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, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-8661____
THE CHUBB CORPORATION
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(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615
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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
---------------- ----------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
---------------- ----------------
The number of shares of common stock outstanding as of March 31, 2005 was
195,341,534.
THE CHUBB CORPORATION
INDEX
Page Number
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Statements of Income for the
Three Months Ended March 31, 2005 and 2004................... 1
Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004......................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2005 and 2004........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004................... 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 6 - Exhibits............................................... 28
Signatures........................................................ 28
Page 1
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
2005 2004
-------- --------
(in millions)
Revenues
Premiums Earned..................................... $3,035.1 $2,794.0
Investment Income................................... 334.2 295.9
Other Revenues...................................... 34.5 7.5
Realized Investment Gains........................... 44.9 80.9
-------- --------
Total Revenues............................... 3,448.7 3,178.3
-------- --------
Losses and Expenses
Insurance Losses and Loss Expenses.................. 1,835.0 1,740.6
Amortization of Deferred Policy Acquisition Costs... 730.9 687.2
Other Insurance Operating Costs and Expenses........ 153.2 188.8
Investment Expenses................................. 8.5 7.3
Other Expenses...................................... 59.9 27.2
Corporate Expenses.................................. 49.4 38.2
-------- --------
Total Losses and Expenses.................... 2,836.9 2,689.3
-------- --------
Income Before Federal and Foreign Income Tax.......... 611.8 489.0
Federal and Foreign Income Tax........................ 142.2 128.3
-------- --------
Net Income............................................ $ 469.6 $ 360.7
======== ========
Net Income Per Share
Basic................................................ $2.43 $ 1.92
Diluted.............................................. 2.37 1.88
Dividends Declared Per Share.......................... .43 .39
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
2005 2004
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments ............................. $ 1,415.7 $ 1,307.5
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $305.3
and $338.3) ..................................... 288.7 317.2
Available-for-Sale
Tax Exempt (cost $14,160.9 and $13,522.6) ....... 14,467.8 14,071.3
Taxable (cost $13,686.2 and $13,362.7) .......... 13,782.5 13,620.8
Equity Securities (cost $1,828.0 and $1,687.3) ..... 1,969.6 1,841.3
--------- ---------
TOTAL INVESTED ASSETS ....................... 31,924.3 31,158.1
Cash ................................................. 36.8 41.7
Securities Lending Collateral ........................ 2,437.7 1,853.9
Accrued Investment Income ............................ 361.4 350.0
Premiums Receivable .................................. 2,245.6 2,336.4
Reinsurance Recoverable on Unpaid Losses
and Loss Expenses ................................... 3,556.3 3,483.2
Prepaid Reinsurance Premiums ......................... 326.6 328.3
Deferred Policy Acquisition Costs .................... 1,443.2 1,434.7
Real Estate Assets ................................... 424.7 474.2
Investment in Partially Owned Company ................ 365.5 346.2
Deferred Income Tax .................................. 613.1 533.5
Goodwill ............................................. 467.4 467.4
Other Assets ......................................... 1,345.2 1,452.7
--------- ---------
TOTAL ASSETS ................................ $45,547.8 $44,260.3
========= =========
Liabilities
Unpaid Losses and Loss Expenses ...................... $20,875.5 $20,291.9
Unearned Premiums .................................... 6,395.9 6,355.9
Securities Lending Payable ........................... 2,437.7 1,853.9
Long Term Debt ....................................... 2,808.8 2,813.7
Dividend Payable to Shareholders ..................... 83.9 75.0
Accrued Expenses and Other Liabilities ............... 2,544.7 2,743.5
--------- ---------
TOTAL LIABILITIES ........................... 35,146.5 34,133.9
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 195,803,824 Shares ...... 195.8 195.8
Paid-In Surplus ...................................... 1,291.7 1,319.1
Retained Earnings .................................... 8,504.8 8,119.1
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax .. 354.1 624.5
Foreign Currency Translation Gains, Net of Tax ...... 86.1 79.0
Treasury Stock, at Cost - 462,290 and 3,127,282 Shares (31.2) (211.1)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .................. 10,401.3 10,126.4
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .. $45,547.8 $44,260.3
========= =========
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
2005 2004
------ ------
(in millions)
Net Income ........................................ $469.6 $360.7
------ ------
Other Comprehensive Income
Change in Unrealized Appreciation of Investments,
Net of Tax ..................................... (270.4) 124.5
Foreign Currency Translation Gains,
Net of Tax ..................................... 7.1 9.6
------ ------
(263.3) 134.1
------ ------
Comprehensive Income .............................. $206.3 $494.8
====== ======
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
2005 2004
-------- --------
(in millions)
Cash Flows from Operating Activities
Net Income ........................................ $ 469.6 $ 360.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Losses and Loss Expenses, Net 510.5 513.3
Increase in Unearned Premiums, Net .............. 21.1 223.4
Decrease in Premiums Receivable ................. 90.8 11.3
Increase in Deferred Policy Acquisition Costs ... (5.0) (39.6)
Change in Deferred Income Tax ................... 56.0 60.3
Depreciation .................................... 23.1 28.2
Realized Investment Gains ....................... (44.9) (80.9)
Other, Net ...................................... (110.4) (188.8)
-------- --------
Net Cash Provided by Operating Activities ......... 1,010.8 887.9
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities ........... 2,009.6 925.6
Proceeds from Maturities of Fixed Maturities ...... 388.8 661.9
Proceeds from Sales of Equity Securities .......... 139.7 132.4
Purchases of Fixed Maturities ..................... (3,306.8) (3,382.5)
Purchases of Equity Securities .................... (228.1) (259.9)
Decrease (Increase) in Short Term Investments, Net (108.2) 655.0
Increase in Net Payable from Security Transactions
Not Settled ...................................... 98.3 283.5
Purchases of Property and Equipment, Net .......... (9.6) (17.6)
Other, Net ........................................ 11.0 --
-------- --------
Net Cash Used in Investing Activities ............. (1,005.3) (1,001.6)
-------- --------
Cash Flows from Financing Activities
Increase (Decrease) in Funds Held Under
Deposit Contracts ................................ (77.4) 85.2
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans ..................... 142.0 87.5
Dividends Paid to Shareholders .................... (75.0) (67.7)
-------- --------
Net Cash Provided by (Used in) Financing Activities (10.4) 105.0
-------- --------
Net Decrease in Cash ................................ (4.9) (8.7)
Cash at Beginning of Year ........................... 41.7 52.2
-------- --------
Cash at End of Period ............................. $ 36.8 $ 43.5
======== ========
See Notes to Consolidated Financial Statements.
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The accompanying consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
and include the accounts of The Chubb Corporation and its subsidiaries
(collectively, the Corporation). Significant intercompany transactions
have been eliminated in consolidation.
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 2004 Annual Report on Form 10-K.
2) Investments
Short term investments, which have an original maturity of one year
or less, are carried at amortized cost which approximates market value.
Fixed maturities classified as held-to-maturity are carried at amortized
cost. Fixed maturities classified as available-for-sale and equity
securities are carried at market value as of the balance sheet date.
The net change in unrealized appreciation of investments carried at
market value was as follows:
Three Months Ended
March 31
------------------
2005 2004
------ ------
(in millions)
Change in unrealized appreciation
of equity securities ........... $ (12.4) $ 33.8
Change in unrealized appreciation
of fixed maturities ............ (403.6) 157.9
------- ------
(416.0) 191.7
Deferred income tax (credit) .... (145.6) 67.2
------- ------
Change in unrealized appreciation
of investments, net ............ $(270.4) $124.5
======= ======
Page 6
3) Income Tax
In connection with the sale of a subsidiary a number of years ago,
the Corporation agreed to indemnify the buyer for certain pre-closing tax
liabilities. During the first three months of 2005, this obligation was
settled with the purchaser. Accordingly, the income tax liability was
reduced, which resulted in the recognition of a tax benefit of $22
million.
4) Segments Information
The principal business of the Corporation is property and casualty
insurance. The profitability of the property and casualty insurance
business depends on the results of both underwriting operations and
investments, which are viewed as two distinct operations. The underwriting
operations are managed and evaluated separately from the investment
function.
The reporting format for property and casualty underwriting results
by business unit has been changed to more closely reflect the way the
business is now managed. Prior period amounts have been reclassified to
conform with the new presentation.
The property and casualty underwriting operations consist of four
separate business units: personal insurance, commercial insurance,
specialty insurance and reinsurance assumed. 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 professional liability coverages and
surety. Reinsurance assumed includes the business produced by Chubb Re.
Chubb Financial Solutions' non-insurance business was primarily
structured credit derivatives, principally as a counterparty in portfolio
credit default swap contracts. The Corporation has implemented a plan to
exit the credit derivatives business.
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 7
Revenues and income before income tax of the operating segments were
as follows:
Three Months Ended
March 31
-----------------------
2005 2004
-------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance .................. $ 792.8 $ 735.5
Commercial insurance ................ 1,257.2 1,145.0
Specialty insurance ................. 721.9 677.3
-------- --------
Total insurance ..................... 2,771.9 2,557.8
Reinsurance assumed ................. 263.2 236.2
-------- --------
3,035.1 2,794.0
Investment income ..................... 321.1 284.0
-------- --------
Total property and casualty insurance 3,356.2 3,078.0
Chubb Financial Solutions non-insurance
business ............................... 1.5 (5.0)
Corporate and other ..................... 27.9 24.4
Realized investment gains ............... 44.9 80.9
-------- --------
Total revenues ...................... $3,430.5 $3,178.3
======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance .................. $ 134.4 $ 24.0
Commercial insurance ................ 169.3 136.4
Specialty insurance ................. (30.0) (28.2)
-------- --------
Total insurance ..................... 273.7 132.2
Reinsurance assumed ................. 40.5 6.6
-------- --------
314.2 138.8
Increase in deferred policy
acquisition costs .................. 5.0 39.6
-------- --------
Underwriting income ................. 319.2 178.4
Investment income ..................... 313.4 277.7
Other charges ......................... (3.2) (1.0)
-------- --------
Total property and casualty insurance 629.4 455.1
Chubb Financial Solutions non-insurance
business ............................... -- (14.3)
Corporate and other loss ................ (62.5) (32.7)
Realized investment gains ............... 44.9 80.9
-------- --------
Total income before income tax ...... $ 611.8 $ 489.0
======== ========
Page 8
5) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
--------------------
2005 2004
------- -------
(in millions, except
per share amounts)
Basic earnings per share:
Net income .................................... $ 469.6 $ 360.7
======= =======
Weighted average number of common
shares outstanding ........................... 193.2 187.9
======= =======
Basic earnings per share ...................... $ 2.43 $ 1.92
======= =======
Diluted earnings per share:
Net income .................................... $ 469.6 $ 360.7
======= =======
Weighted average number of common
shares outstanding ........................... 193.2 187.9
Additional shares from assumed exercise
of stock-based compensation awards ........... 3.7 3.7
Additional shares from assumed issuance of
common stock upon settlement of purchase
contracts and mandatorily exercisable warrants 1.5 .1
------- -------
Weighted average number of common shares and
potential common shares assumed outstanding
for computing diluted earnings per share ..... 198.4 191.7
======= =======
Diluted earnings per share .................... $ 2.37 $ 1.88
======= =======
Page 9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Quarters Ended March 31, 2005 and 2004
Certain statements in this document are "forward-looking statements" as
that term is defined in the Private Securities Litigation Reform Act of 1995
(PSLRA). These forward-looking statements are made pursuant to the safe harbor
provisions of the PSLRA and include estimates and assumptions related to
economic, competitive, regulatory, judicial, legislative and other developments.
These include statements relating to trends in, or representing management's
beliefs about, our future strategies, operations and financial results, as well
as other statements that include words such as "anticipate," "believe,"
"estimate," "expect," "intend," "may," "plan," "should," "will," or other
similar expressions. Forward-looking statements are made based upon management's
current expectations and beliefs concerning trends and future developments and
their potential effects on us. These statements are not guarantees of future
performance. Actual results may differ materially from those suggested by
forward-looking statements as a result of risks and uncertainties, which
include, among others, those discussed or identified from time to time in our
public filings with the Securities and Exchange Commission and those 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, chemical or radiological
events;
- the effects of outbreak or escalation of war or hostilities;
- premium pricing 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;
- adverse changes in loss cost trends;
- our ability to retain existing business;
- 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 reinsurance recoverables;
- the effects of proposed asbestos liability legislation,
including the impact of claims patterns arising from the
possibility of legislation and those that may arise if
legislation is not passed;
- our estimates relating to ultimate asbestos liabilities;
- the impact from the bankruptcy protection sought by various
asbestos producers and other related businesses;
- the willingness of parties, including us, to settle disputes;
- developments in judicial decisions or regulatory or
legislative actions relating to coverage and liability for
asbestos, toxic waste and mold claims;
- development of new theories of liability;
Page 10
- the impact of economic factors on companies on whose behalf we have issued
surety bonds, and, in particular, on those companies that have filed for
bankruptcy or otherwise experienced deterioration in creditworthiness;
- the effects of disclosures by, and investigations of, public companies
relating to possible accounting irregularities, practices in the financial
services industry and other corporate governance issues, including:
- the effects on the capital markets and the markets for directors and
officers and errors and omissions insurance;
- claims and litigation arising out of actual or alleged accounting or
other corporate malfeasance by other companies;
- claims and litigation arising out of practices in the financial
services industry;
- legislative or regulatory proposals or changes, including the
changes in law and regulation implemented under the Sarbanes-Oxley
Act of 2002;
- the effects of investigations into market practices in the U.S. property
and casualty insurance industry and any legal or regulatory proceedings
arising therefrom;
- the occurrence of significant weather-related or other natural or
human-made disasters, particularly in locations where we have
concentrations of risk;
- any downgrade in our claims-paying, financial strength or other credit
ratings;
- the ability of our subsidiaries to pay us dividends;
- 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 our Chubb Financial Solutions unit in particular;
- the effects of inflation;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the inability to reinsure certain risks economically;
- changes in the litigation environment;
- general market conditions; and
- our ability to implement management's strategic plans and initiatives.
The Corporation assumes no obligation to update any forward looking
information set forth in this document, which speak as of the date hereof.
Page 11
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. 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 future obligations under financial products contracts and the
recoverability of the carrying value of real estate properties. These estimates
and judgments, which are discussed within the following analysis of our results
of operations, require the use of assumptions about matters that are highly
uncertain and therefore are subject to change as facts and circumstances
develop. If different estimates and judgments had been applied, materially
different amounts might have been reported in the financial statements.
EXECUTIVE SUMMARY
The following highlights do not address all of the matters covered in the
other sections of Management's Discussion and Analysis of Financial Condition
and Results of Operations or contain all of the information that may be
important to the Corporation's shareholders or the investing public. This
summary should be read in conjunction with the other sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
- Net income was $470 million in the first quarter of 2005 compared
with $361 million in the comparable period of 2004.
- Premium growth was 1% in the first quarter of 2005, reflecting
modest growth in our insurance business and a decrease in written
premiums in our reinsurance assumed business. We maintained
underwriting discipline in a more competitive market environment.
Rates were generally stable in most classes of business.
- Underwriting results were highly profitable as evidenced by the
combined loss and expense ratio of 89.4% in the first quarter of
2005 compared with 92.6% in the corresponding 2004 quarter.
- Property and casualty investment income after taxes increased by 14%
in the first quarter of 2005.
Page 12
A summary of our consolidated net income is as follows:
Quarter Ended March 31
----------------------
2005 2004
---- ----
(in millions)
Property and Casualty Insurance...................... $ 629 $ 455
Chubb Financial Solutions Non-Insurance Business..... - (14)
Corporate and Other.................................. (62) (33)
Realized Investment Gains............................ 45 81
----- -----
Consolidated Income Before Income Tax................ 612 489
Federal and Foreign Income Tax....................... 142 128
----- -----
Consolidated Net Income.............................. $ 470 $ 361
===== =====
Net income included realized investment gains after tax of $29 million in
the first quarter of 2005 and $53 million in the first quarter of 2004.
Decisions to sell securities are governed principally by considerations of
investment opportunities and tax consequences. As a result, realized gains and
losses on the sale of investments may vary significantly from period to period.
PROPERTY AND CASUALTY INSURANCE
A summary of the results of operations of our property and casualty
insurance business is as follows:
Quarter Ended March 31
----------------------
2005 2004
------- -------
(in millions)
Underwriting
Net Premiums Written ........................... $ 3,056 $ 3,017
Increase in Unearned Premiums .................. (21) (223)
------- -------
Premiums Earned ............................. 3,035 2,794
------- -------
Losses and Loss Expenses ....................... 1,835 1,741
Operating Costs and Expenses ................... 879 907
Increase in Deferred Policy Acquisition Costs .. (5) (39)
Dividends to Policyholders ..................... 7 7
------- -------
Underwriting Income ............................ 319 178
------- -------
Investments
Investment Income Before Expenses .............. 321 284
Investment Expenses ............................ 8 6
------- -------
Investment Income .............................. 313 278
------- -------
Other Charges ................................... (3) (1)
------- -------
Property and Casualty Income Before Tax ......... $ 629 $ 455
======= =======
Property and Casualty Investment Income After Tax $ 252 $ 222
======= =======
Page 13
Earnings from our property and casualty business were significantly higher
in the first quarter of 2005 compared with the same period of 2004.
Underwriting income was substantially higher in the first quarter of 2005
due primarily to improvement in our personal insurance business. Our commercial
insurance business produced exceptionally strong results in the first quarter of
2005 and 2004.
Investment income also increased significantly in the first quarter of
2005 compared with 2004.
The profitability of the property and casualty insurance business depends
on the results of both underwriting operations and investments. We view these as
two distinct operations. The underwriting functions are managed separately from
the investment function. Accordingly, in assessing our performance, management
evaluates underwriting results separately from investment results.
UNDERWRITING RESULTS
We evaluate the underwriting results of our property and casualty
insurance business in the aggregate and also for each of our business units.
The combined loss and expense ratio, expressed as a percentage, is the key
measure of underwriting profitability traditionally used in the property and
casualty insurance business. Management evaluates the performance of our
underwriting operations and of each of our business units using, among other
measures, the combined loss and expense ratio calculated in accordance with
statutory accounting principles. It is the sum of the ratio of losses and loss
expenses 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.
Statutory accounting principles applicable to property and casualty
insurance companies differ in certain respects from generally accepted
accounting principles (GAAP). Under statutory accounting principles, policy
acquisition and other underwriting expenses are recognized immediately, not at
the time premiums are earned. Management uses underwriting results determined in
accordance with GAAP, among other measures, to assess the overall performance of
our underwriting operations. To convert underwriting results to a GAAP basis,
policy acquisition expenses are deferred and amortized over the period in which
the related premiums are earned. Underwriting income determined in accordance
with GAAP is defined as premiums earned less losses and loss expenses incurred
and GAAP underwriting expenses incurred.
Net Premiums Written
Property and casualty net premiums written were $3.1 billion in the first
quarter of 2005, an increase of 1% compared with the first quarter of 2004.
Insurance premiums grew 3% in the first quarter of 2005 compared with the
same period of 2004. Over 75% of our insurance premiums are written in the
United States. Insurance premiums in the U.S. grew by 1% in the first quarter.
Insurance premiums outside the U.S. grew 7% on a reported basis and 3% in local
currencies.
Page 14
We experienced modest premium growth in the first quarter in each of our
insurance business units, while maintaining underwriting discipline in a more
competitive market environment. Rates were generally stable in most classes of
business. We continued to retain a high percentage of our existing customers and
to find opportunities to write new business at adequate rates. We expect that
pricing pressure will continue throughout 2005.
As expected, reinsurance assumed premiums generated by Chubb Re decreased
by 12% in the first quarter compared with the same period of 2004.
Reinsurance Ceded
Our premiums written are net of amounts ceded to reinsurers who assume a
portion of the risk under the insurance policies that are subject to the
reinsurance. After several years of significant price increases, the cost of
reinsurance in the marketplace has leveled off. However, the reinsurance
capacity for certain coverages, such as terrorism, continues to be limited and
expensive.
We expect our reinsurance costs in 2005 to be less than those in 2004. In
January 2005, we discontinued our executive protection per risk treaty.
Underwriting actions we have taken in recent years have resulted in lower
average limits on those large risks we write, which we believe made this treaty
no longer economical. On our casualty clash treaty, which operates like a
catastrophe treaty, we increased our retention from $50 million to $75 million.
This treaty now provides $125 million of coverage in excess of $75 million per
insured event. We did not renew a high excess surety per risk treaty as we
believe the cost was not justified.
Our property reinsurance program was renewed in April 2005. On the
property per risk treaty, our retention remained at $15 million. Our property
catastrophe treaty for events in the United States was modified to increase the
coverage in the northeastern part of the country by $100 million. The program
now provides coverage of approximately 85% of losses between $250 million and
$1.25 billion, with additional coverage of 80% of losses between $1.25 billion
and $1.6 billion in the northeastern part of the country. Our property
catastrophe treaty for events outside the United States was modified to increase
our retention from $25 million to $50 million.
Our property reinsurance treaties generally contain terrorism exclusions.
Since September 2001, we have changed our underwriting protocols to address
terrorism and the limited availability of terrorism reinsurance. However, given
the uncertainty of the potential threats, we cannot be sure that we have
addressed all the possibilities.
It is unclear at this time whether Congress will reauthorize the Terrorism
Risk Insurance Act of 2002 (TRIA) for periods subsequent to December 31, 2005.
Regardless of whether or not TRIA is extended, we will continue to manage this
type of catastrophic risk by monitoring and controlling terrorism risk
aggregations. Nevertheless, given the unpredictable nature of terrorism, its
targets, frequency and severity as well as the limited terrorism coverage in our
reinsurance program, our future operating results could be more volatile.
Profitability
Underwriting results were highly profitable in the first quarter of both
2005 and 2004. Our combined loss and expense ratio was 89.4% in the first
quarter of 2005 compared with 92.6% in 2004.
Page 15
The loss ratio was 60.6% for the first quarter of 2005 compared with 62.5%
in 2004. The improvement in the loss ratio in 2005 was due to lower catastrophe
losses. Catastrophe losses during the first quarter of 2005 amounted to $20
million which represented 0.6 of a percentage point of the loss ratio compared
with $97 million or 3.5 percentage points in 2004.
Our expense ratio decreased to 28.8% for the first quarter of 2005 from
30.1% in 2004 due to lower contingent commissions as well as a modest decrease
in overhead expenses as we continued to make progress in reducing our cost
structure.
We have not yet concluded the negotiations with our brokers and agents on
2005 commission arrangements. At this point, we continue to expect that total
producer compensation in 2005 will be at about 2004 levels and we accrued at
that rate in the first quarter of 2005. The lower contingent commissions in the
first quarter of 2005 compared with the same period in 2004 was due largely to
the fact that we accrued contingent commissions in the first quarter of 2004 at
a higher rate in anticipation of high premium growth during 2004.
REVIEW OF UNDERWRITING RESULTS BY BUSINESS UNIT
The reporting format for property and casualty underwriting results by
business unit has been changed to more closely reflect the way the business is
now managed. Prior period amounts have been reclassified to conform with the new
presentation.
The changes to the reporting format are as follows:
Personal Insurance
- Valuable articles results, which have been included in other
personal, are now included in homeowners.
- Accident results, which have been included in other specialty, are
now included in other personal.
Commercial Insurance
- Commercial insurance results for financial institutions, which have
been included in financial institutions results in specialty
insurance, are now included in the appropriate commercial insurance
lines.
Specialty Insurance
- Executive protection results are now combined with the professional
liability and financial fidelity results for financial institutions
into a new professional liability line. Financial institutions
results are no longer reported separately.
- Surety results, which have been included in other specialty, are now
reported separately within specialty insurance.
Reinsurance Assumed
- Reinsurance assumed results, which have been included in other
specialty, are now reported as a separate business unit.
Page 16
Underwriting results during 2005 and 2004 by business unit were as
follows:
Net Premiums Written Combined Loss and
-------------------------------- Expense Ratios
% Increase -----------------
2005 2004 (Decrease) 2005 2004
------ ------ ----------- ------ ------
(in millions)
Quarter Ended March 31
PERSONAL INSURANCE
Automobile.............. $ 146 $ 144 1% 95.7% 96.2%
Homeowners.............. 452 413 9 80.6 102.6
Other................... 158 162 (3) 86.8 83.1
------ ------ ----- -----
Total Personal...... 756 719 5 84.5 97.5
------ ------ ----- -----
COMMERCIAL INSURANCE
Multiple Peril.......... 336 335 - 82.2 85.2
Casualty................ 452 445 2 93.7 84.9
Workers' Compensation... 278 274 1 86.1 88.5
Property and Marine..... 299 286 5 70.1 75.5
------ ------ ----- -----
Total Commercial.... 1,365 1,340 2 84.0 82.9
------ ------ ----- -----
SPECIALTY INSURANCE
Professional Liability.. 646 641 1 101.6 107.3
Surety.................. 53 49 9 154.1 46.0
------ ------ ----- -----
Total Specialty..... 699 690 1 105.0 103.7
------ ------ ----- -----
TOTAL INSURANCE..... 2,820 2,749 3 89.6 92.6
REINSURANCE ASSUMED....... 236 268 (12) 88.0 93.1
------ ------ ----- -----
TOTAL............... $3,056 $3,017 1 89.4% 92.6%
====== ====== ===== =====
Personal Insurance
Premiums from personal insurance coverages, which represent 25% of total
premiums written, increased by 5% in the first quarter of 2005 compared with the
same quarter in 2004. Premium growth was driven by our homeowners business due
to increased insurance-to-value and, to a lesser extent, modestly higher rates
and an increase in the in force policy count. The low growth in personal
automobile premiums was due to our maintaining underwriting discipline in a more
competitive marketplace. The decrease in other personal premiums was
attributable to our accident business, due in large part to the non-renewal of
one large account.
Our personal insurance business produced highly profitable underwriting
results in the first quarter of 2005 compared with modestly profitable results
in 2004. The combined loss and expense ratio was 84.5% in the first quarter of
2005 compared with 97.5% in 2004. Excluding catastrophe losses, the combined
ratio was 83.1% and 87.3% in the first quarter of 2005 and 2004, respectively.
Homeowners results were highly profitable in 2005 compared with modestly
unprofitable results in 2004. The improvement was due to lower catastrophe
losses as well as better pricing and contract wording changes related to mold
damage that we have implemented over the past few years. Catastrophe losses
represented 2.6 and 16.8 percentage points of the loss ratio for this class in
the first quarter of 2005 and 2004, respectively. The catastrophe losses in 2004
were primarily from severe winter weather in the northeastern part of the United
States where we have a significant market presence.
Page 17
Our personal automobile business produced similarly profitable results in
2005 and 2004. This business continues to experience stable claim frequency and
severity. Other personal coverages, which include excess liability, yacht and
accident insurance, produced highly profitable results in both years due to
favorable loss experience.
Commercial Insurance
Premiums from commercial insurance, which represent 44% of our total
writings, increased by 2% in the first quarter of 2005 compared with the same
period a year ago. Rates were flat in the first quarter of 2005 compared with
the first quarter of 2004 as we continued to experience more competition in the
marketplace. Retention levels in the first quarter of 2005 were slightly higher
than those in the comparable period of 2004. New business volume was down from
2004 levels as competitors have worked to retain their better accounts. We
continued to get favorable terms and conditions on business written. We expect
that rates will be relatively stable through the remainder of 2005.
Our commercial insurance business produced highly profitable underwriting
results in the first quarter of 2005 and 2004. The combined loss and expense
ratio was 84.0% for the first quarter of 2005 compared with 82.9% in 2004. These
results reflect the cumulative effect of price increases, better terms and
conditions and more stringent risk selection in recent years. Results in both
years also benefited from low property losses.
Multiple peril results were highly profitable in 2005 and 2004. The
property component of this business was exceptionally profitable in both years.
Catastrophe losses represented 0.5 of a percentage point of the loss ratio for
this class in the first quarter of 2005 compared with 3.9 percentage points in
2004.
Our casualty business produced less profitable results in 2005 compared
with 2004. The primary liability and automobile components of this business were
highly profitable in both years but more so in 2004. The excess liability
component produced breakeven results in 2005 compared with modestly profitable
results in 2004.
Workers' compensation results were highly profitable in 2005 and 2004 due
in large part to our disciplined risk selection during the past several years.
Property and marine results were highly profitable in both years due to
few severe losses. Catastrophe losses represented 1.3 percentage points of the
loss ratio for this class in 2005 compared with 3.7 percentage points in 2004.
Specialty Insurance
Premiums from specialty insurance, which represent 23% of our total
writings, increased by 1% in the first quarter of 2005 compared with the same
period a year ago. Premium growth in the professional liability classes of
business was constrained by the competitive pressure on rates and our commitment
to maintain underwriting discipline. Rates for most classes were generally
stable. However, rates in the for-profit directors and officers liability
component were down, particularly for large public companies. New business
volume in 2005 was similar to 2004 levels. In line with our strategy in recent
years, we continue to focus on small and middle market publicly traded and
privately held companies. Retention levels in 2005 were also similar to 2004
levels. We continued to get adequate rates and favorable terms and conditions on
both new business and renewals.
Page 18
Our specialty insurance business produced unprofitable underwriting
results in the first quarter of 2005 and 2004. The combined loss and expense
ratio was 105.0% for the first quarter of 2005 compared with 103.7% in 2004.
Our professional liability results improved in 2005 but were modestly
unprofitable. The improvement in 2005 was due to the cumulative effect of price
increases, lower policy limits and better terms and conditions in recent years.
Results in 2005 and 2004 were adversely affected by unfavorable development on
loss reserves related to accident years 2002 and prior. The adverse development
was due in large part to claims that have arisen due to corporate failures and
allegations of management misconduct and accounting irregularities. The fidelity
component of this business was highly profitable in both years but more so in
2005. Fidelity results in 2004 were adversely affected by several large losses
outside the United States.
Surety results were highly unprofitable in 2005 compared with highly
profitable results in 2004. Our surety business tends to be characterized by
infrequent but potentially high severity losses. The unprofitable results in
2005 were due to one $60 million loss.
Reinsurance Assumed
Premiums from our reinsurance assumed business generated by Chubb Re,
which represent 8% of total premiums written, decreased by 12% in the first
quarter of 2005 compared with the first quarter of 2004. The decrease in
premiums was expected as there were fewer attractive opportunities in the
reinsurance market.
Our reinsurance assumed business was highly profitable in the first
quarter of 2005 and 2004, but more so in 2005. The combined loss and expense
ratio was 88.0% in the first quarter of 2005 compared with 93.1% in 2004. The
improvement in 2005 was largely the result of the favorable settlement of one
loss.
LOSS RESERVES
Unpaid losses and loss expenses, also referred to as loss reserves, are
the largest liability of our property and casualty subsidiaries.
Our loss reserves include the accumulation of individual case estimates
for claims that have been reported and estimates of claims that have been
incurred but not reported as well as estimates of the expenses associated with
settling all reported and unreported claims. Estimates are based upon past loss
experience modified for current trends as well as prevailing economic, legal and
social conditions. Our loss reserves are not discounted to present value.
We continually review our loss reserves using a variety of statistical and
actuarial techniques. We update the reserves as loss experience develops,
additional claims are reported and new information becomes available. Any
changes in estimates are reflected in operating results in the period in which
the estimates are changed.
Page 19
Our loss reserves include significant amounts related to asbestos and
toxic waste claims and the September 11, 2001 attack. The components of our loss
reserves were as follows:
March 31, December 31,
2005 2004
-------- -----------
(in millions)
Gross loss reserves
Related to asbestos and toxic
waste claims.......................... $ 1,151 $ 1,169
Related to September 11 attack......... 662 700
All other loss reserves................ 19,062 18,423
------- -------
20,875 20,292
------- -------
Reinsurance recoverable
Related to asbestos and toxic
waste claims.......................... 53 55
Related to September 11 attack......... 581 582
All other reinsurance recoverable...... 2,922 2,846
------- -------
3,556 3,483
------- -------
Net loss reserves......................... $17,319 $16,809
======= =======
Loss reserves, net of reinsurance recoverable, increased by $510 million
during the first quarter of 2005. The loss reserves related to asbestos and
toxic waste claims and the September 11 attack are significant components of our
total loss reserves, but they distort the growth trend in our loss reserves.
Excluding such loss reserves, our loss reserves, net of reinsurance recoverable,
increased by $563 million during the first quarter of 2005.
The components of our net loss reserves were as follows:
March 31, December 31,
2005 2004
-------- -----------
(in millions)
Reserves related to asbestos and toxic
waste claims............................. $ 1,098 $ 1,114
Reserves related to September 11 attack... 81 118
All other loss reserves
Personal insurance...................... 1,606 1,579
Commercial insurance.................... 6,829 6,596
Specialty insurance..................... 6,512 6,280
Reinsurance assumed..................... 1,193 1,122
------- -------
Net loss reserves......................... $17,319 $16,809
======= =======
Loss reserves for each of our business units increased in the first
quarter of 2005, with the most significant increases in the long tail liability
classes of business within commercial and specialty insurance and reinsurance
assumed. The relatively small increase in personal insurance loss reserves was
due in part to a $23 million reduction in unpaid claims related to catastrophes.
Page 20
Based on all information currently available, we believe that the
aggregate loss reserves of our property and casualty subsidiaries at March 31,
2005 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, it is possible that management's estimate of the ultimate
liability for losses that had occurred as of March 31, 2005 may increase in
future periods. Such increases in estimates 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 RESULTS
Property and casualty investment income before taxes increased by 13% in
the first quarter of 2005 compared with the same period in 2004. Growth was due
to an increase in invested assets since the first quarter of 2004. The increase
in invested assets was due to substantial cash flow from operations over the
period. Growth in investment income in 2005 was dampened, however, by lower
available reinvestment rates on fixed maturities that matured over the past
year.
The effective tax rate on investment income was 19.5% in the first quarter
of 2005 compared with 20.1% in the comparable period in 2004. The effective tax
rate fluctuates as a result of our holding a different proportion of our
investment portfolio in tax-exempt securities during each period.
On an after-tax basis, property and casualty investment income increased
by 14% in the first quarter of 2005. 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
income tax.
CHUBB FINANCIAL SOLUTIONS
Chubb Financial Solutions (CFS) was organized in 2000 to develop and
provide customized products to address specific financial needs of corporate
clients. CFS operated through both the capital and insurance markets.
In April 2003, the Corporation announced its intention to exit CFS's
non-insurance business and to run-off the existing financial products portfolio.
CFS's non-insurance business was primarily structured credit derivatives,
principally as a counterparty in portfolio credit default swap contracts. The
Corporation guaranteed all of these obligations.
Page 21
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 our positions. Most of these credit default swaps
tend to be unique transactions and there is no market for trading such
exposures. To estimate the fair value of the obligation in each credit default
swap, we use internal valuation models that are similar to external valuation
models.
The fair value of our 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. Changes in fair
value are included in income in the period of the change.
The non-insurance business of CFS produced breakeven results in the first
quarter of 2005 compared with a loss before taxes of $14 million in the
comparable period of 2004. The loss in the first quarter of 2004 was primarily
related to the termination during the quarter of CFS's obligations under certain
portfolio credit default swaps.
CFS's aggregate exposure, or retained risk, from each of its in-force
portfolio credit default swaps is referred to as notional amount. 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.
The notional amount of CFS's credit default swaps was $8.2 billion at
March 31, 2005. Our realistic loss exposure is a very small portion of the $8.2
billion notional amount as our position is senior to subordinated interests of
$5.3 billion in the aggregate. In addition, using our internal ratings models,
we estimate that the credit ratings of the individual portfolio credit default
swaps at March 31, 2005 were AAA.
In addition to portfolio credit default swaps, CFS 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 under
derivative contracts by type of risk were as follows:
Notional Amount Fair Value
----------------------- ----------------------
March 31, December 31, March 31, December 31,
2005 2004 2005 2004
-------- ----------- -------- -----------
(in billions) (in millions)
Credit default swaps
Corporate securities.... $1.0 $1.3 $ 5 $ 5
Asset-backed securities. 7.2 7.4 8 9
---- ---- --- ---
8.2 8.7 13 14
Other.................... .3 .3 8 8
---- ---- --- ---
$8.5 $9.0 $21 $22
==== ==== === ===
Page 22
In the fourth quarter of 2003, CFS terminated two asset-backed portfolio
credit default swaps that had experienced deterioration in credit quality and
simultaneously entered into a new contract that guaranteed principal and
interest obligations. The Corporation has guaranteed CFS's obligations under the
new contract. CFS's potential payment obligation extends to the date when the
last of the underlying obligations expires. At March 31, 2005, the remaining
notional amount of referenced securities was $1.8 billion. Under the new
agreement, CFS's maximum potential payment obligation is limited to $500 million
regardless of the amount of losses that might be incurred on the $1.8 billion of
referenced securities. Moreover, if losses are incurred, CFS's payment
obligations are limited to an extended payment schedule under which no payment
would be due until 2010 at the earliest.
CFS established a liability of $186 million related to the principal and
interest contract, which represented the estimated fair value of the guarantee
at its inception. The principal and interest guarantee is not a derivative
contract. Therefore, the liability related to this contract is not
marked-to-market each period and remained at $186 million at March 31, 2005. Due
to the nature of the guarantee, we will reduce this liability only upon either
the expiration or settlement of the guarantee. If actual losses are incurred, a
liability for the losses will be established, and a portion of the guarantee
liability will be released. The amount released will depend on our evaluation of
expected ultimate loss experience.
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. It also includes income from our investment in
Allied World Assurance Company, Ltd.
Corporate and other produced a loss before taxes of $62 million in the
first quarter of 2005 compared with a loss of $33 million in the first quarter
of 2004. The significantly higher loss in 2005 was due to the recognition of a
real estate impairment loss, which is discussed below. Results in the first
quarter of 2004 included a loss at The Chubb Institute, Inc., our post-secondary
educational subsidiary, which we sold in the third quarter of 2004.
REAL ESTATE
Real estate operations resulted in a loss before taxes of $43 million in
the first quarter of 2005 compared with a loss of $5 million in the same period
in 2004, which amounts are included in the corporate and other results.
During the first quarter of 2005, we committed to a plan to sell a parcel
of land in New Jersey that we had previously intended to hold and develop. The
decision to sell the property was based on our assessment of the current real
estate market and our concern about zoning issues. As a result of our decision
to sell this property in the near term, we reassessed the recoverability of its
carrying value. Based on our reassessment, we recognized an impairment loss of
$43 million to reduce the carrying value of the property to its estimated fair
value.
Page 23
In addition to the aforementioned parcel of land that we plan to dispose
of in the near term, we own approximately $190 million of land that we expect
will be developed in the future. Our real estate assets also include
approximately $155 million of commercial properties and land parcels under
lease, of which $22 million relates to a variable interest entity in which we
are the primary beneficiary.
The recoverability of the carrying value of our real estate assets, other
than the parcel of land that we plan to dispose of in the near term, 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. Management believes that it has 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.
REALIZED INVESTMENT GAINS AND LOSSES
Net investment gains realized were as follows:
Quarter Ended March 31
----------------------
2005 2004
------ ------
(in millions)
Net realized gains (losses)
Equity securities.................... $52 $56
Fixed maturities..................... (7) 25
--- ---
Realized investment gains before tax... $45 $81
=== ===
Realized investment gains after tax.... $29 $53
=== ===
Of the net realized gains on sales of equity securities, $47 million and
$46 million in the first quarter of 2005 and 2004, respectively, related to our
share of gains recognized by investment partnerships in which we have an
interest.
We regularly review those invested assets whose fair value is less than
cost to determine if an other than temporary decline in value has occurred. In
evaluating whether a decline in value of any investment is other than temporary,
we consider various quantitative and qualitative 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 issuer 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. The
fair value of the investment becomes its new cost basis. There were no other
than temporary impairment writedowns in the first quarter of 2005 or 2004.
Page 24
INCOME TAXES
In connection with the sale of a subsidiary a number of years ago, we
agreed to indemnify the buyer for certain pre-closing tax liabilities. During
the first quarter of 2005, we settled this obligation with the purchaser.
Accordingly, we reduced our income tax liability, which resulted in the
recognition of a benefit of $22 million.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength
of the Corporation and its ability to generate cash flows from its operating
subsidiaries, borrow funds at competitive rates and raise new capital to meet
operating and growth needs.
CAPITAL RESOURCES
Capital resources provide protection for policyholders, furnish the
financial strength to support the business of underwriting insurance risks and
facilitate continued business growth. At March 31, 2005, the Corporation had
shareholders' equity of $10.4 billion and total debt of $2.8 billion.
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 additional debt and/or equity securities.
In June 2003, a shelf registration statement that the Corporation filed in
March 2003 was declared effective by the Securities and Exchange Commission.
Under the registration statement, up to $2.5 billion of various types of
securities may be issued. At March 31, 2005, the Corporation had approximately
$650 million remaining under the shelf registration statement.
In July 1998, the Board of Directors authorized the repurchase of up to
12,500,000 shares of the Corporation's common stock. The authorization has no
expiration. The Corporation made no share repurchases during the first quarter
of 2005. As of March 31, 2005, 3,287,100 shares remained under the share
repurchase authorization.
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, strategic position and ability to meet our
obligations to policyholders.
Ratings are an important factor in establishing our competitive position
in the insurance markets. There can be no assurance that our ratings will
continue for any given period of time or that they will not be changed.
Page 25
It is possible that positive or negative ratings actions by one or more of
the rating agencies may occur in the future. If our ratings were downgraded, the
Corporation may incur higher borrowing costs and may have more limited means to
access capital. In addition, reductions in our ratings could adversely affect
the competitive position of our insurance operations, including a possible
reduction in demand for our products in certain markets.
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.
Our property and casualty operations provide liquidity in that premiums
are generally received months or even years before losses are paid under the
policies purchased by such premiums. 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. After satisfying our cash requirements, excess
cash flows are used to build the investment portfolio and thereby increase
future investment income.
New cash from operations available for investment by the property and
casualty subsidiaries was approximately $900 million in the first quarter of
2005 compared with $825 million in the same period in 2004.
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 in the past have been met by
dividends from its property and casualty subsidiaries and the issuance of
commercial paper and debt and equity securities. It is expected that our
liquidity requirements in the future will be met by these sources of funds or,
if necessary, borrowings from our credit facilities.
INVESTED ASSETS
The main objectives in managing our investment portfolios are to maximize
after-tax investment income and total investment returns while minimizing credit
risks in order to provide maximum support to the insurance underwriting
operations. Investment strategies are developed based on many factors including
underwriting results and our resulting tax position, regulatory requirements,
fluctuations in interest rates and consideration of other market risks.
Investment decisions are centrally managed by investment professionals based on
guidelines established by management and approved by the boards of directors.
Our investment portfolios are primarily comprised of high quality bonds,
principally tax-exempt, U.S. Treasury and government agency, mortgage-backed
securities and corporate issues as well as foreign bonds that support our
international operations. In addition, the portfolios include equity securities
held primarily with the objective of capital appreciation.
In the first quarter of 2005, we invested new cash in tax-exempt bonds
and, to a lesser extent, taxable bonds and equity securities. Taxable bonds we
invested in were primarily mortgage-backed securities and corporate bonds. Our
objective is to achieve the appropriate mix of taxable and tax-exempt securities
in our portfolio to balance both investment and tax strategies.
Page 26
The unrealized appreciation before tax of investments carried at market
value, which includes fixed maturities classified as available-for-sale and
equity securities, was $545 million and $961 million at March 31, 2005 and
December 31, 2004, 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 $17 million at March 31, 2005 and $21 million at
December 31, 2004. 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.
Page 27
Item 4 - Controls and Procedures
As of March 31, 2005, 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 chief executive officer and chief financial
officer concluded that the Corporation's disclosure controls and procedures were
effective as of the evaluation date.
During the three month period ended March 31, 2005, there were no changes
in internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
Page 28
PART II. OTHER INFORMATION
Item 6 - Exhibits
A. Exhibits
Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications
(1) Certification by John D. Finnegan
(2) Certification by Michael O'Reilly
Exhibit (32) Section 1350 Certifications
(1) Certification by John D. Finnegan
(2) Certification by Michael O'Reilly
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: May 9, 2005