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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8661
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 903-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
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, 2004 was
189,715,342.
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, 2004 and 2003................... 1
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003......................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2004 and 2003........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 8
Item 4 - Controls and Procedures................................ 25
Part II. Other Information:
Item 4 - Submission of Matters to a Vote of
Security Holders...................................... 26
Item 6 - Exhibits and Reports on Form 8-K....................... 26
Signatures........................................................ 27
Page 1
Part I. Financial Information
Item 1 - Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
2004 2003
--------- ---------
(in millions)
Revenues
Premiums Earned ................................. $ 2,794.0 $ 2,325.2
Investment Income ............................... 295.9 257.0
Other Revenues .................................. 7.5 29.2
Realized Investment Gains ....................... 80.9 4.5
--------- ---------
Total Revenues ........................... 3,178.3 2,615.9
--------- ---------
Losses and Expenses
Insurance Losses and Loss Expenses .............. 1,740.6 1,505.5
Amortization of Deferred Policy Acquisition Costs 687.2 580.1
Other Insurance Operating Costs and Expenses .... 188.8 177.0
Investment Expenses ............................. 7.3 10.2
Other Expenses .................................. 27.2 17.0
Corporate Expenses .............................. 38.2 43.9
--------- ---------
Total Losses and Expenses ................ 2,689.3 2,333.7
--------- ---------
Income Before Federal and Foreign Income Tax ...... 489.0 282.2
Federal and Foreign Income Tax .................... 128.3 57.6
--------- ---------
Net Income ........................................ $ 360.7 $ 224.6
========= =========
Net Income Per Share
Basic ............................................ $ 1.92 $ 1.32
Diluted .......................................... 1.88 1.31
Dividends Declared Per Share ...................... .39 .36
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
2004 2003
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments .......................... $ 2,040.9 $ 2,695.9
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $463.4
and $502.2) .................................. 430.9 467.0
Available-for-Sale
Tax Exempt (cost $11,622.9 and $10,509.7) .... 12,291.5 11,154.0
Taxable (cost $11,338.3 and $10,531.8) ....... 11,730.8 10,790.7
Equity Securities (cost $1,565.0 and $1,381.4) .. 1,731.8 1,514.4
--------- ---------
TOTAL INVESTED ASSETS .................... 28,225.9 26,622.0
Cash .............................................. 43.5 52.2
Securities Lending Collateral ..................... 1,438.9 704.8
Accrued Investment Income ......................... 314.3 286.8
Premiums Receivable ............................... 2,176.7 2,188.0
Reinsurance Recoverable on Unpaid Losses
and Loss Expenses ................................ 3,264.1 3,426.6
Prepaid Reinsurance Premiums ...................... 379.5 391.0
Deferred Policy Acquisition Costs ................. 1,388.3 1,343.4
Real Estate Assets ................................ 511.3 518.8
Investment in Partially Owned Company ............. 328.6 312.3
Deferred Income Tax ............................... 498.6 641.4
Goodwill .......................................... 467.4 467.4
Other Assets ...................................... 1,594.4 1,405.9
--------- ---------
TOTAL ASSETS ............................. $40,631.5 $38,360.6
========= =========
Liabilities
Unpaid Losses and Loss Expenses ................... $18,298.6 $17,947.8
Unearned Premiums ................................. 6,173.9 5,939.4
Securities Lending Payable ........................ 1,438.9 704.8
Long Term Debt .................................... 2,814.9 2,813.9
Dividend Payable to Shareholders .................. 74.0 67.7
Accrued Expenses and Other Liabilities ............ 2,784.8 2,365.0
--------- ---------
TOTAL LIABILITIES ........................ 31,585.1 29,838.6
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 195,803,824 and
195,803,824 Shares ............................... 195.8 195.8
Paid-In Surplus ................................... 1,304.1 1,318.8
Retained Earnings ................................. 7,155.6 6,868.9
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax 798.1 673.6
Foreign Currency Translation Gains, Net of Tax ... 21.6 12.0
Receivable from Employee Stock Ownership Plan ..... (17.9) (17.9)
Treasury Stock, at Cost - 6,088,482 and
7,840,448 Shares ................................. (410.9) (529.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 9,046.4 8,522.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,631.5 $38,360.6
========= =========
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
2004 2003
--------- ---------
(in millions)
Net Income ........................................ $ 360.7 $ 224.6
--------- ---------
Other Comprehensive Income
Change in Unrealized Appreciation of Investments,
Net of Tax ..................................... 124.5 42.3
Foreign Currency Translation Gains,
Net of Tax ..................................... 9.6 9.5
--------- ---------
134.1 51.8
--------- ---------
Comprehensive Income .............................. $ 494.8 $ 276.4
========= =========
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
2004 2003
---------- ----------
(in millions)
Cash Flows from Operating Activities
Net Income ....................................... $ 360.7 $ 224.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Losses and Loss Expenses, Net 513.3 348.7
Increase in Unearned Premiums, Net ............. 223.4 349.5
Decrease (Increase) in Premiums Receivable ..... 11.3 (56.8)
Increase in Deferred Policy Acquisition Costs .. (39.6) (67.9)
Change in Deferred Income Tax .................. 60.3 35.1
Depreciation ................................... 28.2 27.8
Realized Investment Gains ...................... (80.9) (4.5)
Other, Net ..................................... (188.8) (165.3)
---------- ----------
Net Cash Provided by Operating Activities ........ 887.9 691.2
---------- ----------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .......... 925.6 1,403.6
Proceeds from Maturities of Fixed Maturities ..... 661.9 281.1
Proceeds from Sales of Equity Securities ......... 132.4 129.0
Purchases of Fixed Maturities .................... (3,382.5) (2,215.9)
Purchases of Equity Securities ................... (259.9) (270.0)
Decrease (Increase) in Short Term Investments, Net 655.0 (591.6)
Increase (Decrease) in Net Payable from Security
Transactions Not Settled ........................ 283.5 (11.5)
Purchases of Property and Equipment, Net ......... (17.6) (20.0)
---------- ----------
Net Cash Used in Investing Activities ............ (1,001.6) (1,295.3)
---------- ----------
Cash Flows from Financing Activities
Decrease in Short Term Debt, Net ................. -- 257.0
Proceeds from Issuance of Long Term Debt ......... -- 500.0
Repayment of Long Term Debt ...................... (.1) (100.1)
Increase (Decrease) in Funds Held Under
Deposit Contracts ............................... 85.3 (.5)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans .................... 87.5 2.7
Dividends Paid to Shareholders ................... (67.7) (59.9)
Other, Net ....................................... -- (6.2)
---------- ----------
Net Cash Provided by Financing Activities ........ 105.0 593.0
---------- ----------
Net Decrease in Cash ............................... (8.7) (11.1)
Cash at Beginning of Year .......................... 52.2 41.9
---------- ----------
Cash at End of Period ............................ $ 43.5 $ 30.8
========== ==========
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 accounting principles generally accepted in
the United States 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 2003 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 or depreciation of
investments carried at market value was as follows:
Three Months Ended
March 31
----------------------
2004 2003
---------- ----------
(in millions)
Change in unrealized appreciation or depreciation
of equity securities .......................... $ 33.8 $ (5.2)
Change in unrealized appreciation
of fixed maturities ........................... 157.9 70.3
---------- ----------
191.7 65.1
Deferred income tax ............................. 67.2 22.8
---------- ----------
Change in unrealized appreciation
of investments, net ........................... $ 124.5 $ 42.3
========== ==========
Page 6
3) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
---------------------
2004 2003
-------- --------
(in millions, except
per share amounts)
Basic earnings per share:
Net income ...................................... $ 360.7 $ 224.6
======== ========
Weighted average number of common
shares outstanding ............................ 187.9 170.5
======== ========
Basic earnings per share ........................ $ 1.92 $ 1.32
======== ========
Diluted earnings per share:
Net income ...................................... $ 360.7 $ 224.6
======== ========
Weighted average number of common
shares outstanding ............................ 187.9 170.5
Additional shares from assumed exercise
of stock-based compensation awards ............ 3.8 .9
-------- --------
Weighted average number of common shares and
potential common shares assumed outstanding for
computing diluted earnings per share .......... 191.7 171.4
======== ========
Diluted earnings per share ...................... $ 1.88 $ 1.31
======== ========
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 distinctive operations. The
underwriting operations are managed separately from the investment
function.
The property and casualty underwriting operations consist of three
separate business units: 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 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
-------------------------
2004 2003
---------- ----------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance .................. $ 659.8 $ 579.8
Commercial insurance ................ 1,054.5 878.7
Specialty insurance ................. 1,079.7 866.7
---------- ----------
2,794.0 2,325.2
Investment income ..................... 284.0 253.6
---------- ----------
Total property and casualty insurance 3,078.0 2,578.8
Chubb Financial Solutions non-insurance
business ............................... (5.0) 17.4
Corporate and other ..................... 24.4 15.2
Realized investment gains ............... 80.9 4.5
---------- ----------
Total revenues ...................... $ 3,178.3 $ 2,615.9
========== ==========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance .................. $ 15.2 $ (15.6)
Commercial insurance ................ 128.0 54.2
Specialty insurance ................. (4.4) (36.4)
---------- ----------
138.8 2.2
Increase in deferred policy
acquisition costs .................. 39.6 67.9
---------- ----------
Underwriting income ................. 178.4 70.1
Investment income ..................... 277.7 246.3
Other charges ......................... (1.0) (7.5)
---------- ----------
Total property and casualty insurance 455.1 308.9
Chubb Financial Solutions non-insurance
business ............................... (14.3) 14.0
Corporate and other loss ................ (32.7) (45.2)
Realized investment gains ............... 80.9 4.5
---------- ----------
Total income before income tax ...... $ 489.0 $ 282.2
========== ==========
Page 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Quarters Ended March 31, 2004 and 2003
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 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;
- adverse changes in loss cost trends;
- our ability to retain existing business;
- material differences between actual and expected assessments for guaranty
funds and mandatory pooling arrangements;
- 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 and related
reinsurance recoverables;
- 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;
Page 9
- 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 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 actual or alleged accounting or
other corporate malfeasance 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 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
- the 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 10
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 $360.7 million in the first quarter of 2004 compared
with $224.6 million in the comparable period of 2003.
- The fundamentals of our property and casualty insurance business
remain strong. Premium growth was 13% in the first quarter of 2004.
- Our combined loss and expense ratio was 92.6% in the first quarter
of 2004 compared with 95.3% in the corresponding 2003 quarter.
- Property and casualty investment income after taxes increased by 12%
in the first quarter of 2004.
Page 11
A summary of the Corporation's results for the first quarter of 2004 and
2003 is as follows:
Quarter Ended
March 31
-------------------------
2004 2003
---------- ----------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written ......................... $ 3,017.4 $ 2,674.7
Increase in Unearned Premiums ................ (223.4) (349.5)
---------- ----------
Premiums Earned ........................... 2,794.0 2,325.2
---------- ----------
Losses and Loss Expenses ..................... 1,740.6 1,505.5
Operating Costs and Expenses ................. 907.3 811.5
Increase in Deferred Policy Acquisition Costs (39.6) (67.9)
Dividends to Policyholders ................... 7.3 6.0
---------- ----------
Underwriting Income .......................... 178.4 70.1
---------- ----------
Investments
Investment Income Before Expenses ............ 284.0 253.6
Investment Expenses .......................... 6.3 7.3
---------- ----------
Investment Income ............................ 277.7 246.3
---------- ----------
Other Charges ................................. (1.0) (7.5)
---------- ----------
Property and Casualty Income .................. 455.1 308.9
CHUBB FINANCIAL SOLUTIONS NON-INSURANCE BUSINESS (14.3) 14.0
CORPORATE AND OTHER ............................ (32.7) (45.2)
REALIZED INVESTMENT GAINS ...................... 80.9 4.5
---------- ----------
CONSOLIDATED INCOME BEFORE INCOME TAX .......... 489.0 282.2
Federal and Foreign Income Tax ................. 128.3 57.6
---------- ----------
CONSOLIDATED NET INCOME ........................ $ 360.7 $ 224.6
========== ==========
PROPERTY AND CASUALTY INVESTMENT INCOME
AFTER INCOME TAX .............................. $ 221.8 $ 198.0
========== ==========
Net income included realized investment gains after taxes of $52.6 million
in the first quarter of 2004 and $2.9 million in the first quarter of 2003.
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.
Page 12
PROPERTY AND CASUALTY INSURANCE RESULTS
Earnings from our property and casualty business were significantly higher
in the first quarter of 2004 compared with the same period of 2003. Underwriting
income was substantially higher in the first quarter of 2004 due to the
exceptionally strong results in our commercial business and, to a lesser extent,
improvement in our personal and specialty businesses. Investment income also
increased significantly in the first quarter of 2004 compared with 2003.
Property and casualty income before taxes amounted to $455.1 million in the
first quarter of 2004 compared with $308.9 million in 2003.
The profitability of the property and casualty insurance business depends
on the results of both underwriting operations and investments, which we view as
two distinctive operations. The underwriting functions are managed separately
from the investment function. Accordingly, in assessing our performance, we
evaluate 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 three separate
business units: personal insurance, commercial insurance and specialty
insurance.
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 evaluate the performance of our underwriting operations
and of each of our business units using the combined loss and expense ratio
calculated in accordance with statutory accounting principles. 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.
Statutory accounting principles differ in certain respects from generally
accepted accounting principles (GAAP). Under statutory accounting principles
applicable to property and casualty insurance companies, policy acquisition and
other underwriting expenses are recognized immediately, not at the time premiums
are earned. We use underwriting results determined in accordance with GAAP,
among other measures, to assess the overall performance of the 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 incurred and GAAP underwriting expenses
incurred.
Net Premiums Written
Net premiums written were $3.0 billion in the first quarter of 2004, an
increase of 13% compared with the first quarter of 2003. Premium growth was
particularly strong in our reinsurance assumed business generated by Chubb Re.
About 80% of our net premiums written are in the United States. U.S.
premiums grew 11% in the first quarter. Premiums produced by Chubb Re accounted
for 5 percentage points of the U.S. growth. Non-U.S. premiums grew 19% on a
reported basis and 4% in local currencies.
Page 13
We experienced premium growth in the first quarter in all segments of our
business. The growth was the result of our attracting new customers, retaining a
high percentage of our existing customers and securing rate increases when
needed. However, as was true for most of 2003, the size of rate increases has
decelerated as the marketplace has become more competitive. We expect that this
trend will continue throughout 2004.
Reinsurance
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. 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 costs are expected to increase modestly in 2004. We
discontinued a casualty per risk treaty that responded primarily to excess
liability exposures over $25 million, as underwriting actions we have taken in
recent years have resulted in a reduction in the number of such exposures, which
we believe made this treaty no longer economical. Our executive protection per
risk treaty was renewed with coverage similar to the prior year. On our casualty
clash treaty, which operates like a catastrophe treaty, our retention remained
at $50 million.
Our property reinsurance program was renewed in April 2004. 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 our
initial retention from $150 million to $250 million and to increase the
reinsurance coverage at the top. The program now provides coverage of
approximately 88% of losses between $250 million and $1.25 billion, with
additional coverage of $250 million for losses above $1.25 billion in the
northeastern part of the country.
We are making a concerted effort to monitor and control terrorism risk
aggregations. However, our future operating results could be more volatile due
to the limited terrorism coverage in our reinsurance program.
Profitability
Underwriting results were highly profitable in the first quarter of both
2004 and 2003. Our combined loss and expense ratio was 92.6% in the first
quarter of 2004 compared with 95.3% in 2003.
The loss ratio was 62.5% for the first quarter of 2004 compared with 64.9%
in 2003. The improvement in the loss ratio in 2004 reflects the impact of higher
premiums and favorable loss experience, including unusually low commercial
property losses. Catastrophe losses during the first quarter of 2004 amounted to
$96.7 million which represented 3.5 percentage points of the loss ratio compared
with $94.9 million or 4.1 percentage points in 2003.
Our expense ratio decreased to 30.1% for the first quarter of 2004 from
30.4% in 2003 due primarily to premiums written growing at a somewhat higher
rate than overhead expenses.
Page 14
REVIEW OF UNDERWRITING RESULTS BY BUSINESS UNIT
Underwriting results during 2004 and 2003 by business unit were as
follows:
Net Premiums Combined Loss and
Written Expense Ratios
------------------------ ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(in millions)
Quarter Ended March 31
PERSONAL INSURANCE
Automobile ........... $ 144.6 $ 132.9 96.2% 101.4%
Homeowners ........... 341.7 312.5 109.6 114.1
Other ................ 129.5 119.6 77.0 77.8
---------- ---------- ---------- ----------
Total Personal ... 615.8 565.0 99.9 103.6
---------- ---------- ---------- ----------
COMMERCIAL INSURANCE
Multiple Peril ....... 302.8 276.5 84.6 88.0
Casualty ............. 412.2 344.1 87.3 85.2
Workers' Compensation 221.5 188.4 90.6 87.6
Property and Marine .. 290.6 273.3 71.8 87.4
---------- ---------- ---------- ----------
Total Commercial . 1,227.1 1,082.3 82.8 86.5
---------- ---------- ---------- ----------
SPECIALTY INSURANCE
Executive Protection . 554.6 521.6 101.5 103.6
Financial Institutions 234.2 223.8 110.8 110.9
Other ................ 385.7 282.0 84.3 78.8
---------- ---------- ---------- ----------
Total Specialty .. 1,174.5 1,027.4 97.9 99.2
---------- ---------- ---------- ----------
TOTAL ............ $ 3,017.4 $ 2,674.7 92.6% 95.3%
========== ========== ========== ==========
Personal Insurance
Premiums from personal insurance coverages, which represent 20% of total
premiums written, increased by 9% in the first quarter of 2004 compared with the
same quarter in 2003. Premium growth occurred in all classes; however, growth
has slowed somewhat from prior periods due to increased competition in the
marketplace. The premium growth in our homeowners business was due to increased
insurance-to-value and modestly higher rates; the in force policy count for this
class was flat.
Our personal insurance business produced near breakeven underwriting
results in the first quarter of 2004 compared with unprofitable results in 2003.
Results in both years were adversely affected by significant catastrophe losses.
The combined loss and expense ratio was 99.9% in the first quarter of 2004
compared with 103.6% in 2003. Excluding catastrophe losses, the combined ratio
was 88.4% and 92.7% in the first quarter of 2004 and 2003, respectively.
Homeowners results improved in 2004 but remained highly unprofitable. The
improvement was largely the result of better pricing and contract wording.
Results in both 2004 and 2003 were adversely affected by significant catastrophe
losses, primarily from severe winter weather in the northeastern part of the
United States where we have a significant market presence. Catastrophe losses
represented 20.0 and 19.6 percentage points of the loss ratio for this class in
the first quarter of 2004 and 2003, respectively.
Page 15
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 implemented
rate increases in most states where rates have been deficient. We remain
concerned about the potential for water damage claims, including those related
to mold. 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 42 states, including
Texas, California, Florida and New York, and approved in two other states.
Our automobile business produced profitable results in 2004 compared with
near breakeven results in 2003. The improvement was due to stable claim
frequency and severity. Other personal coverages, which include insurance for
valuable articles and excess liability, produced highly profitable results in
2004 and 2003 due to continued favorable loss experience.
Commercial Insurance
Premiums from commercial insurance, which represent 41% of our total
writings, increased by 13% in the first quarter of 2004 compared with the same
period a year ago. Growth occurred in all segments of this business but was
particularly strong in the casualty and workers' compensation classes. Rates
continued to increase in 2004 although, as expected, the level of rate increases
declined from 2003 levels as we experienced more competition in the marketplace.
Despite this, retention levels in the first quarter of 2004 were about the same
as those in the comparable period of 2003. New business remained strong but was
down from 2003 levels. We continue to get favorable terms and conditions on
business written. We expect that rates will continue to rise overall but that
the level of rate increases will continue to decline.
Our commercial insurance business produced highly profitable underwriting
results in the first quarter of 2004 and 2003. The combined loss and expense
ratio was 82.8% for the first quarter of 2004 compared with 86.5% in 2003. These
results reflect the cumulative effect of price increases, better terms and
conditions and more stringent risk selection in recent years. The 2004 results
were exceptionally profitable due to unusually low property losses.
Multiple peril produced highly profitable results in 2004 and 2003, but
more so in 2004. The improvement in 2004 was driven by the property component of
this business due in large part to lower catastrophe losses. Catastrophe losses
represented 3.9 percentage points of the loss ratio for this class in the first
quarter of 2004 compared with 6.9 percentage points in 2003.
Our casualty business produced highly profitable results in 2004 and 2003.
Such results were due to the price increases over the last several years and
favorable loss experience. The primary liability and automobile components of
this business were highly profitable in both years. The excess liability
component was profitable to a lesser degree.
Workers' compensation results were highly profitable in 2004 and 2003 due
in large part to our disciplined risk selection during the past several years.
Property and marine results were highly profitable in both years,
particularly in 2004, due to few severe losses. Catastrophe losses represented
3.3 percentage points of the loss ratio for this class in 2004 compared with 5.6
percentage points in 2003.
Page 16
Specialty Insurance
Premiums from specialty insurance, which represent 39% of our total
writings, increased by 14% in the first quarter of 2004 compared with the same
period a year ago. The growth in our executive protection and financial
institutions businesses was 6% and 5%, respectively. The pace of rate increases
has dropped off significantly as a result of increased competition in the
marketplace. The decline in rate increases was especially pronounced in the
large public directors and officers liability component of this business. Our
strategy in recent years has been to concentrate more on growth opportunities
with small and middle market publicly-traded and private customers. New business
was down from 2003 levels due to a decrease in submission activity. Retention
levels, however, were higher than in 2003 and we continued to get favorable
terms and conditions on both renewals and new business.
Growth in our other specialty business was primarily from Chubb Re, our
reinsurance assumed business. Premiums produced by Chubb Re grew 76% in the
first quarter of 2004. We expect that Chubb Re's growth will decline as the year
progresses.
Our specialty insurance business produced modestly profitable underwriting
results in the first quarter of 2004 compared with near breakeven results in
2003. The combined loss and expense ratio was 97.9% for the first quarter of
2004 compared with 99.2% in 2003.
Executive protection results were unprofitable in 2004 and 2003, but
showed improvement in 2004 due to the impact of higher premiums. Results in both
years 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 directors and officers liability and errors and omissions
liability claims related to the corporate failures and allegations of management
misconduct and accounting irregularities in recent years.
Financial institutions results were similarly unprofitable in 2004 and
2003. The fidelity component of this business was less profitable in 2004 due to
several large losses outside the United States. Fidelity results in 2003 were
highly profitable. The standard commercial business written on financial
institutions produced highly profitable results in both years, reflecting the
rate increases and more stringent risk selection in recent years. Results for
the professional liability component were highly unprofitable in both years due
to the same adverse directors and officers liability and errors and omissions
liability claim trends experienced in our executive protection business.
Financial institutions have been the focus of scrutiny by regulators and the
plaintiffs' bar.
Our other specialty results were highly profitable in 2004 and 2003. Our
surety business produced highly profitable results in both years. Our
reinsurance assumed business generated by Chubb Re and our accident business
were both profitable in 2004 and 2003.
Our surety business tends to be characterized by infrequent but
potentially high severity losses. Since the end of 2001, we have been reducing
our exposure on an absolute basis and by specific bond type. The majority of our
obligations are intended to be performance-based guarantees. When losses occur,
they are mitigated by the customer's balance sheet, contract proceeds and
bankruptcy recovery.
Page 17
Notwithstanding our efforts to manage and reduce our surety exposure, we
continue to have substantial commercial surety exposure for outstanding bonds.
In that regard, we have exposures related to commercial surety bonds issued on
behalf of companies that have experienced deterioration in creditworthiness,
including several gas forward purchase surety bonds. We therefore may experience
an increase in filed claims and may incur high severity losses. Such losses
would be recorded if and when claims are filed and determined to be valid, and
could have a material adverse effect on the Corporation's results of operations
and liquidity.
In particular, we have in force $510 million of gas forward purchase
surety bonds with one principal, Aquila, Inc. Our exposure under these bonds
will decline over the terms of the bonds, which extend until 2012. These surety
bonds, which are uncollateralized, secure Aquila's 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 Aquila 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 exposure under these
bonds. Aquila continues to perform its obligations under the related gas forward
purchase agreements.
LOSS RESERVES
Loss reserves at March 31, 2004 and December 31, 2003 included significant
amounts related to asbestos and toxic waste claims and the September 11, 2001
attack. The components of loss reserves were as follows:
March 31, December 31,
2004 2003
---------- ----------
(in millions)
Gross loss reserves
Total, per balance sheet ....... $ 18,299 $ 17,948
Less:
Related to asbestos and toxic
waste claims ................... 1,265 1,295
Related to September 11 attack .. 861 999
---------- ----------
Total, as adjusted ............. $ 16,173 $ 15,654
========== ==========
Reinsurance recoverable
Total, per balance sheet ....... $ 3,264 $ 3,427
Less:
Related to asbestos and toxic
waste claims ................... 55 57
Related to September 11 attack 624 748
---------- ----------
Total, as adjusted ............. $ 2,585 $ 2,622
========== ==========
Net loss reserves
Total .......................... $ 15,035 $ 14,521
Total, as adjusted ............. 13,588 13,032
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. Adjusted to exclude such
loss reserves, our loss reserves, net of reinsurance recoverable, increased by
$556 million during the first quarter of 2004.
Page 18
Net loss reserves, as adjusted, by segment were as follows:
March 31, December 31,
2004 2003
---------- ----------
(in millions)
Personal insurance ........... $ 1,303 $ 1,219
Commercial insurance ......... 5,390 5,248
Specialty insurance .......... 6,895 6,565
---------- ----------
Net loss reserves, as adjusted $ 13,588 $ 13,032
========== ==========
Loss reserves for each of our business segments increased significantly in
the first quarter of 2004. The increase in loss reserves for specialty insurance
was due in large part to the relatively low paid losses for directors and
officers liability and errors and omissions liability coverages as well as the
strong growth in our reinsurance assumed business. Unpaid claims related to
catastrophes contributed $29 million to the increase in personal insurance loss
reserves.
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, 2004 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 liabilities may
emerge in future periods for amounts in excess of carried reserves. 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 2004 compared with the same period in 2003. Growth was due
to an increase in invested assets since the first quarter of 2003. The increase
in invested assets was due to substantial cash flow from operations over the
period as well as a capital contribution of $800 million to the property and
casualty subsidiaries by the Corporation in the second quarter of 2003. Growth
in investment income in 2004 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 20.1% in the
first quarter of 2004 from 19.6% in the comparable period in 2003 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 12% in the first quarter of 2004. 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.
Page 19
OTHER CHARGES
Other charges include miscellaneous income and expenses of the property
and casualty subsidiaries. Other charges in the first quarter of 2003 included
expenses of $3 million related to the restructuring of our operations in
Continental Europe.
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.
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. Most of the 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. Thus, CFS's results
are subject to volatility, which has had a significant effect on the
Corporation's results of operations from period to period.
The non-insurance business of CFS produced a loss before taxes of $14.3
million in the first quarter of 2004 compared with income of $14.0 million in
the comparable period of 2003. The loss in the first quarter of 2004 was
primarily related to the termination of CFS's obligations under certain credit
default swaps during the quarter. Results for the first quarter of 2003
benefited from an improvement in corporate credit spreads.
Revenues from the non-insurance business of CFS, primarily consisting of
the change in fair value of derivative contracts, were negative $5.0 million in
the first quarter of 2004 and positive $17.4 million in the same period of 2003.
Revenues were negative in 2004 due to the termination of several portfolio
credit default swaps during the quarter.
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.
Page 20
As a result of the termination of several portfolio credit default swaps
during the first quarter of 2004, the notional amount of CFS's credit default
swaps was reduced to $16.0 billion at March 31, 2004. Our realistic loss
exposure is a very small portion of the $16.0 billion notional amount due to
several factors. Our position is senior to subordinated interests of $3.9
billion in the aggregate. Of the $3.9 billion of subordination, there were only
$37 million of defaults through March 31, 2004, none of which has pierced the
subordination limits of any of our contracts. In addition, using internal rating
models, CFS estimates that the credit ratings of the individual portfolio credit
default swaps at March 31, 2004 were either AAA or AA.
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,
2004 2003 2004 2003
-------- -------- -------- --------
(in billions) (in millions)
Credit default swaps
Corporate securities .. $ 3.6 $ 11.2 $ 12 $ 21
Asset-backed securities 9.5 10.5 12 23
Loan portfolios ....... 2.9 3.0 1 2
-------- -------- -------- --------
16.0 24.7 25 46
Other ................... .4 .4 9 9
-------- -------- -------- --------
$ 16.4 $ 25.1 $ 34 $ 55
======== ======== ======== ========
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 guarantees principal and
interest obligations. The Corporation guaranteed CFS's obligations under the
contract. CFS's potential payment obligation extends to the date when the last
of the underlying obligations expires. At March 31, 2004, the notional amount of
referenced securities was $2.3 billion. Under the agreement, CFS's maximum
potential payment obligation is limited to $500 million regardless of the amount
of losses that might be incurred on the $2.3 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. 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.
Page 21
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. Corporate and other produced a loss before taxes of
$32.7 million in the first quarter of 2004 compared with a loss of $45.2 million
in the first quarter of 2003. The lower loss in 2004 was due primarily to higher
investment income and higher income from our investment in Allied World
Assurance Company, Ltd. offset in part by higher interest expense. Investment
income was higher in 2004 due to an increase in corporate invested assets
resulting from the issuance of debt and equity securities during 2003. Interest
expense was higher in 2004 due primarily to the issuance of $500 million of debt
in the first quarter of 2003 and $460 million of debt in the second quarter of
2003.
In 2004 and 2003, income from our investment in Allied World Assurance
Company was offset in varying degrees by a loss at The Chubb Institute, Inc.,
our post secondary educational subsidiary. As part of our focus on our core
insurance business, we are continuing to analyze our alternatives with respect
to Chubb Institute.
REAL ESTATE
Real estate operations resulted in a loss before taxes of $5.0 million in
the first quarter of 2004 compared with a loss of $1.5 million in the same
period in 2003, which amounts are included in the corporate and other results.
We own approximately $280 million of land that we expect will be developed
in the future. In addition, our real estate assets include approximately $185
million of commercial properties and land parcels under lease, of which $23
million relates to a variable interest entity in which we are the primary
beneficiary. We are continuing to explore the sale of certain of our remaining
properties.
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.
Page 22
REALIZED INVESTMENT GAINS AND LOSSES
Net investment gains realized were as follows:
Quarter Ended March 31
2004 2003
-------- --------
(in millions)
Net realized gains
Equity securities ........... $ 56.1 $ 15.9
Fixed maturities ............ 24.8 12.6
-------- --------
80.9 28.5
-------- --------
Other than temporary impairment
Equity securities ........... -- 8.1
Fixed maturities ............ -- 15.9
-------- --------
-- 24.0
-------- --------
Realized investment gains
before tax .................. $ 80.9 $ 4.5
======== ========
Realized investment gains
after tax ................... $ 52.6 $ 2.9
======== ========
We regularly review our invested assets with a fair value below 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 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. The
fair value of the investment becomes its new cost basis.
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, 2004, the Corporation had
shareholders' equity of $9.0 billion and total debt of $2.8 billion.
Page 23
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, 2004, 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 2004. As of March 31, 2004, 3,287,100 shares remained under the share
repurchase authorization. We do not anticipate that we will repurchase any
shares of our common stock in 2004.
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 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.
Reductions in our ratings could adversely affect the competitive position of our
operating businesses.
It is possible that positive or negative ratings actions 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.
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 $825 million in the first quarter of
2004 compared with $570 million in the same period in 2003. The increase in new
cash in 2004 was due to the substantial growth in premium receipts without a
commensurate increase in paid losses.
Page 24
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. Subject to our operating
results, financial condition, capital structure and any regulatory constraints,
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 portfolio is 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 portfolio includes equity securities
held primarily with the objective of capital appreciation.
In the first quarter of 2004, we invested new cash in tax-exempt
securities and, to a lesser extent, U.S. Treasury securities. Our objective is
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 $1,228 million and $1,036 million at March 31, 2004 and
December 31, 2003, 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 $33 million at March 31, 2004 and $35 million at
December 31, 2003. 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 25
Item 4 - Controls and Procedures
As of March 31, 2004, 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, 2004, there were no changes
in internal control over financial reporting that have materially affected, or
are reasonably likely to affect, the Corporation's internal control over
financial reporting.
Page 26
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
Information regarding the matters submitted to a vote of the Corporation's
security holders at the Corporation's annual meeting conducted on April 27,
2004, including the voting results relating thereto, is set forth in the
Corporation's current report on Form 8-K filed with the Securities & Exchange
Commission on May 4, 2004.
Item 6 - Exhibits and Reports on Form 8-K
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
B. Reports on Form 8-K
The Registrant filed a current report on Form 8-K on February 3, 2004
furnishing under Item 12 information with respect to the issuance of a
press release announcing its results for the quarter and year ended
December 31, 2003 and the availability of its Supplementary Investor
Information Report for the quarter and year ended December 31, 2003.
The Registrant filed a current report on Form 8-K on April 14, 2004
furnishing under Item 9 information with respect to the sale by the
Registrant of its investment in Hiscox plc.
The Registrant filed a current report on Form 8-K on April 26, 2004
furnishing under Item 12 information with respect to the issuance of a
press release announcing its results for the quarter ended March 31, 2004
and the availability of its Supplementary Investor Information Report for
the quarter ended March 31, 2004.
The Registrant filed a current report on Form 8-K on May 4, 2004 under
Item 5 regarding matters submitted to a vote of the Corporation's security
holders at the Corporation's annual meeting conducted on April 27, 2004,
including the voting results relating thereto.
Page 27
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 7, 2004