Back to GetFilings.com
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 June 30, 2002
-------------------------
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
---------------- ----------------
The number of shares of common stock outstanding as of July 31, 2002 was
171,793,005.
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001.......................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 2002 and 2001....................................... 2
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 2002 and 2001....................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001...................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 8
Part II. Other Information:
Item 1 - Legal Proceedings...................................... 24
Item 6 - Exhibits and Reports on Form 8-K....................... 25
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
2002 2001
----------- -----------
(in millions)
Assets
Invested Assets
Short Term Investments .......................... $ 1,057.7 $ 956.8
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $1,139.0
and $1,282.5) ................................ 1,075.3 1,218.5
Available-for-Sale
Tax Exempt (cost $8,050.2 and $8,053.8) ...... 8,538.4 8,372.9
Taxable (cost $7,193.5 and $6,408.2) ......... 7,299.3 6,525.3
Equity Securities (cost $729.1 and $757.9) ...... 707.9 710.4
----------- -----------
TOTAL INVESTED ASSETS .................... 18,678.6 17,783.9
Cash .............................................. 22.8 25.8
Securities Lending Collateral ..................... 854.2 417.5
Accrued Investment Income ......................... 242.6 247.7
Premiums Receivable ............................... 2,015.7 1,692.8
Reinsurance Recoverable on Unpaid Claims
and Claim Expenses ............................... 4,378.9 4,505.2
Prepaid Reinsurance Premiums ...................... 453.3 340.8
Deferred Policy Acquisition Costs ................. 1,065.9 928.8
Real Estate Assets ................................ 628.2 646.6
Investments in Partially Owned Companies .......... 391.2 386.2
Deferred Income Tax ............................... 570.5 674.8
Goodwill .......................................... 467.4 467.4
Other Assets ...................................... 1,570.9 1,331.5
----------- -----------
TOTAL ASSETS ............................. $ 31,340.2 $ 29,449.0
=========== ===========
Liabilities
Unpaid Claims and Claim Expenses .................. $ 15,590.3 $ 15,514.9
Unearned Premiums ................................. 4,566.0 3,916.2
Securities Lending Payable ........................ 854.2 417.5
Short Term Debt ................................... -- 199.0
Long Term Debt .................................... 1,348.1 1,351.0
Dividend Payable to Shareholders .................. 60.2 57.8
Accrued Expenses and Other Liabilities ............ 1,898.4 1,467.3
----------- -----------
TOTAL LIABILITIES ........................ 24,317.2 22,923.7
----------- -----------
Shareholders' Equity
Common Stock - $1 Par Value; 180,221,150 and
180,131,238 Shares ............................... 180.2 180.1
Paid-In Surplus ................................... 490.3 527.0
Retained Earnings ................................. 6,657.7 6,369.3
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax 372.3 252.6
Foreign Currency Translation Losses, Net of Tax .. (71.7) (73.0)
Receivable from Employee Stock Ownership Plan ..... (41.7) (48.9)
Treasury Stock, at Cost - 8,285,923 and
10,059,857 Shares ................................ (564.1) (681.8)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............... 7,023.0 6,525.3
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,340.2 $ 29,449.0
=========== ===========
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
------------------------ --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in millions)
Revenues
Premiums Earned ..................... $ 1,927.9 $ 1,640.5 $ 3,783.3 $ 3,261.1
Investment Income ................... 249.8 248.4 492.3 493.1
Real Estate and Other Revenues ...... 4.9 18.8 21.5 41.5
Realized Investment Gains ........... 40.9 6.8 31.6 10.3
----------- ----------- ----------- -----------
Total Revenues ............... 2,223.5 1,914.5 4,328.7 3,806.0
----------- ----------- ----------- -----------
Claims and Expenses
Insurance Claims and Claim Expenses. 1,270.5 1,143.1 2,461.0 2,224.1
Amortization of Deferred Policy
Acquisition Costs .................. 504.8 444.0 977.8 883.2
Other Insurance Operating Costs
and Expenses ....................... 131.1 115.2 276.4 233.6
Real Estate and Other Expenses ...... 21.7 21.4 39.8 39.9
Investment Expenses ................. 5.3 2.8 10.9 8.2
Corporate Expenses .................. 28.5 21.8 56.3 41.4
----------- ----------- ----------- -----------
Total Claims and Expenses .... 1,961.9 1,748.3 3,822.2 3,430.4
----------- ----------- ----------- -----------
Income Before Federal and Foreign
Income Tax ........................... 261.6 166.2 506.5 375.6
Federal and Foreign Income Tax ........ 51.4 19.4 98.1 53.8
----------- ----------- ----------- -----------
Net Income ............................ $ 210.2 $ 146.8 $ 408.4 $ 321.8
=========== =========== =========== ===========
Average Common Shares Outstanding ..... 171.1 174.3 170.5 174.6
Average Common and Potentially Dilutive
Shares Outstanding ................... 174.6 178.2 173.7 178.6
Net Income Per Share
Basic ................................ $ 1.22 $ .84 $ 2.39 $ 1.84
Diluted .............................. 1.20 .83 2.35 1.80
Dividends Declared Per Share .......... .35 .34 .70 .68
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
--------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in millions)
Net Income ........................... $ 210.2 $ 146.8 $ 408.4 $ 321.8
-------- -------- -------- --------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation or
Depreciation of Investments,
Net of Tax ........................ 188.7 (87.9) 119.7 13.2
Foreign Currency Translation Gains
(Losses), Net of Tax .............. 6.6 (2.6) 1.3 (12.9)
-------- -------- -------- --------
195.3 (90.5) 121.0 .3
-------- -------- -------- --------
Comprehensive Income ................. $ 405.5 $ 56.3 $ 529.4 $ 322.1
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
2002 2001
---------- ----------
(in millions)
Cash Flows from Operating Activities
Net Income ........................................... $ 408.4 $ 321.8
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims and Claim Expenses, Net . 201.7 113.3
Increase in Unearned Premiums, Net ................ 521.7 109.8
Increase in Premiums Receivable ................... (322.9) (119.1)
Increase in Deferred Policy Acquisition Costs ..... (132.4) (29.9)
Change in Deferred Federal Income Tax ............. 38.2 (12.2)
Depreciation ...................................... 50.5 45.8
Realized Investment Gains ......................... (31.6) (10.3)
Other, Net ........................................ 19.4 60.2
---------- ----------
Net Cash Provided by Operating Activities ............ 753.0 479.4
---------- ----------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .............. 2,776.8 1,837.1
Proceeds from Maturities of Fixed Maturities ......... 769.9 595.1
Proceeds from Sales of Equity Securities ............. 271.7 156.9
Purchases of Fixed Maturities ........................ (4,205.4) (2,511.6)
Purchases of Equity Securities ....................... (201.6) (152.2)
Increase in Short Term Investments, Net .............. (100.9) (121.5)
Increase in Net Payable from Security
Transactions Not Settled ............................ 176.4 85.1
Purchases of Fixed Assets, Net ....................... (64.8) (77.5)
Other, Net ........................................... 4.3 (10.1)
---------- ----------
Net Cash Used in Investing Activities ................ (573.6) (198.7)
---------- ----------
Cash Flows from Financing Activities
Decrease in Short Term Debt, Net ..................... (199.0) --
Repayment of Long Term Debt .......................... (7.7) (1.4)
Increase (Decrease) in Funds Held Under
Deposit Contracts ................................... 74.1 (4.4)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans ........................ 97.3 106.7
Repurchase of Shares ................................. (36.7) (280.6)
Dividends Paid to Shareholders ....................... (117.6) (117.7)
Other, Net ........................................... 7.2 22.2
---------- ----------
Net Cash Used in Financing Activities ................ (182.4) (275.2)
---------- ----------
Net Increase (Decrease) in Cash ........................ (3.0) 5.5
Cash at Beginning of Year .............................. 25.8 22.4
---------- ----------
Cash at End of Period ................................ $ 22.8 $ 27.9
========== ==========
See Notes to Consolidated Financial Statements.
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The amounts included in this report are unaudited but include
those adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes in the 2001
Annual Report to Shareholders.
2) Adoption of New Accounting Pronouncements
Effective January 1, 2002, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. The Statement addresses how intangible assets should
be accounted for upon their acquisition and how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. In accordance with SFAS No. 142,
goodwill is no longer amortized but rather is tested at least annually
for impairment. SFAS No. 142 may not be applied retroactively to
financial statements of prior periods. In the first quarter of 2002, the
Corporation completed a transitional goodwill impairment test under SFAS
No. 142. As a result of the test, management determined that there was
no impairment of goodwill.
Adoption of SFAS No. 142 as of January 1, 2001 would have
increased net income for the first six months of 2001 by $9.9 million or
$0.06 per share.
3) Investments
Short term investments, which have an original maturity of one
year or less, are carried at amortized cost which approximates market
value. Fixed maturities classified as held-to-maturity are carried at
amortized cost. Fixed maturities classified as available-for-sale and
equity securities are carried at market value as of the balance sheet
date.
The net change in unrealized appreciation or depreciation of
investments carried at market value was as follows:
Periods Ended June 30
---------------------------------------------
Second Quarter Six Months
--------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- -------
(in millions)
Change in unrealized depreciation of
equity securities ................. $ 6.8 $ (22.7) $ 26.3 $ (23.0)
Change in unrealized appreciation of
fixed maturities .................. 283.5 (112.4) 157.8 43.3
-------- -------- -------- -------
290.3 (135.1) 184.1 20.3
Deferred income tax (credit) ....... 101.6 (47.2) 64.4 7.1
-------- -------- -------- -------
Change in unrealized appreciation or
depreciation of investments, net .. $ 188.7 $ (87.9) $ 119.7 $ 13.2
======== ======== ======== =======
Page 6
4) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Periods Ended June 30
------------------------------------------------
Second Quarter Six Months
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in millions,
except per share amounts)
Basic earnings per share:
Net income ............................. $ 210.2 $ 146.8 $ 408.4 $ 321.8
========= ========= ========= =========
Weighted average number of common
shares outstanding .................... 171.1 174.3 170.5 174.6
========= ========= ========= =========
Basic earnings per share ............... $ 1.22 $ .84 $ 2.39 $ 1.84
========= ========= ========= =========
Diluted earnings per share:
Net income ............................. $ 210.2 $ 146.8 $ 408.4 $ 321.8
========= ========= ========= =========
Weighted average number of common
shares outstanding .................... 171.1 174.3 170.5 174.6
Additional shares from assumed exercise
of stock-based compensation awards .... 3.5 3.9 3.2 4.0
--------- --------- --------- ---------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share .................... 174.6 178.2 173.7 178.6
========= ========= ========= =========
Diluted earnings per share ............. $ 1.20 $ .83 $ 2.35 $ 1.80
========= ========= ========= =========
5) Segments Information
The property and casualty operations include three reportable
underwriting segments and the investment function. The underwriting
segments are personal insurance, commercial insurance and specialty
insurance. The personal segment targets the personal insurance market.
The personal classes include automobile, homeowners and other personal
coverages. The commercial segment includes those classes of business
that are generally available in broad markets and are of a more
commodity nature. Commercial classes include multiple peril, casualty,
workers' compensation and property and marine. The specialty segment
includes those classes of business that are available in more limited
markets since they require specialized underwriting and claim
settlement. Specialty classes include executive protection, financial
institutions and other specialty coverages.
Page 7
Revenues and income before income tax of the operating segments
were as follows:
Periods Ended June 30
-------------------------------------------------------
Second Quarter Six Months
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance ........... $ 518.6 $ 453.6 $ 1,020.8 $ 891.1
Commercial insurance ......... 690.5 590.7 1,340.3 1,179.8
Specialty insurance .......... 718.8 596.2 1,422.2 1,190.2
---------- ---------- ---------- ----------
1,927.9 1,640.5 3,783.3 3,261.1
Investment income .............. 237.6 229.3 467.8 454.7
---------- ---------- ---------- ----------
Total property and casualty
insurance ................... 2,165.5 1,869.8 4,251.1 3,715.8
Corporate and other .............. 17.1 37.9 46.0 79.9
Realized investment gains ........ 40.9 6.8 31.6 10.3
---------- ---------- ---------- ----------
Total revenues ............... $ 2,223.5 $ 1,914.5 $ 4,328.7 $ 3,806.0
========== ========== ========== ==========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance ........... $ (19.0) $ (39.1) $ (6.0) $ (39.8)
Commercial insurance ......... 8.2 (57.8) (41.6) (122.9)
Specialty insurance .......... (9.9) 41.2 (3.4) 71.2
---------- ---------- ---------- ----------
(20.7) (55.7) (51.0) (91.5)
Increase in deferred policy
acquisition costs ........... 45.0 1.7 132.4 29.9
---------- ---------- ---------- ----------
Underwriting income (loss) ... 24.3 (54.0) 81.4 (61.6)
Investment income .............. 232.8 226.8 458.0 447.6
Other charges (a) .............. (2.8) (7.8) (13.3) (18.2)
---------- ---------- ---------- ----------
Total property and casualty
insurance ................... 254.3 165.0 526.1 367.8
Corporate and other .............. (33.6) (5.6) (51.2) (2.5)
Realized investment gains ........ 40.9 6.8 31.6 10.3
---------- ---------- ---------- ----------
Total income before income tax $ 261.6 $ 166.2 $ 506.5 $ 375.6
========== ========== ========== ==========
(a) Other charges included goodwill amortization of $4.9 million for the
second quarter of 2001 and $9.9 million for the six months ended June
30, 2001.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
AND FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001
Cautionary Statement Regarding Forward Looking Information
Certain statements in this document may be considered to be "forward
looking statements" as that term is defined in the Private Securities Litigation
Reform Act of 1995, such as statements that include words or phrases "will
result", "is expected to", "will continue", "is anticipated", or similar
expressions. Such statements are subject to certain risks, uncertainties and
assumptions about our business. The factors that could cause actual results to
differ materially from those suggested by any such statements include but are
not limited to those discussed or identified from time to time in the
Corporation's public filings with the Securities and Exchange Commission and
specifically to risks or uncertainties associated with:
- - the availability of primary and reinsurance coverage, including the
implications relating to terrorism legislation and regulation;
- - global political conditions and the occurrence of any terrorist
attacks, including any nuclear, biological or chemical events;
- - premium price increases and profitability or growth estimates overall
or by lines of business, and related expectations with respect to the
timing and terms of any required regulatory approvals;
- - our expectations with respect to cash flow projections and investment
income and with respect to other income;
- - the adequacy of loss reserves including:
- our expectations relating to insurance losses from the September 11
attack and related reinsurance recoverables;
- any impact from the bankruptcy protection sought by various
asbestos producers and other related businesses;
- developments in judicial decisions or legislative actions relating
to coverage and liability for asbestos and toxic waste claims;
- developments in judicial decisions or regulatory actions relating
to coverage and liability for mold claims;
- - the effects of disclosures by and investigations of public companies
relating to possible accounting irregularities, practices in the energy
industry and other corporate governance issues, including:
- the effects on the energy markets and the companies that
participate in them, and in particular as they may relate to
concentrations of risk in our surety business;
- the effects on the capital markets and the markets for directors
and officers and errors and omissions insurance;
- claims and litigation arising out of accounting and other corporate
governance disclosures by other companies;
- legislative or regulatory proposals or changes, including the
certifications required by SEC Order 4-460 and the changes in law
required under the Sarbanes-Oxley Act of 2002;
Page 9
- - changes in management;
- - any downgrade in our claims-paying, financial strength or credit
ratings;
- - general economic conditions including:
- changes in interest rates, market credit spreads and the
performance of the financial markets, generally and as they relate
to credit risks assumed by our Chubb Financial Solutions unit in
particular;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the occurrence of significant weather-related or other natural or
human-made disasters;
- the inability to reinsure certain risks economically;
- changes in the litigation environment; and
- general market conditions.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects are uncertain. Such estimates and
judgments affect the reported amounts in the financial statements. Those
estimates and judgments that were most critical to the preparation of the
financial statements involved the adequacy of loss reserves and, to a lesser
extent, the fair value of credit derivative obligations and the recoverability
of the carrying value of real estate properties. If different estimates and
judgments had been applied, materially different amounts might have been
reported in the financial statements.
Page 10
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for
the second quarter and six months ended June 30, 2002 and 2001:
Periods Ended June 30
-------------------------------------------------------
Second Quarter Six Months
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written ......... $ 2,114.1 $ 1,638.0 $ 4,305.0 $ 3,370.9
Decrease (Increase) in
Unearned Premiums ........... (186.2) 2.5 (521.7) (109.8)
---------- ---------- ---------- ----------
Premiums Earned ........... 1,927.9 1,640.5 3,783.3 3,261.1
---------- ---------- ---------- ----------
Claims and Claim Expenses .... 1,270.5 1,143.1 2,461.0 2,224.1
Operating Costs and Expenses . 669.1 545.9 1,355.7 1,114.3
Increase in Deferred Policy
Acquisition Costs ........... (45.0) (1.7) (132.4) (29.9)
Dividends to Policyholders ... 9.0 7.2 17.6 14.2
---------- ---------- ---------- ----------
Underwriting Income (Loss) ... 24.3 (54.0) 81.4 (61.6)
---------- ---------- ---------- ----------
Investments
Investment Income Before
Expenses .................... 237.6 229.3 467.8 454.7
Investment Expenses ......... 4.8 2.5 9.8 7.1
---------- ---------- ---------- ----------
Investment Income ............ 232.8 226.8 458.0 447.6
---------- ---------- ---------- ----------
Other Charges ................. (2.8) (7.8) (13.3) (18.2)
---------- ---------- ---------- ----------
Property and Casualty Income .. 254.3 165.0 526.1 367.8
CORPORATE AND OTHER ............ (33.6) (5.6) (51.2) (2.5)
---------- ---------- ---------- ----------
CONSOLIDATED OPERATING INCOME
BEFORE INCOME TAX ............. 220.7 159.4 474.9 365.3
Federal and Foreign Income Tax . 37.1 17.0 87.0 50.2
---------- ---------- ---------- ----------
CONSOLIDATED OPERATING INCOME .. 183.6 142.4 387.9 315.1
REALIZED INVESTMENT GAINS
AFTER INCOME TAX .............. 26.6 4.4 20.5 6.7
---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME ........ $ 210.2 $ 146.8 $ 408.4 $ 321.8
========== ========== ========== ==========
PROPERTY AND CASUALTY INVESTMENT
INCOME AFTER INCOME TAX ....... $ 190.8 $ 188.0 $ 376.4 $ 372.6
========== ========== ========== ==========
Page 11
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were significantly
higher in the first six months and second quarter of 2002 compared with the same
periods of 2001 due primarily to a substantial improvement in underwriting
results. Investment income increased slightly in 2002 compared with 2001.
Property and casualty income before taxes amounted to $526.1 million in the
first six months of 2002 and $254.3 million in the second quarter compared with
$367.8 million and $165.0 million, respectively, in 2001.
Net premiums written were $4.3 billion in the first six months of 2002,
an increase of 28% compared with the same period in 2001. Net premiums written
were $2.1 billion in the second quarter of 2002, an increase of 29% over the
comparable period of 2001. U.S. premiums grew 28% in the first six months of
2002 and 31% in the second quarter. Substantial premium growth was also achieved
outside the United States in 2002. Non-U.S. premiums grew about 25% in local
currencies in the first six months of 2002 and 19% in the second quarter.
Premium growth was strong in all segments of our business due primarily
to higher rates. Premium growth was exceptionally strong in the commercial
classes, which include multiple peril, casualty, workers' compensation and
property and marine. In the wake of heavy insurance industry losses in recent
years, exacerbated by the tragic event of September 11, 2001, many insurance
companies have sought substantial price increases, raised deductibles, reduced
coverage limits or declined outright to renew coverage. In this environment, we
are seeing more opportunities to write new, high quality accounts and we are
retaining more of our business. We are getting substantial rate increases on
business we write, often with more restrictive policy terms and conditions. We
expect that this trend will continue throughout 2002.
At the same time, as a result of the substantial losses incurred by
reinsurers, the cost of reinsurance in the marketplace has increased
significantly and reinsurance capacity for certain coverages, such as terrorism,
is limited. The insurance industry has asked for a government backstop for any
future terrorist attacks. However, Congress has not enacted a legislative
solution to terrorism related losses.
Our casualty reinsurance program renewed in January 2002. The casualty
per risk and casualty clash treaties in the aggregate will cost approximately
$20 million more annually. We did not renew a workers' compensation catastrophe
treaty that had substantially reduced our net losses from the September 11
attack because the terms and cost that were offered were unreasonable.
Our property reinsurance program was renewed in April 2002. The
property per risk treaty and property catastrophe treaties in the aggregate will
cost approximately $120 million more on an annualized basis, with more
restrictive terms, including terrorism exclusions. Our property per risk
retention increased from $10 million to $15 million. Our catastrophe treaty for
events in the United States was modified to increase our initial retention, to
increase the reinsurance coverage at the top and to reduce our participation in
certain layers of the program. The program now provides coverage for individual
catastrophic events of approximately 87% of losses between $150 million and $650
million.
Page 12
The potential increase in our net risk concentrations from a
catastrophic event that would result from these changes to our reinsurance
arrangements may be offset to some degree by changes to our gross risk profile.
In particular, we are making a concerted effort to reduce terrorism risk
aggregations. Despite this effort, our future operating results could be more
volatile.
Underwriting results were profitable in the first six months and second
quarter of 2002 compared with unprofitable results in the similar periods of
2001. Our combined loss and expense ratio was 97.0% in the first six months of
2002 and 98.0% in the second quarter compared with 101.7% and 103.5%,
respectively, in 2001.
The loss ratio was 65.4% for the first six months of 2002 and 66.2% for
the second quarter compared with 68.5% and 70.0%, respectively, in the prior
year. The improvement in the loss ratio in 2002 was due in large part to lower
catastrophe losses. Catastrophe losses during the first six months of 2002
amounted to $23.6 million which represented 0.6 of a percentage point of the
loss ratio compared with $91.8 million or 2.8 percentage points in 2001.
Catastrophe losses for the second quarter of 2002 amounted to $10.3 million or
0.5 of a percentage point of the loss ratio compared with $80.3 million or 4.9
percentage points in 2001. The catastrophe losses in both years resulted
primarily from storms in the United States, particularly tropical storm Allison
in the second quarter of 2001.
Our expense ratio was 31.6% for the first six months of 2002 and 31.8%
for the second quarter compared with 33.2% and 33.5%, respectively, in 2001. The
decrease in the expense ratio in 2002 was due to premiums written growing at a
substantially higher rate than overhead expenses.
Page 13
Underwriting results during 2002 and 2001 by class of business were as
follows:
Six Months Ended June 30
------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------------ --------------------
2002 2001 2002 2001
---------- ---------- ---------- ------
(in millions)
Personal Insurance
Automobile ........... $ 258.1 $ 231.7 100.6% 97.5%
Homeowners ........... 617.7 507.1 104.0 115.6
Other ................ 240.8 217.8 77.1 75.0
---------- ---------- ---------- ------
Total Personal ... 1,116.6 956.6 97.4 102.1
---------- ---------- ---------- ------
Commercial Insurance
Multiple Peril ....... 452.4 373.4 100.7 105.1
Casualty ............. 558.8 381.4 101.2 110.9
Workers' Compensation 233.9 180.2 92.9 94.2
Property and Marine .. 414.3 272.5 81.6 123.8
---------- ---------- ---------- ------
Total Commercial . 1,659.4 1,207.5 95.3 109.6
---------- ---------- ---------- ------
Specialty Insurance
Executive Protection . 771.5 648.6 102.2 92.2
Financial Institutions 340.1 292.9 96.7 93.3
Other ................ 417.4 265.3 90.3 97.5
---------- ---------- ---------- ------
Total Specialty .. 1,529.0 1,206.8 98.1 93.6
---------- ---------- ---------- ------
Total ............ $ 4,305.0 $ 3,370.9 97.0% 101.7%
========== ========== ========== ======
Quarter Ended June 30
----------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------------ --------------------
2002 2001 2002 2001
---------- ---------- ---------- ------
(in millions)
Personal Insurance
Automobile ........... $ 139.0 $ 125.1 100.9% 98.3%
Homeowners ........... 345.3 283.6 105.9 117.0
Other ................ 129.8 119.3 73.6 76.4
---------- ---------- ---------- ------
Total Personal ... 614.1 528.0 97.8 103.4
---------- ---------- ---------- ------
Commercial Insurance
Multiple Peril ....... 205.4 168.9 101.8 105.9
Casualty ............. 258.0 175.9 102.1 111.8
Workers' Compensation 91.1 72.0 96.6 95.4
Property and Marine .. 212.0 127.5 76.2 134.8
---------- ---------- ---------- ------
Total Commercial . 766.5 544.3 95.1 112.8
---------- ---------- ---------- ------
Specialty Insurance
Executive Protection . 382.9 318.8 105.0 93.9
Financial Institutions 161.9 132.8 99.2 85.3
Other ................ 188.7 114.1 93.1 107.1
---------- ---------- ---------- ------
Total Specialty .. 733.5 565.7 100.8 94.7
---------- ---------- ---------- ------
Total ............ $ 2,114.1 $ 1,638.0 98.0% 103.5%
========== ========== ========== ======
Page 14
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 26% of the
premiums written by our property and casualty subsidiaries, increased by 17% in
the first six months of 2002 and 16% in the second quarter compared with the
similar periods in 2001. Premium growth occurred in all classes. However, growth
in our in-force policy count has slowed, as planned. Premium growth was
particularly significant in our homeowners business due primarily to higher
rates and increased insurance-to-value. Homeowners premiums were up 22% in the
first six months of 2002, while the in-force policy count was up less than 4% on
an annualized basis.
Our personal insurance business produced profitable underwriting
results in the first six months and second quarter of 2002 compared with
unprofitable results in the same periods in 2001. The combined loss and expense
ratios were 97.4% for the first six months of 2002 and 97.8% for the second
quarter compared with 102.1% and 103.4%, respectively, in 2001.
Homeowners results improved significantly in 2002, but remained
unprofitable. The improvement in 2002 was due to a decrease in the frequency of
both catastrophe and non-catastrophe losses, the latter resulting in large part
from the mild winter weather in the eastern half of the United States.
Catastrophe losses represented 3.8 percentage points of the loss ratio for this
class in the first six months of 2002 and 3.1 percentage points in the second
quarter compared with 7.0 percentage points and 11.2 percentage points,
respectively, in 2001. Homeowners results outside the United States remained
somewhat unprofitable in 2002 as we are still building the critical mass
necessary to absorb the costs of operating the franchise.
Our remediation plan relating to our homeowners business is on track.
We have made substantial progress in implementing rate increases in states where
rates have been deficient. However, we continue to be concerned about the
proliferation of water damage claims in Texas, including those related to mold.
Moreover, while state mandated policy language has contributed to broader water
damage coverage in Texas, we are concerned about the spread of this problem to
other states. We are attempting to deal with the Texas problem through
underwriting, legislative and regulatory strategies. In 30 other states, we are
taking steps to implement contract changes that treat mold as a separate peril
available at an appropriate price.
Our automobile business produced near breakeven results in 2002
compared with modestly profitable results in the first half of 2001 due
primarily to a higher allocation of overhead expenses, which resulted from the
updating of our cost allocation formulas, and increased guarantee fund
assessments.
Other personal coverages, which include insurance for valuable articles
and excess liability, produced highly profitable results in both years due to
continued favorable loss experience.
Page 15
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent 39% of our total
writings, increased by 37% in the first six months of 2002 and 41% in the second
quarter compared with the similar periods in 2001. The substantial premium
growth in all segments of this business was due in large part to substantially
higher rates and also to an increase in our in-force policy count. Retention
levels in the first six months of 2002 improved significantly from year ago
levels. On the business that was renewed, rate increases in the U.S. averaged
24% in the first six months of 2002. New business in the first six months of
2002 was nearly three times that in the same period in 2001. During the first
six months, we wrote more than two dollars of new business for every dollar of
business we lost. The substantial growth was produced with the same tightened
underwriting discipline that existed over the past three years when we were
shrinking the book of business.
Our commercial insurance business produced profitable underwriting
results in the first six months and second quarter of 2002 compared with
unprofitable results in the same periods in 2001. Results improved in all
segments of this business due in large part to the cumulative effect of price
increases, better terms and conditions and more stringent risk selection in
recent years. The combined loss and expense ratio was 95.3% for the first six
months of 2002 and 95.1% for the second quarter compared with 109.6% and 112.8%,
respectively, in 2001.
Commercial insurance results, particularly in the casualty classes,
were adversely affected in both years by incurred losses related to asbestos and
toxic waste claims. Such losses were $41 million in the first six months of 2002
and $19 million in the second quarter compared with $30 million and $15 million,
respectively, in 2001.
Multiple peril produced near breakeven results in 2002 compared with
unprofitable results in the first half of 2001. The improvement in 2002 was in
the property component of this business due primarily to an absence of
catastrophe losses. There were virtually no catastrophe losses for this class in
2002. Catastrophe losses represented 6.3 percentage points of the loss ratio in
the first six months of 2001 and 11.7 percentage points in the second quarter.
Our casualty business improved considerably in 2002, producing near
breakeven results compared with unprofitable results in the first half of the
prior year. The automobile component of this business showed significant
improvement in 2002 due to higher rates and the culling of loss prone business,
which resulted in a lower frequency of losses. Results in the primary liability
component also improved significantly. The excess liability component produced
similarly unprofitable results in the first six months of 2002 and 2001. The
severity of the large losses that are prevalent in this class has increased in
recent years. As noted above, casualty results were adversely affected in both
years, but more so in 2002, by incurred losses related to asbestos and toxic
waste claims.
Workers' compensation results were similarly profitable in the first
six months of 2002 and 2001 due in large part to our disciplined risk selection
during the past several years.
Page 16
Property and marine results were highly profitable in 2002 compared
with highly unprofitable results in the first half of 2001. Results in 2002
benefited from a significant reduction in the number of severe losses, both in
the United States and overseas, as well as lower catastrophe losses. Results in
the second quarter of 2001 were adversely affected by five losses that
represented approximately 24 percentage points of the loss ratio for this class
for the quarter. Catastrophe losses represented 1.5 percentage points of the
loss ratio for this class in the first six months of 2002 and 1.6 percentage
points in the second quarter compared with 9.4 percentage points and 17.7
percentage points, respectively, in 2001.
SPECIALTY INSURANCE
Premiums from specialty insurance, which represent 35% of our total
writings, increased by 27% in the first six months of 2002 and 30% in the second
quarter compared with the same periods in 2001. Our strategy of working closely
with our customers and our ability to differentiate our products continue to
enable us to renew a considerable percentage of our executive protection and
financial institutions business. The growth in executive protection and the
professional liability component of our financial institutions business was
primarily attributable to higher rates. In response to claim severity trends, we
initiated a program in the second half of 2001 to increase pricing and improve
policy terms and to not renew business that no longer met our underwriting
criteria. We have implemented tighter terms and conditions, including lower
policy limits and higher deductibles. New business is coming from the small to
mid-size market. In the standard commercial component of our financial
institutions business, rates were higher as well. Growth of this business was
somewhat restrained by our management of terrorism exposure concentrations and
higher reinsurance costs.
Growth in our other specialty insurance business was primarily from
Chubb Re, our reinsurance business that began operations in 1999. Premiums
produced by Chubb Re amounted to $189 million in the first six months of 2002
compared with $98 million in the same period in 2001.
Our specialty commercial business produced less profitable underwriting
results in the first six months and second quarter of 2002 compared with the
same periods in 2001. The combined loss and expense ratio was 98.1% for the
first six months of 2002 and 100.8% for the second quarter compared with 93.6%
and 94.7%, respectively, in 2001.
Executive protection results were unprofitable in 2002 compared with
profitable results in the first half of 2001 due to deteriorating claim trends
in directors and officers liability and errors and omissions liability in the
United States and Europe in the most recent accident years. As a result,
development of prior year loss reserves was less favorable in 2002.
Our financial institutions business produced profitable results in the
first six months of 2002 and 2001, but more so in 2001. The fidelity component
of this business was highly profitable in both years due to favorable loss
experience. Results for the professional liability component were unprofitable
in 2002 compared with modestly profitable results in the first half of 2001. The
deterioration was due to the same claim trends experienced in our executive
protection business. The standard commercial business written on financial
institutions was highly profitable in the first six months of 2002 compared with
near breakeven results in the same period in 2001. The improvement was due in
large part to the rate increases and more stringent risk selection in recent
years. In addition, results in 2001 were adversely affected by one $10 million
property loss, net of reinsurance, in the first quarter.
Page 17
Results in our other specialty classes were profitable in the first six
months of 2002 and 2001, but more so in 2002. Our surety business in particular
produced highly profitable results in the first six months of both years.
As a result of disarray in the surety reinsurance market caused in
large part by the bankruptcy of Enron Corp., the availability of surety
reinsurance in the near term has been significantly reduced. As a result, our
future surety results could be more volatile.
We have in force several gas forward purchase surety bonds similar to
those issued to Enron. The total amount of bonds with one principal, Aquila,
Inc., is $550 million. The combined amount of all other similar surety bonds is
approximately $260 million. Certain of these principals, including Aquila, have
experienced rating downgrades. However, all of the principals under these surety
bonds continue to perform at this time.
LOSS RESERVES
Loss reserves at June 30, 2002 and December 31, 2001 included
significant amounts related to the September 11 attack and to our surety
exposure arising from the bankruptcy of Enron Corp. The components of loss
reserves were as follows:
June 30, December 31,
2002 2001
------- -----------
(in millions)
Gross loss reserves
Total, per balance sheet $15,590 $15,515
Less:
Related to September 11 attack 2,529 2,775
Related to Enron surety exposure 206 333
------- -------
Total, as adjusted $12,855 $12,407
======= =======
Reinsurance recoverable
Total, per balance sheet $ 4,378 $ 4,505
Less:
Related to September 11 attack 2,031 2,239
Related to Enron surety exposure 13 121
------- -------
Total, as adjusted $ 2,334 $ 2,145
======= =======
Net loss reserves
Total $11,212 $11,010
Total, as adjusted 10,521 10,262
Adjusted to exclude the loss reserves related to the September 11
attack and the Enron surety losses, loss reserves, net of reinsurance
recoverable, increased by $259 million during the first six months of 2002. Loss
reserves for personal insurance and specialty insurance increased during the
period while loss reserves for commercial insurance decreased. Such decrease
reflects the significant exposure reductions of the past several years and the
improved accident year results due to more stringent risk selection.
Page 18
Business interruption claims from the September 11 attack will take
some time to settle, while potential liability claims, if initiated, could take
years to settle. Also, certain of our reinsurers are questioning our
interpretation and/or application of some provisions of our property per risk
reinsurance agreements. Our loss reserve estimates are thus subject to
considerable uncertainty. However, we continue to believe that our estimate that
our net costs related to the September 11 attack were $645 million is
reasonable. While it is possible that our estimate of ultimate gross losses
related to the September 11 attack, as well as the collectibility of related
reinsurance recoverables, may change in the future, we do not expect that any
such change would have a material effect on the Corporation's consolidated
financial condition or liquidity.
The process of establishing loss reserves is complex and imprecise as
it reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in our claim handling procedures.
Judicial decisions and legislative actions continue to broaden
liability and policy definitions and to increase the severity of claim payments.
As a result of this and other societal and economic developments, the
uncertainties inherent in estimating ultimate claim costs on the basis of past
experience have been exacerbated, further complicating the already complex loss
reserving process.
The uncertainties relating to asbestos and toxic waste claims on
insurance policies written many years ago are exacerbated by inconsistent court
decisions and judicial and legislative interpretations of coverage that in some
cases have tended to erode the clear and express intent of such policies and in
others have expanded theories of liability. The industry as a whole is engaged
in extensive litigation over these coverage and liability issues and is thus
confronted with a continuing uncertainty in its efforts to quantify these
exposures.
Asbestos remains the most significant and difficult mass tort for the
insurance industry in terms of claims volume and dollar exposure. The continued
flow of claims has pushed about a dozen manufacturers and users of asbestos
products into bankruptcy since 2000. To date, approximately 50 companies have
filed for bankruptcy as a result of asbestos liability. In part as a result of
these bankruptcies, the volume and value of claims against viable asbestos
defendants continue to increase.
Our most significant individual asbestos exposures have involved
product liability on the part of traditional defendants who manufactured,
distributed or installed asbestos products for whom we wrote general liability
and excess liability coverages. While these insureds have been relatively few in
number, such exposure has increased in recent years due to the increased volume
of claims, the erosion of much of the underlying limits and the bankruptcies of
target defendants.
Page 19
Our other asbestos exposures involve non-product liability on the part
of peripheral defendants, including a mix of manufacturers, distributors and
installers of certain products that contain asbestos as well as premises owners.
Generally, these insureds are named defendants on a regional rather than a
nationwide basis. As the financial resources of traditional asbestos defendants
have been depleted, plaintiffs are targeting these peripheral parties with
greater frequency and, in many cases, for larger awards. In addition, the
plaintiffs' bar continues to solicit new claimants through extensive advertising
and through asbestos medical screenings. Litigation is then initiated even
though many of the claimants do not show any signs of asbestos-related illness.
Thus, new asbestos claims and new exposures on existing claims have continued
unabated despite the fact that usage of asbestos has declined since the
mid-1970's. Based on published projections, we expect that we will continue
receiving asbestos claims at the current rate for at least the next several
years.
Early asbestos claims focused on the major manufacturers, distributors
or installers of asbestos products under the products liability section of
primary general liability policies as well as under excess liability policies,
both of which typically had aggregate limits that capped an insurer's liability.
A growing number of asbestos claims by insureds are being presented as
"non-products" claims, such as those by installers of asbestos products and by
property owners who allegedly had asbestos on their property, under the premises
or operations section of primary general liability policies. Unlike products
exposures, these non-products exposures typically had no aggregate limits,
creating potentially greater exposure. Further, in an effort to seek additional
insurance coverage, some insureds that have substantially eroded their products
coverage are presenting new asbestos claims as non-products premises or
operations claims or attempting to reclassify old products claims. The extent to
which insureds will be liable under such theories and successful in obtaining
coverage on this basis is uncertain.
The expanded focus of asbestos litigation beyond asbestos manufacturers
and distributors to installers and premises owners has created in some instances
conflicts among insureds, primary insurers and excess insurers, primarily
involving questions regarding allocation of indemnity and expense costs and
exhaustion of policy limits. These issues are generating costly coverage
litigation with the potential for inconsistent results.
Significant uncertainty remains as to our ultimate liability related to
asbestos-related claims due to such factors as the long latency period between
asbestos exposure and disease manifestation and the resulting potential for
involvement of multiple policy periods for individual claims as well as the
increase in the volume of claims by plaintiffs who claim exposure but who have
no symptoms of asbestos-related disease and an increase in claims filed under
the non-aggregate premises or operations section of general liability policies.
In the second quarter of this year, a large settlement of
asbestos-related coverage litigation was announced, subject to a number of
contingencies. The proposed settlement involved a Chubb insured, but did not
have a significant impact on our second quarter earnings because our
contribution was largely reserved. However, the settlement did represent further
evidence of the growing exposure of the insurance industry to asbestos-related
litigation based on theories of coverage other than liability for products.
Page 20
In the third quarter, our actuaries and outside actuarial consultants
will commence their regular periodic ground-up exposure based analysis of our
asbestos-related liabilities. As part of this analysis, they will consider the
various potentially adverse recent developments in the asbestos litigation
environment. Upon completion of the analysis and assessment of the results, we
will evaluate the need for any additional reserves for asbestos claims. The
amount, if any, cannot be reasonably estimated at the present time.
Toxic waste losses, on the other hand, appear to be developing as
expected due to relatively stable claim trends. In many cases, claims are being
settled for less than initially anticipated due to various factors, including
more efficient site remediation efforts and increasing success with policy buy
backs.
Based on current information, we believe that the aggregate loss
reserves of the property and casualty subsidiaries at June 30, 2002 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 expansion of coverage and liability by the courts
and the legislatures in the past and the possibilities of similar
interpretations in the future, particularly as they relate to asbestos claims
and, to a lesser extent, toxic waste claims, additional increases in loss
reserves may emerge in future periods. Any such increases would have an adverse
effect on future operating results. However, we do not expect that any such
increases would have a material adverse effect on the Corporation's consolidated
financial condition or liquidity.
INVESTMENTS
Investment income after taxes increased by 1.0% in the first six months
of 2002 and 1.5% in the second quarter compared with the same periods in 2001.
Invested assets increased since the second quarter of 2001 due to substantial
cash flow from operating activities over the period as well as capital
contributed to the property and casualty subsidiaries by the Corporation in the
fourth quarter of 2001. Growth in investment income in 2002 was hindered,
however, by lower available reinvestment rates on fixed maturities that matured
over the past year. The effective tax rate on investment income increased to
17.8% in the first six months of 2002 from 16.8% in the comparable period in
2001 due to holding a smaller proportion of our investment portfolio in
tax-exempt securities.
During the first six months of 2002, new cash available for investment
was invested in taxable bonds.
The property and casualty subsidiaries maintain sufficient investments
in highly liquid, short term and other marketable securities to provide for
immediate cash needs.
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, and the results of Chubb Financial Solutions (CFS) and
our real estate and other non-insurance subsidiaries. Corporate and other
produced a loss before taxes of $51.2 million in the first six months of 2002
compared with a loss of $2.5 million in the first six months of 2001. The higher
loss in 2002 was due to three factors. First, there was an increase in the fair
value of CFS's obligations with respect to its credit derivatives business,
described below. Second, investment income was lower in 2002 due to the decrease
in corporate invested assets resulting from the capital contributions to the
property and casualty subsidiaries in the fourth quarter of 2001. Third,
interest expense was higher in 2002 due to the issuance of debt in the fourth
quarter of 2001.
CHUBB FINANCIAL SOLUTIONS
Since its inception in 2000, CFS's non-insurance operations have been
primarily in the credit derivatives business, principally as a counterparty in
portfolio credit default swap contracts. The Corporation guarantees all of these
obligations. The non-insurance business of CFS produced a loss before taxes of
$16.5 million in the first six months of 2002 compared with income of $3.4
million in the same period in 2001, which amounts are included in the corporate
and other results.
In a typical credit default swap, CFS participates in the senior or
super senior layer of a structure designed to replicate the performance of a
portfolio of securities, loans or other debt obligations. The structure of these
portfolio credit default swaps generally requires CFS to make payment to
counterparties to the extent cumulative losses, related to numerous credit
events, exceed a specified attachment point. The risk below that attachment
point, referred to as subordination, is assumed by other parties with the
primary risk layer often retained by the buyer. The amount of subordination for
each contract varies based on the credit quality of the underlying portfolio and
the length of the contract.
Credit default swaps are derivatives and are carried at estimated fair
value in the financial statements. Changes in fair value are included in income
in the period of the change. Thus, CFS's results are subject to volatility from
period to period. Valuation models are used to estimate the fair value of our
obligation in each credit default swap. Such valuations require considerable
judgment and are subject to significant uncertainty.
The loss in the first six months of 2002 was mostly due to an adverse
movement in the mark-to-market adjustment in the second quarter. Several factors
contributed to the increase in the fair value of the obligations related to the
credit default swaps, including a widening of market credit spreads toward the
end of the second quarter, a decrease in interest rates during the period and,
for certain credit default swaps, erosion in the risk layers that are
subordinate to the CFS risk layer due to actual losses in such subordinate
layers.
Page 22
At June 30, 2002, CFS's aggregate exposure or retained risk, referred
to as notional amounts, from its open credit default swaps was approximately
$20.6 billion. The notional amounts are used to express the extent of
involvement in swap transactions. The notional amounts are not a quantification
of market risk or credit risk and are not recorded on the balance sheet. These
amounts are used to calculate the exchange of contractual cash flows and are not
necessarily representative of the potential for gain or loss.
Our realistic loss exposure is a very small portion of the $20.6
billion notional amount because 97% of the credits are investment grade
companies or transactions, the underlying portfolio of credits is highly
diversified and our position is senior to subordinated interests of $1.7 billion
in the aggregate. The fair value of future obligations under CFS's credit
derivatives business was approximately $80 million at June 30, 2002 compared
with $48 million at December 31, 2001, which amounts are included in accrued
expenses and other liabilities.
In addition to the credit derivatives business, CFS also engages in
other types of non-insurance transactions, such as equity derivatives, weather
derivatives, residual value guarantees and contingent capital facilities. In the
event of extreme circumstances, certain of these contracts are of a magnitude
that could produce losses that would have a material adverse effect on future
operating results. However, we do not expect that any such losses would have a
material adverse effect on the Corporation's consolidated financial condition or
liquidity.
REAL ESTATE
Real estate operations resulted in a loss before taxes of $1.8 million
in the first six months of 2002 and 2001, which amounts are included in the
corporate and other results.
We own approximately $310 million of land that we expect will be
developed in the future. In addition, we own approximately $180 million of
commercial properties and land parcels under lease. We are continuing to explore
the sale of certain of our remaining properties.
Loans receivable, which amounted to $89 million at June 30, 2002, are
primarily purchase money mortgages. Such loans, which were issued in connection
with our joint venture activities and other property sales, are generally
collateralized by buildings and, in some cases, land. We continually evaluate
the ultimate collectibility of such loans and establish appropriate reserves.
The recoverability of the carrying value of our real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The assumptions used reflect future improvement in demand for office
space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. We believe that we have made adequate provisions
for impairment of real estate assets. However, if the assets are not sold or
developed, or if leased properties do not perform as presently contemplated, it
is possible that additional impairment losses may be recognized.
Page 23
INVESTMENT GAINS AND LOSSES
Net realized investment gains before taxes were $31.6 million in the
first six months of 2002 compared with net gains of $10.3 million for the same
period in 2001. Decisions to sell securities are governed principally by
considerations of investment opportunities and tax consequences. As a result,
realized investment gains and losses on the sale of investments may vary
significantly from period to period. If a decline in the fair value of an
individual security is deemed to be other than temporary, the difference between
cost and estimated fair value is charged to income as a realized investment
loss. In the first six months of 2002 and 2001, realized investment gains and
losses reflected writedowns of $55.3 million and $25.8 million, respectively,
due to the recognition of other than temporary impairment on certain securities.
CAPITAL RESOURCES
In July 1998, the Board of Directors authorized the repurchase of up to
12,500,000 shares of the Corporation's common stock. In June 2001, the Board of
Directors authorized the repurchase of up to an additional 16,000,000 shares.
The 1998 authorization has no expiration while the 2001 authorization will
expire on June 30, 2003. In the first six months of 2002, the Corporation
purchased 500,000 shares in open-market transactions at a cost of $36.7 million.
As of June 30, 2002, 3,287,100 shares remained under the 1998 share repurchase
authorization and 9,866,300 shares remained under the 2001 authorization.
On April 4, 2002, the shelf registration statement that the Corporation
filed in December 2001 was declared effective by the Securities and Exchange
Commission. Under the registration statement, up to $1 billion of various types
of securities may be issued by the Corporation.
In June 2002, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500 million in
the aggregate. The $250 million short term revolving credit facility terminates
on June 27, 2003 and may be renewed or replaced. The $250 million medium term
revolving credit facility terminates on June 28, 2007. On the respective
termination dates for these agreements, any loans then outstanding become
payable. There have been no borrowings under these agreements. Various interest
rate options are available to the Corporation, all of which are based on market
interest rates. These facilities replaced, on substantially the same terms, $500
million of revolving credit facilities that were to expire in July 2002.
CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 2002, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer amortized. SFAS No. 142 may
not be applied retroactively to financial statements of prior periods. The
elimination of goodwill amortization resulted in an increase in net income of
$10 million in the first six months of 2002 and $5 million in the second quarter
compared with the same periods in 2001. The goodwill amortization in 2001 was
included in property and casualty other charges. The adoption of SFAS No. 142 is
discussed further in Note 2 of the Notes to Consolidated Financial Statements
included in Item 1 of this report.
Page 24
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
A. On June 26, 2002, the United States District Court for the District of
New Jersey entered an order dismissing in its entirety the previously
reported purported class action complaint originally filed on August
31, 2000 by the California Public Employees' Retirement System, as
amended on September 4, 2001, and granting plaintiffs the right to file
a Second Amended Complaint. On August 9, 2002, plaintiffs filed a
Second Amended Complaint based on substantially the same allegations
as previously reported. The Corporation is defending the action
vigorously.
B. On June 21, 2002, in connection with the previously reported surety
bond litigation involving Federal Insurance Company (Federal), JPMorgan
Chase Bank (JPM) and Mahonia Limited and Mahonia Natural Gas Limited
(Mahonia), Federal filed a third party complaint against JPM with the
United States District Court for the Southern District of New York
alleging, in part, fraud in the procurement of surety bonds and seeking
indemnification if Federal is deemed liable to pay Mahonia under such
bonds. JPM, in turn, on June 28, 2002, amended the complaint against
Federal and other surety bond issuers, alleging that JPM and Mahonia
were fraudulently induced by the sureties to accept surety bonds in
place of letters of credit. The sureties, including Federal, have filed
a motion to dismiss the amended complaint.
Page 25
Item 6 - Exhibits and Reports on Form 8-K
A. Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
The Chubb Corporation has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: Henry B. Schram
--------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: August 13, 2002