with unprofitable
results in 2002 due to higher rates and the culling of business where we could
not attain price adequacy. The primary liability and automobile components were
highly profitable in both years. As noted above, casualty results in 2003 also
benefited from an absence of incurred losses related to asbestos and toxic waste
claims.
Workers' compensation results were highly profitable in 2003 and 2002
due in large part to our disciplined risk selection during the past several
years.
Property and marine results were highly profitable in 2003 and 2002 due
in part to few severe losses. Results were similar in both years despite higher
catastrophe losses in 2003. Catastrophe losses represented 5.6 percentage points
of the loss ratio for this class in 2003 compared with 1.6 percentage points in
2002.
SPECIALTY INSURANCE
Premiums from specialty insurance, which represent 38% of our total
writings, increased by 29% in the first quarter of 2003 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 latter 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. We continue to reprofile our book of business by reducing the
number of Fortune 200 companies for which we write directors and officers
liability coverages. At the same time, we continue to generate most of our new
business from the small to mid-size market. In the fidelity and standard
commercial components of our financial institutions business, rates continued to
increase as well. 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 58% in the first quarter of 2003.
Our specialty business produced near breakeven underwriting results in
the first quarter of 2003 compared with profitable results in 2002. The combined
loss and expense ratio was 99.2% for the first quarter of 2003 compared with
95.4% in 2002.
Our executive protection business produced unprofitable results in 2003
compared with near breakeven results in the prior year. Results in 2003 were
adversely affected by directors and officers liability and errors and omissions
liability claims that have arisen due to the corporate abuses and accounting
irregularities in recent years.
Page 18
Financial institutions results were unprofitable in 2003 compared with
profitable results in 2002. The fidelity component of this business was highly
profitable in both years due to favorable loss experience. The standard
commercial business written on financial institutions also produced highly
profitable results in both years due in large part to the rate increases and
more stringent risk selection in recent years. However, results for the
professional liability component were highly unprofitable in both years, but
more so in 2003. The deterioration was due to the same adverse claim trends
experienced in our executive protection business.
Our other specialty results were highly profitable in both years, but
more so in 2003 due to improved results in our reinsurance assumed business
generated by Chubb Re and in our aviation business. Our surety business produced
highly profitable results in both years.
As a result of disarray in the surety reinsurance market caused by
several years of declining prices and high losses, the availability of surety
reinsurance in the near term has been significantly reduced. As a result, our
future surety results could be more volatile.
We have in force several gas forward purchase surety bonds. The total
amount of bonds with one principal, Aquila, Inc., is approximately $540 million.
These bonds are uncollateralized. The combined amount of all other gas forward
surety bonds is approximately $235 million. Approximately $125 million of these
bonds are uncollateralized. Our obligations under these bonds will decline over
the terms of the bonds, the longest of which extends until 2012.
These surety bonds secure the suppliers' obligation to supply gas under
long-term forward purchase agreements. Under the terms of these bonds, our
entire obligation to pay could be triggered if the related supplier failed to
provide gas under its forward purchase contracts or was the subject of a
bankruptcy filing. There is currently no reinsurance in place covering our
obligations under any of these bonds.
Each of the suppliers continues to perform its obligations under the
related gas forward purchase agreements. If payment under the Aquila surety
bonds were triggered or if payment under all of the other gas forward surety
bonds were triggered, such payments would have a material effect on the
Corporation's results of operations and liquidity.
SEPTEMBER 11 ATTACK
In the third quarter of 2001, we incurred net costs of $645 million
related to the September 11 attack. We estimate that our gross claims and claim
expenses from the September 11 attack were about $3.2 billion. Most of the
claims were from property exposure and business interruption losses. We also
had significant workers' compensation losses. We estimated that our net costs
were $645 million due to various reinsurance agreements. Our property exposures
were protected by facultative reinsurance, property per risk treaties that
limited our net loss per risk, and our property catastrophe treaties. Our
workers' compensation losses were protected by a casualty catastrophe treaty
and a casualty clash treaty.
Page 19
Certain of our reinsurers questioned our interpretation and/or
application of some provisions of our property per risk reinsurance agreements.
The questions raised generally involved the applicable limit of reinsurance
coverage available to us, the definition of what constitutes one risk, our
accumulation of exposure in the various buildings destroyed or damaged and our
adherence to our underwriting guidelines. We have resolved all of the questions
that had been raised by our property per risk reinsurers. That resolution will
result in our collecting an amount of reinsurance that confirms our estimate of
net costs of $645 million related to the September 11 attack.
Business interruption claims from the September 11 attack will take
some time to resolve, while potential liability claims could take years to
resolve. Therefore, it is possible that our estimate of ultimate gross losses
related to the September 11 attack may change in the future, and that the change
in estimate could have a material effect on the Corporation's results of
operations. However, we do not expect that any such change would have a material
effect on the Corporation's financial condition or liquidity.
LOSS RESERVES
Loss reserves at March 31, 2003 and December 31, 2002 included
significant amounts related to the September 11 attack and to asbestos and toxic
waste claims. Loss reserves at December 31, 2002 also included a significant
amount related to our surety exposure arising from the bankruptcy of Enron
Corp., which was substantially paid in the first quarter of 2003. The components
of loss reserves were as follows:
March 31, December 31,
2003 2002
------- -----------
(in millions)
Gross loss reserves
Total, per balance sheet $16,885 $16,713
Less:
Related to September 11 attack 1,853 2,063
Related to asbestos and toxic
waste claims 1,112 1,136
Related to Enron surety exposure 14 113
------- -------
Total, as adjusted $13,906 $13,401
======= =======
Reinsurance recoverable
Total, per balance sheet $ 3,895 $ 4,071
Less:
Related to September 11 attack 1,345 1,558
Related to asbestos and toxic
waste claims 50 53
Related to Enron surety exposure -- 7
------- -------
Total, as adjusted $ 2,500 $ 2,453
======= =======
Net loss reserves
Total $12,990 $12,642
Total, as adjusted 11,406 10,948
The loss reserves related to the September 11 attack, asbestos and
toxic waste claims and our Enron surety exposure are significant components of
our total loss reserves, but they distort the growth trend in our loss reserves.
Adjusted to exclude such loss reserves, our loss reserves, net of reinsurance
recoverable, increased by $458 million during the first quarter of 2003.
Page 20
Net loss reserves, as adjusted, by segment were as follows:
March 31, December 31,
2003 2002
------- -------
(in millions)
Personal insurance $ 1,141 $ 1,064
Commercial insurance 4,792 4,714
Specialty insurance 5,473 5,170
------- -------
Net loss reserves, as adjusted $11,406 $10,948
======= =======
Loss reserves for personal insurance and specialty insurance increased
significantly in the first quarter of 2003. Unpaid claims related to
catastrophes contributed approximately $41 million to the increase in personal
insurance loss reserves. The increase in loss reserves for specialty insurance
was due in large part to the directors and officers and errors and omissions
claim activity combined with relatively low paid losses for these coverages
during the quarter.
We continually review and update our loss reserves. Based on all
information currently available, we believe that the aggregate loss reserves of
the property and casualty subsidiaries at March 31, 2003 were adequate to cover
claims for losses that had occurred, including both those known to us and those
yet to be reported. In establishing such reserves, we consider facts currently
known and the present state of the law and coverage litigation. However, given
the judicial decisions and legislative actions that have broadened the scope of
coverage and expanded theories of liability in the past and the possibilities of
similar interpretations in the future, particularly as they relate to asbestos
claims and, to a lesser extent, toxic waste claims, additional increases in loss
reserves may emerge in future periods. Such increases could have a material
adverse effect on the Corporation's future operating results. However,
management does not expect that any such increases would have a material effect
on the Corporation's consolidated financial condition or liquidity.
INVESTMENT INCOME
Property and casualty investment income before taxes increased by 9.4%
in the first quarter of 2003 compared with the same period in 2002. Growth was
due to an increase in invested assets since the first quarter of 2002. The
increase in invested assets was due to substantial cash flow from operations
over the period as well as a capital contribution of $1 billion to the property
and casualty subsidiaries by the Corporation in the fourth quarter of 2002.
Growth in investment income in 2003 was dampened, however, by lower available
reinvestment rates on fixed maturities that matured over the past year.
The effective tax rate on investment income increased to 19.6% in the
first quarter of 2003 from 17.6% in the comparable period in 2002 due to our
holding a smaller proportion of our investment portfolio in tax-exempt
securities. On an after-tax basis, property and casualty investment income
increased by 6.7% in the first quarter of 2003. Management uses property and
casualty investment income after-tax, a non-GAAP financial measure, to evaluate
its investment performance because it reflects the impact of any change in the
proportion of the investment portfolio invested in tax-exempt securities and is
therefore more meaningful for analysis purposes than investment income before
taxes.
Page 21
CHUBB FINANCIAL SOLUTIONS
Chubb Financial Solutions (CFS) was organized by the Corporation in
2000 to develop and provide customized products to address specific financial
needs of corporate clients. CFS operates through both the capital and insurance
markets. Since its inception, CFS's non-insurance business has been primarily
structured credit derivatives, principally as a counterparty in portfolio credit
default swap contracts. The Corporation guarantees all of these obligations.
In a typical portfolio credit default swap, CFS participates in the
senior layer of a structure designed to replicate the performance of a portfolio
of corporate securities, a portfolio of asset-backed securities or a specified
pool of loans. The structure of these portfolio credit default swaps generally
requires CFS to make payment to counterparties to the extent cumulative losses,
related to numerous credit events, exceed a specified threshold. The risk below
that threshold, referred to as subordination, is assumed by other parties with
the primary risk layer sometimes retained by the buyer. The amount of
subordination for each contract varies based on the credit quality of the
underlying portfolio and the term to maturity of the contract. Credit events
generally arise when one of the referenced entities within a portfolio becomes
bankrupt, undergoes a debt restructuring or fails to make timely interest or
principal payments on a senior unsecured debt obligation.
Portfolio credit default swaps are derivatives and are carried in the
financial statements at estimated fair value, which represents management's best
estimate of the cost to exit the positions. Changes in fair value are included
in income in the period of the change. Thus, CFS's results are subject to
volatility, which could have a significant effect on the Corporation's results
of operations from period to period. Valuation models are used to estimate the
fair value of the obligation in each credit default swap. Such valuations
require considerable judgment and are subject to significant uncertainty.
The fair value of credit default swaps is subject to fluctuations
arising from, among other factors, changes in credit spreads, the financial
ratings of referenced asset-backed securities, actual credit events reducing
subordination, credit correlation within a portfolio, anticipated recovery rates
related to potential defaults and changes in interest rates. Short term
fluctuations in the fair value of CFS's future obligations may have little
correlation to the ultimate profitability of this business. The ultimate
profitability of this business depends on actual credit events over the lives of
the contracts.
Revenues from the non-insurance business of CFS, principally consisting
of the change in fair value of derivative contracts, were $17.4 million in the
first quarter of 2003 and $3.5 million in 2002. This business produced income
before taxes of $14.0 million in the first quarter of 2003 compared with a loss
of $0.1 million in 2002. Results for the first quarter of 2003 benefited from an
improvement in corporate credit spreads, partially offset by a slight
deterioration in credit quality of the asset-backed portfolios.
At March 31, 2003, CFS's aggregate exposure, or retained risk, referred
to as notional amounts, from its in-force portfolio credit default swaps was
approximately $42.6 billion. The notional amounts are used to express the extent
of involvement in swap transactions. These amounts are used to calculate the
exchange of contractual cash flows and are not necessarily representative of the
potential for gain or loss. The notional amounts are not recorded on the balance
sheet.
Page 22
The realistic loss exposure of CFS is a very small portion of the $42.6
billion notional amount due to several factors. The position of CFS is senior to
subordinated interests of $7.2 billion in the aggregate. Of the $7.2 billion of
subordination, there were only $97 million of defaults through March 31, 2003,
none of which has pierced the subordination limits of any of the contracts. In
addition, the underlying credits are primarily investment grade corporate
credits and highly rated asset-backed securities.
In addition to portfolio credit default swaps, CFS has entered into a
derivative contract linked to an equity market index and a few other
insignificant non-insurance transactions.
The notional amount and fair value of our future obligations by type of
risk were as follows:
Notional Amount Fair Value
--------------- ----------
March 31, December 31, March 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
(in billions) (in millions)
Credit default swaps
Corporate securities $ 24.5 $ 21.2 $ 81 $ 88
Asset-backed securities 15.6 15.5 111 103
Loan portfolios 2.5 2.0 3 4
--------- --------- --------- ---------
42.6 38.7 195 195
Other .4 .4 9 9
--------- --------- --------- ---------
$ 43.0 $ 39.1 $ 204 $ 204
========= ========= ========= =========
In April 2003, the Corporation announced that it intends to run-off the
financial products portfolio of CFS. We do not intend to write any new credit
derivative transactions but might enter into transactions for hedging and other
risk management reasons in the future.
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 our real estate and other
non-insurance subsidiaries. Corporate and other produced a loss before taxes of
$45.2 million in the first quarter of 2003 compared with a loss of $17.5 million
in the first quarter of 2002. The substantially higher loss in 2003 was due
primarily to higher interest expense and lower investment income. Interest
expense was higher in 2003 due primarily to the issuance of $600 million of debt
in the fourth quarter of 2002. Investment income was lower in 2003 due to the
decrease in corporate invested assets resulting from the capital contribution to
the property and casualty subsidiaries in the fourth quarter of 2002.
REAL ESTATE
Real estate operations resulted in a loss before taxes of $1.5 million in
the first quarter of 2003 compared with a loss of $0.9 million in the same
period in 2002, which amounts are included in the corporate and other results.
We own approximately $300 million of land that we expect will be developed
in the future. In addition, we own approximately $175 million of commercial
properties and land parcels under lease. We are continuing to explore the sale
of certain of our remaining properties.
Page 23
Loans receivable, which amounted to $86 million at March 31, 2003, are
primarily purchase money mortgages. Such loans, which were issued in connection
with our joint venture activities and other property sales, are generally
collateralized by buildings and, in some cases, land. We continually evaluate
the ultimate collectibility of such loans and establish appropriate reserves.
The recoverability of the carrying value of our real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The assumptions used reflect future improvement in demand for office
space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. We believe that we have made adequate provisions
for impairment of real estate assets. However, if the assets are not sold or
developed or if leased properties do not perform as presently contemplated, it
is possible that additional impairment losses may be recognized that would have
a material adverse effect on the Corporation's results of operations.
INVESTMENT GAINS AND LOSSES
Net realized investment gains before taxes were $4.5 million in the first
quarter of 2003 compared with net losses of $9.3 million for the same period in
2002. 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.
We regularly review the value of our invested assets for other than
temporary impairment. In evaluating whether a decline in value is other than
temporary, we consider various factors including the length of time and the
extent to which the fair value has been less than the cost, the financial
condition and near term prospects of the issuer, whether the debtor is current
on contractually obligated interest and principal payments, and our intent and
ability to hold the investment for a period of time sufficient to allow us to
recover our cost. 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 the first
quarter of 2003 and 2002, net realized investment gains and losses reflected
writedowns of $24.0 million and $24.8 million, respectively, due to the
recognition of other than temporary impairment on certain securities.
INCOME TAXES
We establish deferred income taxes on the undistributed earnings of
foreign subsidiaries. Similarly, we establish deferred tax assets related to the
expected future U.S. tax benefit of losses and foreign taxes incurred by our
foreign subsidiaries.
At December 31, 2002, the deferred income tax asset related to the
expected future U.S. tax benefit of the losses and foreign taxes incurred by
Chubb Insurance Company of Europe (Chubb Europe) was $140 million. Results in
Chubb Europe were profitable in the first quarter of 2003. As a result, this
deferred tax asset was reduced to $130 million at March 31, 2003.
Page 24
To evaluate the realization of this deferred tax asset, management must
consider whether it is more likely than not that Chubb Europe will generate
sufficient taxable income to realize the future tax benefit of the deferred tax
asset. Management's judgment is based on its assessment of business plans and
related projections of future taxable income that reflect assumptions about
increased premium volume, higher rates and improved policy terms as well as
available tax planning strategies. While the tax loss carryforwards and foreign
tax credits have no expiration and we expect to generate sufficient taxable
income to realize these benefits in the future, we are required under generally
accepted accounting principles to consider a relatively near term horizon when
we evaluate the likelihood of realizing future tax benefits.
During the fourth quarter of 2002, we established a valuation allowance of
$40 million for the portion of the deferred tax asset that we cannot realize for
accounting purposes. We did not adjust the valuation allowance in the first
quarter of 2003. If our estimates of future taxable income in Chubb Europe were
revised upward or downward, we would need to adjust the valuation allowance
accordingly. Depending on the amount of any such adjustment, the effect on the
Corporation's results of operations could be significant.
INVESTED ASSETS
Our investment portfolio is primarily comprised of high quality bonds,
principally tax-exempt, U.S. Treasury, government agency, mortgage-backed
securities and corporate issues. In addition, the portfolio includes equity
securities held primarily with the objective of capital appreciation.
In the first quarter of 2003, we invested new cash in mortgage-backed
securities and, to a lesser extent, U.S. Treasury securities and equity
securities. Our objective is to try to achieve the appropriate mix of taxable
and tax-exempt securities in our portfolio to balance both investment and tax
strategies.
The unrealized appreciation before tax of investments carried at market
value, which includes fixed maturities classified as available-for-sale and
equity securities, was $966 million and $901 million at March 31, 2003 and
December 31, 2002, respectively. Such unrealized appreciation is reflected in a
separate component of other comprehensive income, net of applicable deferred
income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $50 million at March 31, 2003 and $56 million at
December 31, 2002. Such unrealized appreciation was not reflected in the
consolidated financial statements.
Changes in unrealized market appreciation or depreciation of fixed
maturities were due primarily to fluctuations in interest rates.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength
of the Corporation and its ability to generate cash flow from its operating
subsidiaries and to borrow funds at competitive rates and raise new capital to
meet operating and growth needs.
Page 25
CAPITAL RESOURCES
In March 2003, the Corporation issued $225 million of unsecured 3.95%
Notes due in 2008 and $275 million of unsecured 5.2% Notes due in 2013. A
portion of the net proceeds of the offering has been used to repay the
commercial paper that was outstanding at March 31, 2003. The balance will be
used for general corporate purposes.
In March 2003, the Corporation filed a shelf registration statement. When
it is declared effective by the Securities and Exchange Commission, up to $2.5
billion of various types of securities may be issued by the Corporation.
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, the Corporation from time to
time contributes capital to its property and casualty subsidiaries. In addition,
in order to satisfy its capital needs as a result of any rating agency capital
adequacy or other future rating issues, or in the event the Corporation were to
need additional capital to make strategic investments in light of market
opportunities, the Corporation may take a variety of actions, which could
include the issuance of debt and/or equity securities.
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. The Corporation made no share repurchases during the
first quarter of 2003. As of March 31, 2003, 3,287,100 shares remained under the
1998 share repurchase authorization and 8,866,300 shares remained under the 2001
authorization. We do not anticipate that we will repurchase any shares of our
common stock in 2003.
RATINGS
The Corporation and its insurance subsidiaries are rated by major rating
agencies. These ratings reflect the rating agency's opinion of our financial
strength, operating performance, capital resources, strategic position and
ability to meet our obligations to policyholders.
On March 24, 2003, Standard and Poor's Ratings Services (S&P) lowered our
long-term counterparty credit and senior debt ratings from A+ to A and removed
them from CreditWatch. In the same action, S&P lowered its counterparty credit
and financial strength ratings on our operating insurance companies from AA+ to
AA and then removed them from CreditWatch. S&P's outlook on these ratings is
currently stable.
Ratings are an important factor in establishing our competitive position
in our operating businesses. There can be no assurance that our ratings will
continue for any given period of time or that they will not be changed. Further
reductions in our ratings could adversely affect the competitive position of our
operating businesses.
Page 26
LIQUIDITY
Liquidity is a measure of our ability to generate sufficient cash flows to
meet the short and long term cash requirements of our business operations.
In our property and casualty subsidiaries, premiums are generally received
months or even years before losses are paid under the policies purchased by such
premiums. These funds are used first to make current claim and expense payments.
The balance is invested to augment the investment income generated by the
existing portfolio. Historically, cash receipts from operations, consisting of
insurance premiums and investment income, have provided more than sufficient
funds to pay losses, operating expenses and dividends to the Corporation.
New cash from operations available for investment by the property and
casualty subsidiaries was approximately $570 million in the first quarter of
2003 compared with $330 million in the same period in 2002. The increase in new
cash in 2003 was due to the significant growth in premium receipts without a
commensurate increase in paid losses or operating expenses.
Our property and casualty subsidiaries maintain investments in highly
liquid, short-term and other marketable securities to provide for immediate cash
needs.
The Corporation's liquidity requirements are met by dividends from its
property and casualty subsidiaries and the issuance of commercial paper and debt
and equity securities.
Page 27
Item 4 - Controls and Procedures
As of a date within 90 days of the filing date of this quarterly report,
an evaluation of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures was performed under the
supervision and with the participation of the Corporation's management,
including the chief executive officer and chief financial officer. Based on that
evaluation, the Corporation's management, including the chief executive officer
and chief financial officer, concluded that the Corporation's disclosure
controls and procedures were effective as of the evaluation date.
Subsequent to the evaluation date, there have been no significant changes
in the Corporation's internal controls or in other factors that could
significantly affect internal controls.
Page 28
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
29, 2003. 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 142,929,941 5,336,929
John C. Beck 145,779,321 2,487,549
Sheila P. Burke 142,985,828 5,281,042
James I. Cash, Jr 143,159,771 5,107,099
Joel J. Cohen 143,148,952 5,117,918
James M. Cornelius 134,508,046 13,758,824
John D. Finnegan 143,507,461 4,759,409
David H. Hoag 136,534,048 11,732,822
Klaus J. Mangold 133,579,689 14,687,181
Warren B. Rudman 108,275,827 39,991,043
David G. Scholey 144,788,914 3,477,956
Raymond G. H. Seitz 144,885,420 3,381,450
Lawrence M. Small 136,690,558 11,576,312
Daniel E. Somers 145,361,127 2,905,743
Karen Hastie Williams 145,145,287 3,121,583
James M. Zimmerman 136,682,708 11,584,162
Alfred W. Zollar 145,484,103 2,782,767
There were no broker non-votes cast.
Votes were cast in the following manner in connection with the proposal to
approve The Chubb Corporation's 2003 Producer Stock Incentive Plan.
Votes For Votes Against
--------- -------------
127,828,970 19,314,940
There were 1,122,960 abstaining votes and no broker non-votes cast.
Page 29
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 99.1 - Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
The Registrant filed a current report on Form 8-K on January 21, 2003 (a)
reporting under Item 5 thereof that the Registrant had entered into an
employment agreement and change in control employment agreement with the
Registrant's Chief Executive Officer and (b) filing under Item 7 thereof
copies of such agreements.
The Registrant filed a current report on Form 8-K on March 11, 2003 (a)
reporting under Item 9 thereof the submission of certifications of its
Chief Executive Officer and Chief Financial Officer regarding the
Registrant's Annual Report on Form 10-K and (b) filing under Item 7
thereof copies of such certifications.
The Registrant filed a current report on Form 8-K on March 14, 2003 (a)
reporting under Item 5 thereof the issuance of a press release announcing
the pricing of a $500 million notes offering and (b) filing under Item 7
thereof a copy of such press release.
The Registrant filed a current report on Form 8-K on April 30, 2003
furnishing under Item 12 thereof (but provided under Item 9 pursuant to
SEC interim filing guidance for Item 12) information with respect to the
issuance of a press release announcing its results for the quarter ended
March 31, 2003 and announcing the availability of a report on the
Registrant's website detailing its previously disclosed year-end 2002
asbestos review and providing copies of such press release and asbestos
review.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Chubb Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: /s/ Henry B. Schram
------------------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: June 12, 2003
Page 30
CERTIFICATIONS
I, John D. Finnegan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Chubb
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 12, 2003
/s/ John D. Finnegan
-------------------------------------
John D. Finnegan
President and Chief Executive Officer
Page 31
I, Michael O'Reilly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Chubb
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 12, 2003
/s/ Michael O'Reilly
-----------------------------------------
Michael O'Reilly
Vice Chairman and Chief Financial Officer