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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, 2003
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 July 31, 2003
was 187,462,182.
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 2003 and 2002....................................... 1
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002.......................... 2
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 2003 and 2002....................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002...................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 11
Item 4 - Controls and Procedures................................ 31
Part II. Other Information:
Item 1 - Legal Proceedings...................................... 32
Item 6 - Exhibits and Reports on Form 8-K....................... 33
Signatures........................................................ 33
Page 1
Part I. Financial Information
Item 1 - Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
------------------ -----------------
2003 2002 2003 2002
-------- ------- -------- -------
(in millions)
Revenues
Premiums Earned....................... $2,533.2 $1,927.9 $4,858.4 $3,783.3
Investment Income..................... 271.7 249.8 528.7 492.3
Real Estate and Other Revenues........ 12.9 4.9 42.1 21.5
Realized Investment Gains............. 20.7 40.9 25.2 31.6
-------- -------- -------- --------
Total Revenues................. 2,838.5 2,223.5 5,454.4 4,328.7
-------- -------- -------- --------
Claims and Expenses
Insurance Claims and Claim Expenses... 1,633.2 1,270.5 3,138.7 2,461.0
Amortization of Deferred Policy
Acquisition Costs.................... 630.3 504.8 1,210.4 977.8
Other Insurance Operating Costs
and Expenses......................... 182.6 131.1 359.6 276.4
Real Estate and Other Expenses........ 19.9 21.7 36.9 39.8
Investment Expenses................... 6.2 5.3 16.4 10.9
Corporate Expenses.................... 37.4 28.5 81.3 56.3
-------- -------- -------- --------
Total Claims and Expenses...... 2,509.6 1,961.9 4,843.3 3,822.2
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................. 328.9 261.6 611.1 506.5
Federal and Foreign Income Tax.......... 76.8 51.4 134.4 98.1
-------- -------- -------- --------
Net Income.............................. $ 252.1 $ 210.2 $ 476.7 $ 408.4
======== ======== ======== ========
Net Income Per Share
Basic.................................. $ 1.46 $ 1.22 $ 2.78 $ 2.39
Diluted................................ 1.45 1.20 2.76 2.35
Dividends Declared Per Share............ .36 .35 .72 .70
See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
2003 2002
-------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 3,589.0 $ 1,756.7
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $665.7
and $850.7)....................................... 619.4 794.9
Available-for-Sale
Tax Exempt (cost $9,700.1 and $8,449.2)........... 10,421.6 9,082.9
Taxable (cost $8,804.4 and $8,112.5).............. 9,287.3 8,385.7
Equity Securities (cost $1,228.2 and $998.3)......... 1,295.2 992.2
--------- ---------
TOTAL INVESTED ASSETS......................... 25,212.5 21,012.4
Cash................................................... 31.2 41.9
Securities Lending Collateral.......................... 1,564.3 1,354.8
Accrued Investment Income.............................. 262.3 246.9
Premiums Receivable.................................... 2,142.7 2,040.6
Reinsurance Recoverable on Unpaid Claims
and Claim Expenses.................................... 3,525.5 4,071.5
Prepaid Reinsurance Premiums........................... 511.0 479.3
Deferred Policy Acquisition Costs...................... 1,246.4 1,150.0
Real Estate Assets..................................... 593.1 602.9
Investment in Partially Owned Company.................. 285.1 266.7
Deferred Income Tax.................................... 440.5 612.5
Goodwill............................................... 467.4 467.4
Other Assets........................................... 2,000.7 1,767.5
--------- ---------
TOTAL ASSETS.................................. $38,282.7 $34,114.4
========= =========
Liabilities
Unpaid Claims and Claim Expenses....................... $16,934.3 $16,713.1
Unearned Premiums...................................... 5,586.0 5,049.9
Securities Lending Payable............................. 1,564.3 1,354.8
Long Term Debt......................................... 2,821.1 1,959.1
Dividend Payable to Shareholders....................... 61.9 59.9
Accrued Expenses and Other Liabilities................. 2,921.4 2,118.4
--------- ---------
TOTAL LIABILITIES............................. 29,889.0 27,255.2
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 196,060,554 and
180,296,834 Shares.................................... 196.1 180.3
Paid-In Surplus........................................ 1,286.8 445.4
Retained Earnings...................................... 6,705.5 6,352.5
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 826.4 585.5
Foreign Currency Translation Losses, Net of Tax....... (10.1) (56.5)
Receivable from Employee Stock Ownership Plan.......... (26.2) (34.1)
Treasury Stock, at Cost - 8,663,770 and
9,095,162 Shares...................................... (584.8) (613.9)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 8,393.7 6,859.2
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $38,282.7 $34,114.4
========= =========
See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
---------------- ---------------
2003 2002 2003 2002
------ ------ ------ ------
(in millions)
Net Income................................ $252.1 $210.2 $476.7 $408.4
------ ------ ------ ------
Other Comprehensive Income
Change in Unrealized Appreciation
of Investments, Net of Tax............. 198.6 188.7 240.9 119.7
Foreign Currency Translation Gains,
Net of Tax............................. 36.9 6.6 46.4 1.3
------ ------ ------ ------
235.5 195.3 287.3 121.0
------ ------ ------ ------
Comprehensive Income...................... $487.6 $405.5 $764.0 $529.4
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
2003 2002
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................ $ 476.7 $ 408.4
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims and Claim Expenses, Net... 767.2 201.7
Increase in Unearned Premiums, Net.................. 433.6 521.7
Increase in Premiums Receivable..................... (102.1) (322.9)
Increase in Deferred Policy Acquisition Costs....... (77.3) (132.4)
Change in Deferred Income Tax....................... 18.9 38.2
Depreciation........................................ 55.8 50.5
Realized Investment Gains........................... (25.2) (31.6)
Other, Net.......................................... (275.9) 19.4
--------- ---------
Net Cash Provided by Operating Activities............. 1,271.7 753.0
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities............... 2,971.5 2,776.8
Proceeds from Maturities of Fixed Maturities.......... 1,063.5 769.9
Proceeds from Sales of Equity Securities.............. 197.3 271.7
Purchases of Fixed Maturities......................... (5,593.1) (4,205.4)
Purchases of Equity Securities........................ (421.1) (201.6)
Increase in Short Term Investments, Net............... (1,832.3) (100.9)
Increase in Net Payable from Security
Transactions Not Settled............................. 654.5 176.4
Purchases of Property and Equipment, Net.............. (40.8) (64.8)
Other, Net............................................ - 4.3
--------- ---------
Net Cash Used in Investing Activities................. (3,000.5) (573.6)
--------- ---------
Cash Flows from Financing Activities
Decrease in Short Term Debt, Net...................... - (199.0)
Proceeds from Issuance of Long Term Debt.............. 960.0 -
Repayment of Long Term Debt........................... (100.2) (7.7)
Increase in Funds Held Under Deposit Contracts........ 92.4 74.1
Proceeds from Common Stock Offering................... 886.8 -
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans......................... 14.4 97.3
Repurchase of Shares.................................. - (36.7)
Dividends Paid to Shareholders........................ (121.7) (117.6)
Other, Net............................................ (13.6) 7.2
--------- ---------
Net Cash Provided by (Used in) Financing Activities... 1,718.1 (182.4)
--------- ---------
Net Decrease in Cash.................................... (10.7) (3.0)
Cash at Beginning of Year............................... 41.9 25.8
--------- ---------
Cash at End of Period................................. $ 31.2 $ 22.8
========= =========
See Notes to Consolidated Financial Statements.
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The amounts included in this report are unaudited but include
those adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Notes to
Consolidated Financial Statements included in the Corporation's 2002
Annual Report on Form 10-K.
2) Adoption of New Accounting Pronouncement
Effective January 1, 2003, the Corporation adopted the fair value
method of accounting for stock-based employee compensation plans, which
is the method of accounting defined in Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under
the fair value method of accounting, compensation cost is measured based
on the fair value of the award at the grant date and recognized over the
service period. The Corporation has elected to use the modified
prospective method of transition, as permitted by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure.
Under this method, stock-based employee compensation cost is recognized
from the beginning of 2003 as if the fair value method of accounting had
been used to account for all employee awards granted, modified, or
settled in years beginning after December 15, 1994. Prior period
financial statements were not restated. The adoption of the fair value
method of accounting for stock-based employee compensation plans
increased compensation cost by $35.7 million for the six months ended
June 30, 2003, which resulted in a reduction in net income of $25.3
million or $0.15 per basic and diluted share.
The following information illustrates the effect on net income
and earnings per share as if the Corporation had accounted for
stock-based employee compensation using the fair value method.
Periods Ended June 30
---------------------------------
Second Quarter Six Months
-------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
(in millions,
except per share amounts)
Net income, as reported............... $252.1 $210.2 $476.7 $408.4
Add: stock-based employee
compensation expense included in
reported net income, net of tax...... 14.8 4.9 30.6 8.9
Deduct: stock-based employee
compensation expense determined
using the fair value method,
net of tax........................... (14.8) (17.6) (30.6) (34.5)
------ ------ ------ ------
Pro forma net income.................. $252.1 $197.5 $476.7 $382.8
====== ====== ====== ======
Earnings per share
Basic, as reported.................. $ 1.46 $ 1.22 $ 2.78 $ 2.39
Basic, pro forma.................... 1.46 1.15 2.78 2.24
Diluted, as reported................ 1.45 1.20 2.76 2.35
Diluted, pro forma.................. 1.45 1.13 2.76 2.20
Page 6
3) Accounting Pronouncement Not Yet Adopted
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (FIN
46), which requires an enterprise to assess its interests in a variable
interest entity to determine whether to consolidate that entity. A
variable interest entity is an entity in which the equity investment at
risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties or
the equity investors do not have the characteristics of a controlling
financial interest. A variable interest entity shall be consolidated by
its primary beneficiary, which is the party that will absorb a majority
of the entity's expected losses if they occur, receive a majority of the
entity's expected residual returns if they occur, or both.
The provisions of FIN 46 were effective immediately for variable
interest entities created after January 31, 2003 and for variable
interest entities in which the Corporation obtains an interest after
that date. The Corporation has not acquired an interest in any variable
interest entities subsequent to January 31, 2003.
For variable interest entities in which the Corporation holds a
variable interest that it acquired prior to February 1, 2003, the
provisions of FIN 46 are effective for the quarter ending September 30,
2003 and may be applied prospectively or retroactively. For any such
variable interest entities, the assets, liabilities and noncontrolling
interests would be initially measured at their carrying amounts. Any
difference between the net amount added to the Corporation's balance
sheet and the amount of any previously recognized interest in the newly
consolidated entity would be recognized as the cumulative effect of an
accounting change.
The Corporation is currently evaluating the impact of applying
FIN 46 to existing variable interest entities in which it has a variable
interest.
The Corporation's real estate subsidiary has a collateralized
mortgage note receivable from a real estate partnership in which it does
not have an equity interest. However, as a result of other variable
interests, consolidation or disclosure may be required upon adoption of
FIN 46 in the third quarter. The carrying value of the receivable was
$74.6 million at June 30, 2003.
The adoption of FIN 46 is not expected to have a significant
effect on the Corporation's financial position or results of operations.
Page 7
4) 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
---------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
(in millions)
Change in unrealized appreciation or
depreciation of equity securities... $ 78.3 $ 6.8 $ 73.1 $ 26.3
Change in unrealized appreciation of
fixed maturities.................... 227.2 283.5 297.5 157.8
------ ------- ------ ------
305.5 290.3 370.6 184.1
Deferred income tax ................. 106.9 101.6 129.7 64.4
------ ------- ------ ------
Change in unrealized appreciation
of investments, net................. $198.6 $ 188.7 $240.9 $119.7
====== ======= ====== ======
5) Debt
In March 2003, the Corporation issued $225 million of unsecured
3.95% notes due April 1, 2008 and $275 million of unsecured 5.2% notes
due April 1, 2013, the aggregate net proceeds from which were $495
million.
In June 2003, the Corporation issued $460 million of unsecured 2
1/4% senior notes due August 16, 2008 and 18.4 million purchase
contracts to purchase the Corporation's common stock. The notes and
purchase contracts were issued together in the form of 7% equity units.
The net proceeds from the issuance of the equity units were $446
million.
Each equity unit initially represents one purchase contract and
$25 principal amount of senior notes. The notes are pledged by the
holders to secure their obligations under the purchase contracts. The
Corporation will make quarterly interest payments to the holders of the
notes initially at a rate of 2 1/4% per year. In May 2006, the notes
will be remarketed. At that time, the remarketing agent will have the
ability to reset the interest rate on the notes in order to generate
sufficient remarketing proceeds to satisfy the holder's obligation under
the purchase contract. If the senior notes are not successfully
remarketed, the Corporation will exercise its rights as a secured party
to obtain and extinguish the notes and deliver its common stock to the
holders pursuant to the purchase contracts. The purchase contracts are
further described in Note (8).
Page 8
6) 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
-------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
(in millions,
except per share amounts)
Basic earnings per share:
Net income............................ $252.1 $210.2 $476.7 $408.4
====== ====== ====== ======
Weighted average number of common
shares outstanding...................... 172.5 171.1 171.5 170.5
====== ====== ====== ======
Basic earnings per share.................... $ 1.46 $ 1.22 $ 2.78 $ 2.39
====== ====== ====== ======
Diluted earnings per share:
Net income............................ $252.1 $210.2 $476.7 $408.4
====== ====== ====== ======
Weighted average number of common
shares outstanding...................... 172.5 171.1 171.5 170.5
Additional shares from assumed
exercise of stock-based
compensation awards..................... 1.8 3.5 1.4 3.2
------ ------ ------ ------
Weighted average number of common
shares and potential common shares
assumed outstanding for computing
diluted earnings per share.............. 174.3 174.6 172.9 173.7
====== ====== ====== ======
Diluted earnings per share.................. $ 1.45 $ 1.20 $ 2.76 $ 2.35
====== ====== ====== ======
7) Segments Information
The property and casualty operations include three reportable
underwriting segments and the investment function. The underwriting
segments are personal insurance, commercial insurance and specialty
insurance. The personal segment targets the personal insurance market.
The personal classes include automobile, homeowners and other personal
coverages. The commercial segment includes those classes of business
that are generally available in broad markets and are of a more
commodity nature. Commercial classes include multiple peril, casualty,
workers' compensation and property and marine. The specialty segment
includes those classes of business that are available in more limited
markets since they require specialized underwriting and claim
settlement. Specialty classes include executive protection, financial
institutions and other specialty coverages.
Chubb Financial Solutions' (CFS) non-insurance business was
primarily structured credit derivatives, principally as a counterparty
in portfolio credit default swap contracts. In the second quarter of
2003, the Corporation implemented a plan to exit the credit derivatives
business and is running off the financial products portfolio of CFS.
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 9
Revenues and income before income tax of the operating segments
were as follows:
Periods Ended June 30
---------------------------------------
Second Quarter Six Months
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal insurance............... $ 604.1 $ 518.6 $1,183.9 $1,020.8
Commercial insurance............. 922.1 690.5 1,800.8 1,340.3
Specialty insurance.............. 1,007.0 718.8 1,873.7 1,422.2
-------- -------- -------- --------
2,533.2 1,927.9 4,858.4 3,783.3
Investment income.................. 266.5 237.6 520.1 467.8
-------- -------- -------- --------
Total property and casualty
insurance....................... 2,799.7 2,165.5 5,378.5 4,251.1
Chubb Financial Solutions
non-insurance business.............. .5 (10.3) 17.9 (6.8)
Corporate and other.................. 17.6 27.4 32.8 52.8
Realized investment gains............ 20.7 40.9 25.2 31.6
-------- -------- -------- --------
Total revenues................... $2,838.5 $2,223.5 $5,454.4 $4,328.7
======== ======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal insurance............... $ 8.2 $ (19.0) $ (7.4) $ (6.0)
Commercial insurance............. 65.7 8.2 119.9 (41.6)
Specialty insurance.............. 18.0 (9.9) (18.4) (3.4)
-------- -------- -------- --------
91.9 (20.7) 94.1 (51.0)
Increase in deferred policy
acquisition costs............... 9.4 45.0 77.3 132.4
-------- -------- -------- --------
Underwriting income.............. 101.3 24.3 171.4 81.4
Investment income.................. 260.8 232.8 507.1 458.0
Other charges...................... (14.2) (2.8) (21.7) (13.3)
-------- -------- -------- --------
Total property and casualty
insurance....................... 347.9 254.3 656.8 526.1
Chubb Financial Solutions
non-insurance business.............. (5.8) (15.4) 8.2 (15.5)
Corporate and other.................. (33.9) (18.2) (79.1) (35.7)
Realized investment gains............ 20.7 40.9 25.2 31.6
-------- -------- -------- --------
Total income before income tax... $ 328.9 $ 261.6 $ 611.1 $ 506.5
======== ======== ======== ========
Page 10
8) Shareholders' Equity
In June 2003, the Corporation sold 15,525,000 shares of common
stock. Net proceeds from the sale were $887 million.
In June 2003, the Corporation issued 18.4 million purchase
contracts to purchase the Corporation's common stock and $460 million of
2 1/4% senior notes. The purchase contracts and notes were issued
together in the form of 7% equity units. For further discussion of the
notes and purchase contracts, see Note (5).
Each purchase contract obligates the holder to purchase, and
obligates the Corporation to sell, on or before August 16, 2006, for a
settlement price of $25, a variable number of newly issued shares of the
Corporation's common stock. The number of shares of the Corporation's
common stock to be purchased will be determined based on a formula that
considers the market price of the Corporation's common stock immediately
prior to the time of settlement in relation to the $59.50 per share sale
price of the common stock at the time the equity units were offered.
Upon settlement of the purchase contracts, the Corporation will receive
proceeds of approximately $460 million and will issue between
approximately 6.5 million and 7.7 million shares of common stock.
The Corporation will make quarterly contract adjustment payments
to the equity unit holders at a rate of 4 3/4% per year on the stated
amount of $25 per purchase contract until the purchase contract is
settled. The $66.2 million present value of the contract adjustment
payments was accrued as a liability at the date of issuance of the
equity units with an offsetting charge to paid-in surplus. The liability
is included in other liabilities. Subsequent contract adjustment
payments will be allocated between this liability account and interest
expense based on a constant rate calculation over the term of the
purchase contracts. Paid-in surplus also reflected a charge of $11.9
million, representing the portion of the equity unit issuance costs that
was allocated to the purchase contracts.
Page 11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Six Months Ended June 30, 2003 and 2002 and for
the Quarters Ended June 30, 2003 and 2002
Certain statements in this communication may be considered to be
"forward- looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995 (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 and
legislative 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," "plan," "estimate," "expect," "intend," "may,"
"should," 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 the Corporation. They 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 the Corporation's 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 or chemical events;
- - the effects of the outbreak of war or hostilities in other countries or
regions of the world;
- - premium price increases and profitability or growth estimates overall or by
lines of business or geographic area, and related expectations with respect
to the timing and terms of any required regulatory approvals;
- - larger than 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;
- 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 the Corporation, to settle
disputes;
- developments in judicial decisions or legislative actions relating to
coverage and liability for asbestos and toxic waste claims;
- developments in judicial decisions or regulatory or legislative
actions relating to coverage and liability for mold claims;
Page 12
- - the impact of the current economic climate on companies on whose behalf we
have issued surety bonds, and in particular, on those companies that have
experienced deterioration in creditworthiness;
- - the effects of disclosures by and investigations of public companies
relating to possible accounting irregularities, practices in the energy and
securities industries and other corporate governance issues, including:
- the effects on the energy markets and the companies that participate
in them, and in particular as they may relate to concentrations of
risk in our surety business;
- the effects on the capital markets and the markets for directors and
officers and errors and omissions insurance;
- claims and litigation arising out of accounting and other corporate
governance disclosures by other companies;
- claims and litigation arising out of investment banking practices;
- legislative or regulatory proposals or changes, including the changes
in law and regulation implemented under the Sarbanes-Oxley Act of
2002;
- - the occurrence of significant weather-related or other natural or
human-made disasters;
- - any downgrade in our claims-paying, financial strength or other credit
ratings;
- - general economic conditions including:
- changes in interest rates, market credit spreads and the performance
of the financial markets, generally and as they relate to credit
risks assumed by the Chubb Financial Solutions unit in particular;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the inability to reinsure certain risks economically;
- changes in the litigation environment; and
- general market conditions.
Our forward-looking statements speak only as of the date made, and we undertake
no obligation to update these forward-looking statements.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects are uncertain. Such estimates and
judgments affect the reported amounts in the financial statements. Those
estimates and judgments that were most critical to the preparation of the
financial statements involved the adequacy of loss reserves and the
recoverability of related reinsurance recoverables, the fair value of credit
derivative obligations, the recoverability of the carrying value of real estate
properties and the realization of deferred income tax benefits. These estimates
and judgments are discussed within the following analysis of our results of
operations. If different estimates and judgments had been applied, materially
different amounts might have been reported in the financial statements.
Page 13
SUMMARY OF FINANCIAL RESULTS
Net income was $476.7 million in the first six months of 2003 and
$252.1 million in the second quarter compared with $408.4 million and $210.2
million in the comparable periods in 2002.
Results in the first six months of 2003 included realized investment
gains of $25.2 million, or $16.4 million after tax, compared with realized
investment gains of $31.6 million, or $20.5 million after tax, in the first six
months of 2002. Results in the second quarter of 2003 included realized
investment gains of $20.7 million, or $13.5 million after tax, compared with
realized investment gains of $40.9 million, or $26.6 million after tax, in the
second quarter of 2002. 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.
Effective January 1, 2003, the Corporation adopted the fair value
method of accounting for stock-based employee compensation plans, which is the
method of accounting defined in Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation. Prior period financial statements
were not restated. Under the fair value method of accounting, compensation cost
is measured based on the fair value of an award at the grant date and recognized
over the service period. The adoption of the fair value method of accounting for
stock-based employee compensation plans increased compensation cost by $35.7
million in the first six months of 2003 and $16.6 million in the second quarter,
which resulted in a reduction in net income of $25.3 million and $11.3 million,
respectively. The adoption of the fair value method of accounting for
stock-based employee compensation plans is discussed further in Note (2) of the
Notes to Consolidated Financial Statements.
Page 14
The following is a summary of the Corporation's results for the second
quarter and six months ended June 30, 2003 and 2002:
Periods Ended June 30
---------------------------------------
Second Quarter Six Months
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written........... $2,617.3 $2,114.1 $5,292.0 $4,305.0
Increase in Unearned Premiums.. (84.1) (186.2) (433.6) (521.7)
-------- -------- -------- --------
Premiums Earned............. 2,533.2 1,927.9 4,858.4 3,783.3
-------- -------- -------- --------
Claims and Claim Expenses...... 1,633.2 1,270.5 3,138.7 2,461.0
Operating Costs and Expenses... 802.1 669.1 1,613.6 1,355.7
Increase in Deferred Policy
Acquisition Costs............. (9.4) (45.0) (77.3) (132.4)
Dividends to Policyholders..... 6.0 9.0 12.0 17.6
-------- -------- -------- --------
Underwriting Income............ 101.3 24.3 171.4 81.4
-------- -------- -------- --------
Investments
Investment Income Before
Expenses...................... 266.5 237.6 520.1 467.8
Investment Expenses............ 5.7 4.8 13.0 9.8
-------- -------- -------- --------
Investment Income.............. 260.8 232.8 507.1 458.0
-------- -------- -------- --------
Other Charges................... (14.2) (2.8) (21.7) (13.3)
-------- -------- -------- --------
Property and Casualty Income.... 347.9 254.3 656.8 526.1
CHUBB FINANCIAL SOLUTIONS
NON-INSURANCE BUSINESS.......... (5.8) (15.4) 8.2 (15.5)
CORPORATE AND OTHER.............. (33.9) (18.2) (79.1) (35.7)
REALIZED INVESTMENT GAINS........ 20.7 40.9 25.2 31.6
-------- -------- -------- --------
CONSOLIDATED INCOME BEFORE
INCOME TAX...................... 328.9 261.6 611.1 506.5
FEDERAL AND FOREIGN INCOME TAX... 76.8 51.4 134.4 98.1
-------- -------- -------- ---------
CONSOLIDATED NET INCOME.......... $ 252.1 $ 210.2 $ 476.7 $ 408.4
======== ======== ======== ========
PROPERTY AND CASUALTY INVESTMENT
INCOME AFTER INCOME TAX......... $ 207.2 $ 190.8 $ 405.2 $ 376.4
======== ======== ======== ========
Page 15
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were significantly
higher in the first six months and second quarter of 2003 compared with the same
periods of 2002. Underwriting income was significantly higher in 2003 due
primarily to the exceptionally strong results in our commercial classes, which
include multiple peril, casualty, workers' compensation and property and marine.
Investment income also increased in 2003 compared with 2002. Property and
casualty income before taxes amounted to $656.8 million in the first six months
of 2003 and $347.9 million in the second quarter compared with $526.1 million
and $254.3 million, respectively, in 2002.
Net premiums written were $5.3 billion in the first six months of 2003,
an increase of 23% compared with the same period in 2002. Net premiums written
were $2.6 billion in the second quarter of 2003, an increase of 24% over the
comparable period of 2002. U.S. premiums grew 22% in the first six months of
2003 and 23% in the second quarter. Substantial premium growth was also achieved
outside the United States in 2003. On a reported basis, non-U.S. premiums grew
28% in the first six months of 2003 and 30% in the second quarter. In local
currencies, non-U.S. premium growth was 18% in the first six months and 20% in
the second quarter.
Premium growth in the first six months of 2003 was strong in all
segments of our business due in large part to higher rates. We continue to write
new business and we are retaining more of our accounts upon renewal. We continue
to get rate increases on much of the business we write, with favorable policy
terms and conditions. We expect that this trend will continue throughout 2003.
As a result of the substantial losses incurred by reinsurers in recent
years, the cost of reinsurance in the marketplace has increased significantly
and reinsurance capacity for certain coverages, such as terrorism, is limited
and expensive.
Our reinsurance program in 2003 is similar to that in 2002. We have
discontinued some lower limit treaties that we believed were no longer
economical and have increased our participation in certain layers of the
treaties that we renewed. We expect that our reinsurance costs will increase in
2003 in line with the higher premiums on the policies reinsured.
Our casualty per risk and casualty clash treaties renewed in January
2003. On the clash treaty, which operates like a catastrophe treaty, we
increased our retention from $25 million to $50 million.
Our property reinsurance program was renewed in April 2003. The
property per risk retention remained at $15 million. Our property catastrophe
treaty for events in the United States was modified to increase our coverage at
the top by $200 million due to our increased exposure in certain catastrophe
prone areas. The program now provides coverage for individual catastrophic
events of approximately 86% of losses between $150 million and $850 million. We
are in the process of purchasing additional catastrophe reinsurance coverage.
We are making a concerted effort to reduce terrorism risk aggregations.
However, our future operating results could be more volatile due to the limited
terrorism coverage in our reinsurance program.
Page 16
The Terrorism Risk Insurance Act of 2002 (the Terrorism Act)
established a program under which the federal government will share the risk of
loss from certain acts of international terrorism with the insurance industry.
The program terminates on December 31, 2005. The Terrorism Act is applicable to
almost all commercial lines of insurance. Insurance companies with direct
commercial insurance exposure in the United States are required to participate
in the program. Each insurer has a separate deductible in the event of an act of
terrorism before federal assistance becomes available. The deductible is based
on a percentage of direct commercial earned premiums from the previous calendar
year. For 2003, that deductible is 7% of direct commercial premiums earned in
2002. For losses above the deductible, the federal government will pay for 90%
of insured losses, while the insurer contributes 10%. For certain classes of
business, such as workers' compensation, terrorism coverage is mandatory. For
those classes of business where it is not mandatory, insureds may choose not to
accept the terrorism coverage, which would reduce our exposure. As expected, in
2003, most of our middle market commercial insureds have opted for terrorism
coverage. While the provisions of the Terrorism Act will serve to mitigate our
exposure in the event of a large-scale terrorist attack, our deductible is
substantial, approximately $350 million in 2003. Therefore, we continue to
monitor concentrations of risk.
The combined loss and expense ratio, expressed as a percentage, is the
key measure of underwriting profitability traditionally used in the property and
casualty business. We evaluate the performance of our insurance businesses using
the combined loss and expense ratio calculated in accordance with statutory
accounting principles applicable to property and casualty insurance companies.
It is the sum of the ratio of losses to premiums earned (loss ratio) plus the
ratio of statutory 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, policy acquisition and other underwriting expenses are recognized
immediately, not at the time premiums are earned. To convert underwriting
expenses to a GAAP basis, policy acquisition expenses are deferred and
recognized over the period in which the related premiums are earned.
Underwriting results were more profitable in the first six months and
second quarter of 2003 than in the comparable periods in 2002. Our combined loss
and expense ratio was 95.3% in both the first six months and second quarter of
2003 compared with 97.0% and 98.0%, respectively, in 2002.
The loss ratio was 64.8% for the first six months of 2003 and 64.6% for
the second quarter compared with 65.4% and 66.2%, respectively, in the prior
year. The loss ratio was lower in the 2003 periods despite higher catastrophe
losses. Catastrophe losses during the first six months of 2003 amounted to
$165.5 million which represented 3.4 percentage points of the loss ratio
compared with $23.6 million or 0.6 of a percentage point in 2002. Catastrophe
losses for the second quarter of 2003 amounted to $70.6 million or 2.8
percentage points of the loss ratio compared with $10.3 million or 0.5 of a
percentage point in 2002.
Our expense ratio was 30.5% for the first six months of 2003 and 30.7%
for the second quarter compared with 31.6% and 31.8%, respectively, in 2002. The
decrease in the expense ratio was due primarily to lower commissions and to
premiums written growing at a substantially higher rate than overhead expenses,
and was achieved despite a 0.5 of a percentage point adverse impact of expensing
stock options in both periods of 2003.
Page 17
Underwriting results during 2003 and 2002 by class of business were as
follows:
Six Months Ended June 30
---------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------- -----------------
2003 2002 2003 2002
-------- -------- -------- ------
(in millions)
Personal Insurance
Automobile........................ $ 289.3 $ 258.1 100.2% 100.6%
Homeowners........................ 711.3 617.7 105.5 104.0
Other............................. 259.3 240.8 77.3 77.1
-------- -------- ----- -----
Total Personal................ 1,259.9 1,116.6 98.5 97.4
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 532.8 452.4 89.0 100.7
Casualty.......................... 678.6 558.8 87.5 101.2
Workers' Compensation............. 317.5 233.9 91.0 92.9
Property and Marine............... 512.5 414.3 90.8 81.6
-------- -------- ----- -----
Total Commercial.............. 2,041.4 1,659.4 89.1 95.3
-------- -------- ----- -----
Specialty Insurance
Executive Protection.............. 1,001.0 771.5 103.8 102.2
Financial Institutions............ 420.6 340.1 111.7 96.7
Other............................. 569.1 417.4 82.2 90.3
-------- -------- ----- -----
Total Specialty............... 1,990.7 1,529.0 99.3 98.1
-------- -------- ----- -----
Total......................... $5,292.0 $4,305.0 95.3% 97.0%
======== ======== ===== =====
Quarter Ended June 30
---------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------- -----------------
2003 2002 2003 2002
-------- -------- -------- ------
(in millions)
Personal Insurance
Automobile........................ $ 156.4 $ 139.0 99.0% 100.9%
Homeowners........................ 398.8 345.3 97.8 105.9
Other............................. 139.7 129.8 76.9 73.6
-------- -------- ----- -----
Total Personal................ 694.9 614.1 93.8 97.8
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 256.3 205.4 90.0 101.8
Casualty.......................... 334.5 258.0 89.7 102.1
Workers' Compensation............. 129.1 91.1 95.5 96.6
Property and Marine............... 239.2 212.0 93.9 76.2
-------- -------- ----- -----
Total Commercial.............. 959.1 766.5 91.6 95.1
-------- -------- ----- -----
Specialty Insurance
Executive Protection.............. 479.4 382.9 104.1 105.0
Financial Institutions............ 196.8 161.9 112.3 99.2
Other............................. 287.1 188.7 85.3 93.1
-------- -------- ----- -----
Total Specialty............... 963.3 733.5 99.5 100.8
-------- -------- ----- -----
Total......................... $2,617.3 $2,114.1 95.3% 98.0%
======== ======== ===== =====
Page 18
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 24% of
total premiums written in the first six months of 2003, increased by 13% in both
the first six months and second quarter of 2003 compared with the comparable
periods in 2002. Premium growth occurred in all classes. However, as planned,
growth in our in-force policy count continued to slow. The significant premium
growth in our homeowners business was due to higher rates and increased
insurance-to-value; the in-force policy count for this class has remained flat.
Our personal insurance business produced profitable underwriting
results in the first six months of 2003 and 2002. Second quarter results were
profitable in both years, but more so in 2003 due to improved results in the
homeowners class. Results in the first six months and second quarter of 2003
were adversely affected by higher catastrophe losses. The combined loss and
expense ratio was 98.5% in the first six months of 2003 and 93.8% for the second
quarter compared with 97.4% and 97.8%, respectively, in 2002. Excluding
catastrophe losses, the combined ratio was 90.0% in the first six months of 2003
and 87.6% in the second quarter compared with 95.4% and 96.3%, respectively, in
2002.
Homeowners results were unprofitable in the first six months of 2003
and 2002 as higher catastrophe losses in 2003 were substantially offset by a
decrease in non-catastrophe losses and the impact of improved pricing. Despite
higher catastrophe losses, results in the second quarter of 2003 were profitable
compared with unprofitable results in the similar period of 2002. Results in the
first six months and second quarter of 2003 benefited from a decline in fire and
water damage losses compared with the similar periods in 2002. Catastrophe
losses represented 14.7 percentage points of the loss ratio for this class in
the first six months of 2003 and 10.1 percentage points in the second quarter
compared with 3.8 and 3.1 percentage points, respectively, in 2002. Homeowners
results remained unprofitable outside the United States in 2003. We are in the
process of exiting our personal lines business in Continental Europe, with the
exception of the ultra high net worth market segment.
Our remediation plan relating to our homeowners business in the United
States, which began in the latter part of 2001, is on track. We have made
substantial progress in implementing rate increases in states where rates have
been deficient. While the impact of losses related to water damage, including
mold, has decreased in the first six months of 2003 compared with the first six
months of 2002, we remain concerned about the potential for such claims. We have
made regulatory filings in most states to introduce contract changes that would
enable us to treat mold as a separate peril available at an appropriate price.
These changes have been implemented in 33 states, including Texas, California
and Florida, and approved in seven other states.
Our automobile business produced near breakeven results in 2003 and
2002. Other personal coverages, which include insurance for valuable articles
and excess liability, produced highly profitable results in 2003 and 2002 due to
continued favorable loss experience.
Page 19
COMMERCIAL INSURANCE
Premiums from commercial insurance, which represent 38% of our total
writings, increased by 23% in the first six months of 2003 and 25% in the second
quarter compared with the similar periods in 2002. The substantial premium
growth in this business was due to continued price increases and an increase in
our in-force policy count. Growth occurred in all segments of this business but
was particularly strong in the workers' compensation class. We are beginning to
see more competition in the U.S. marketplace, particularly in the property and
multiple peril classes. Despite this, retention levels in the first six months
of 2003 were somewhat higher than those in the same period of 2002. On the
business that was renewed, rate increases were substantial although the level of
rate increases has declined from 2002 levels. During the first half of 2003, we
wrote two dollars of new business for every dollar of business we lost. The
substantial growth in new business was produced with the same tightened
underwriting discipline that has existed over the past several years. We expect
that rates will continue to rise but that the level of rate increases will
continue to decline.
Our commercial insurance business produced profitable underwriting
results in the first six months and second quarter of 2003 and 2002. The 2003
results were exceptionally profitable. The combined loss and expense ratio was
89.1% for the first six months of 2003 and 91.6% for the second quarter compared
with 95.3% and 95.1%, respectively, in 2002. The improvement in 2003 was due in
large part to the cumulative effect of price increases, better terms and
conditions and more stringent risk selection in recent years. The improvement
was most substantial in our commercial multiple peril and casualty classes of
business. The improved casualty results were due in part to the absence of
incurred losses related to asbestos and toxic waste claims. Such losses were $41
million and $19 million, respectively, in the first six months and second
quarter of 2002.
Multiple peril produced highly profitable results in 2003 compared with
near breakeven results in 2002. Both the liability and property components of
this business improved in 2003. In the liability component, we experienced
significantly fewer large losses compared with 2002. In the property component,
an increase in catastrophe losses was more than offset by improved
non-catastrophe loss experience. Catastrophe losses represented 4.4 percentage
points of the loss ratio for this class in the first six months of 2003 and 2.0
points for the second quarter. There were virtually no catastrophe losses for
this class in the similar periods in 2002.
Our casualty business improved considerably in 2003, producing highly
profitable results compared with near breakeven results in the prior year. The
improvement in the first six months of 2003 was primarily in the excess
liability component of this business, which produced profitable results in 2003
compared with unprofitable results in 2002 due to higher rates and the culling
of business where we could not attain price adequacy. The primary liability
component was highly profitable in both years. The automobile component produced
highly profitable results in both years, but more so in 2003. As noted above,
casualty results in 2003 also benefited from an absence of incurred losses
related to asbestos and toxic waste claims.
Workers' compensation results were highly profitable in the first six
months of 2003 and 2002 due in large part to our disciplined risk selection
during the past several years.
Page 20
Property and marine results were highly profitable in both 2003 and
2002. Both years benefited from a low number of severe losses. However, results
were less profitable in 2003 due primarily to higher catastrophe losses and one
$25 million loss in the second quarter that resulted from an adverse arbitration
decision rendered against an insurance pool in which we were formerly a 5.5%
participant. The decision related to a fire that occurred in 1995. Catastrophe
losses represented 7.5 percentage points of the loss ratio for this class in the
first six months of 2003 and 9.2 percentage points in the second quarter
compared with 1.5 percentage points and 1.6 percentage points, respectively, in
2002.
SPECIALTY INSURANCE
Premiums from specialty insurance, which represent 38% of our total
writings, increased by 30% in the first six months of 2003 and 31% in the second
quarter compared with the similar periods a year ago. The growth in executive
protection and the professional liability component of our financial
institutions business was primarily attributable to higher rates. In response to
claim severity trends, we initiated a program in the latter half of 2001 to
increase pricing and improve policy terms and to not renew business that no
longer met our underwriting criteria. We have implemented tighter terms and
conditions, including lower policy limits and higher deductibles. We continue to
reprofile our book of business by reducing the number of Fortune 200 companies
for which we write directors and officers liability coverages. At the same time,
we continue to generate most of our new business from small and middle market
customers. In the fidelity and standard commercial components of our financial
institutions business, rates continued to increase as well. Growth in our other
specialty business was primarily from Chubb Re, our reinsurance business that
began operations in 1999. Premiums produced by Chubb Re grew 85% in the first
six months of 2003 to $350 million.
Our specialty business produced near breakeven underwriting results in
the first six months of 2003 compared with modestly profitable results in 2002.
Results were near breakeven for the second quarter of both years. The combined
loss and expense ratio was 99.3% for the first six months of 2003 and 99.5% for
the second quarter compared with 98.1% and 100.8%, respectively, in 2002.
Our executive protection business produced similarly unprofitable
results in both 2003 and 2002. Results in both years were adversely affected by
directors and officers liability and errors and omissions liability claim
experience, particularly from claims that have arisen due to the corporate
abuses and accounting irregularities in recent years.
Financial institutions results were highly unprofitable in the first
six months of 2003 compared with profitable results in 2002. The fidelity
component of this business was highly profitable in both years due to favorable
loss experience. The standard commercial business written on financial
institutions also produced highly profitable results in both years due in large
part to the rate increases and more stringent risk selection in recent years.
However, results for the professional liability component were highly
unprofitable in both years, but more so in 2003. The deterioration was due to
the same adverse directors and officers liability and errors and omissions
liability claim experience seen in our executive protection business.
Page 21
Our other specialty results were highly profitable in both years, but
more so in 2003 due primarily to improved results in our reinsurance assumed
business generated by Chubb Re and in our surety business. Our surety business
produced highly profitable results in both years, but more so in 2003 due to a
$17 million recovery from the sale of a bankruptcy claim against various Enron
entities.
As a result of disarray in the surety reinsurance market caused by
several years of declining prices and high losses, the availability of surety
reinsurance in the near term has been significantly reduced. As a result, our
future surety results could be volatile.
We have in force several gas forward purchase surety bonds. The total
amount of bonds with one principal, Aquila, Inc., is approximately $535 million.
These bonds are uncollateralized. The combined amount of all other gas forward
surety bonds is approximately $230 million. Approximately $120 million of these
bonds are uncollateralized. Our exposure under these bonds will decline over the
terms of the bonds, the longest of which extends until 2012. There is currently
no reinsurance in place covering our exposure under any of these bonds.
These surety bonds secure the suppliers' obligation to supply gas under
long-term forward purchase agreements. Under the terms of these bonds, our
entire obligation to pay could be triggered if the related supplier failed to
provide gas under its forward purchase contracts or was the subject of a
bankruptcy filing. Each of the suppliers continues to perform its obligations
under the related gas forward purchase agreements. If payment under the Aquila
surety bonds were triggered or if payment under all of the other gas forward
surety bonds were triggered, such payments would have a material adverse effect
on the Corporation's results of operations and liquidity.
SEPTEMBER 11 ATTACK
In the third quarter of 2001, we incurred net costs of $645 million
related to the September 11 attack. We estimate that our gross claims and claim
expenses from the September 11 attack were about $3.2 billion. Most of the
claims were from property exposure and business interruption losses. We also had
significant workers' compensation losses. Our property exposures were protected
by facultative reinsurance, property per risk treaties that limited our net loss
per risk, and our property catastrophe treaties. Our workers' compensation
losses were protected by a casualty catastrophe treaty and a casualty clash
treaty.
Business interruption claims from the September 11 attack will take
some time to resolve, while potential liability claims could take years to
resolve. Therefore, it is possible that our estimate of ultimate gross losses
related to the September 11 attack may change in the future, and that the change
in estimate could have a material effect on the Corporation's results of
operations. However, we do not expect that any such change would have a material
effect on the Corporation's financial condition or liquidity.
Page 22
LOSS RESERVES
Loss reserves at June 30, 2003 and December 31, 2002 included
significant amounts related to the September 11 attack and to asbestos and toxic
waste claims. Loss reserves at December 31, 2002 also included a significant
amount related to our surety exposure arising from the bankruptcy of Enron
Corp., which was substantially paid in the first quarter of 2003. The components
of loss reserves were as follows:
June 30, December 31,
2003 2002
------- ------------
(in millions)
Gross loss reserves
Total, per balance sheet $16,934 $16,713
Less:
Related to September 11 attack 1,286 2,063
Related to asbestos and toxic
waste claims 1,092 1,136
Related to Enron surety exposure 14 113
------- -------
Total, as adjusted $14,542 $13,401
======= =======
Reinsurance recoverable
Total, per balance sheet $ 3,525 $ 4,071
Less:
Related to September 11 attack 887 1,558
Related to asbestos and toxic
waste claims 46 53
Related to Enron surety exposure - 7
------- -------
Total, as adjusted $ 2,592 $ 2,453
======= =======
Net loss reserves
Total $13,409 $12,642
Total, as adjusted 11,950 10,948
The loss reserves related to the September 11 attack, asbestos and
toxic waste claims and our Enron surety exposure are significant components of
our total loss reserves, but they distort the growth trend in our loss reserves.
Adjusted to exclude such loss reserves, our loss reserves, net of reinsurance
recoverable, increased by $1,002 million during the first six months of 2003, of
which approximately $165 million was due to the weakness of the U.S. dollar,
particularly in the second quarter.
Net loss reserves, as adjusted, by segment were as follows:
June 30, December 31,
2003 2002
------- --------
(in millions)
Personal insurance $ 1,139 $ 1,064
Commercial insurance 4,940 4,714
Specialty insurance 5,871 5,170
------- -------
Net loss reserves, as adjusted $11,950 $10,948
======= =======
Page 23
Loss reserves for each segment of our business increased in the first
six months of 2003, but most significantly for specialty insurance. The increase
in loss reserves for specialty insurance was due in large part to directors and
officers and errors and omissions claim activity combined with relatively low
paid losses for these coverages during the period.
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 June 30, 2003 were adequate to cover
claims for losses that had occurred, including both those known to us and those
yet to be reported. In establishing such reserves, we consider facts currently
known and the present state of the law and coverage litigation. However, given
the judicial decisions and legislative actions that have broadened the scope of
coverage and expanded theories of liability in the past and the possibilities of
similar interpretations in the future, particularly as they relate to asbestos
claims and, to a lesser extent, toxic waste claims, additional increases in loss
reserves may emerge in future periods. Such increases could have a material
adverse effect on the Corporation's future operating results. However,
management does not expect that any such increases would have a material effect
on the Corporation's consolidated financial condition or liquidity.
INVESTMENT INCOME
Property and casualty investment income before taxes increased by 10.7%
in the first six months of 2003 and 12.0% in the second quarter compared with
the same periods in 2002. The growth in investment income was due to an increase
in invested assets since the second quarter of 2002 resulting from substantial
cash flow from operations over the period as well as a capital contribution of
$1 billion to the property and casualty subsidiaries by the Corporation in the
fourth quarter of 2002. Growth in investment income 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 six months of 2003 from 17.8% in the comparable period in 2002 due to our
holding a smaller proportion of our investment portfolio in tax-exempt
securities.
On an after-tax basis, property and casualty investment income
increased by 7.7% in the first six months of 2003 and 8.6% in the second
quarter. Management uses property and casualty investment income after-tax, a
non-GAAP financial measure, to evaluate its investment performance because it
reflects the impact of any change in the proportion of the investment portfolio
invested in tax-exempt securities and is therefore more meaningful for analysis
purposes than investment income before taxes.
OTHER CHARGES
Other charges include miscellaneous income and expenses of the property
and casualty subsidiaries. Other charges in the first six months of 2003
included expenses of $15 million related to the restructuring of our operations
in Continental Europe, of which $11 million was expensed in the second quarter.
The restructuring costs consist primarily of severance costs. We have received
the necessary regulatory and works council approvals and are moving ahead with
our planned branch closings and work force reductions, which should be completed
by the end of 2003.
Page 24
CHUBB FINANCIAL SOLUTIONS
Chubb Financial Solutions (CFS) was organized by the Corporation in
2000 to develop and provide customized products to address specific financial
needs of corporate clients. CFS operated through both the capital and insurance
markets. 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.
In April 2003, the Corporation announced its intention to run-off the
financial products portfolio of CFS. We have implemented the plan to exit the
credit derivatives business and we are running off our portfolio. The
Corporation does not intend to write any new credit derivative transactions but
might enter into transactions for hedging and other risk management reasons in
the future.
In a typical portfolio credit default swap, CFS participated in the
senior layer of a structure designed to replicate the performance of a portfolio
of corporate securities, a portfolio of asset-backed securities or a specified
pool of loans. The structure of these portfolio credit default swaps generally
requires CFS to make payment to counterparties to the extent cumulative losses,
related to numerous credit events, exceed a specified threshold. The risk below
that threshold, referred to as subordination, is assumed by other parties with
the primary risk layer sometimes retained by the buyer. The amount of
subordination for each contract varies based on the credit quality of the
underlying portfolio and the term to maturity of the contract. Credit events
generally arise when one of the referenced entities within a portfolio becomes
bankrupt, undergoes a debt restructuring or fails to make timely interest or
principal payments on a senior unsecured debt obligation.
Portfolio credit default swaps are derivatives and are carried in the
financial statements at estimated fair value, which represents management's best
estimate of the cost to exit the positions. Valuation models are used to
estimate the fair value of the obligation in each credit default swap. Such
valuations require considerable judgment and are subject to significant
uncertainty. Changes in fair value are included in income in the period of the
change. Thus, CFS's results are subject to volatility, which could have a
significant effect on the Corporation's results of operations from period to
period.
The fair value of credit default swaps is subject to fluctuations
arising from, among other factors, changes in credit spreads, the financial
ratings of referenced asset-backed securities, actual credit events reducing
subordination, credit correlation within a portfolio, anticipated recovery rates
related to potential defaults and changes in interest rates. Short term
fluctuations in the fair value of CFS's future obligations may have little
correlation to the ultimate profitability of this business. The ultimate
profitability of this business depends on actual credit events over the lives of
the contracts.
Revenues from the non-insurance business of CFS, principally consisting
of the change in fair value of derivative contracts, were $17.9 million in the
first six months of 2003. Revenues were negative $6.8 million in the first six
months of 2002 due to the adverse impact of changes in fair value during the
period. This business produced income before taxes of $8.2 million in the first
six months of 2003 compared with a loss of $15.5 million in 2002. Results for
the first six months of 2003 benefited from the narrowing of corporate credit
spreads, partially offset by deterioration in the credit quality of the
asset-backed portfolios and severance costs.
Page 25
At June 30, 2003, CFS's aggregate exposure, or retained risk, referred
to as notional amounts, from its in-force portfolio credit default swaps was
approximately $43.0 billion. The notional amounts are used to express the extent
of involvement in swap transactions. These amounts are used to calculate the
exchange of contractual cash flows and are not necessarily representative of the
potential for gain or loss. The notional amounts are not recorded on the balance
sheet.
The realistic loss exposure of CFS is a very small portion of the $43.0
billion notional amount due to several factors. The position of CFS is senior to
subordinated interests of $7.3 billion in the aggregate. Of the $7.3 billion of
subordination, there were only $97 million of defaults through June 30, 2003,
none of which has pierced the subordination limits of any of the contracts. In
addition, the underlying credits are primarily investment grade corporate
credits and highly rated asset-backed securities.
In addition to portfolio credit default swaps, CFS entered into a
derivative contract linked to an equity market index and a few other
insignificant non-insurance transactions.
The notional amount and fair value of our future obligations by type of
risk were as follows:
Notional Amount Fair Value
------------------------ -----------------------
June 30, December 31, June 30, December 31,
2003 2002 2003 2002
------- ------------ -------- ------------
(in billions) (in millions)
Credit default swaps
Corporate securities $ 24.6 $ 21.2 $ 56 $ 88
Asset-backed securities 15.6 15.5 133 103
Loan portfolios 2.8 2.0 3 4
------- ------- ---- ----
43.0 38.7 192 195
Other .4 .4 9 9
------- ------- ---- ----
$ 43.4 $ 39.1 $201 $204
======= ======= ==== ====
CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate
invested assets, interest expense and other expenses not allocated to the
operating subsidiaries, and the results of our real estate and other
non-insurance subsidiaries. Corporate and other produced a loss before taxes of
$79.1 million in the first six months of 2003 compared with a loss of $35.7
million in the first six months of 2002. The substantially higher loss in 2003
was due primarily to higher interest expense and lower investment income.
Interest expense was higher in 2003 due to the issuance of $600 million of debt
in the fourth quarter of 2002 and $500 million of debt in the first quarter of
2003. Investment income was lower in 2003 due to the decrease in corporate
invested assets resulting from the capital contribution to the property and
casualty subsidiaries in the fourth quarter of 2002. Results in 2003 were
adversely affected by a significant loss at Chubb Institute, Inc., our computer
training subsidiary, which was offset by income from our investment in Allied
World Assurance Company, Ltd.
Page 26
REAL ESTATE
Real estate operations resulted in a loss before taxes of $2.5 million
in the first six months of 2003 compared with a loss of $1.8 million in the same
period in 2002, which amounts are included in the corporate and other results.
We own approximately $300 million of land that we expect will be
developed in the future. In addition, we own approximately $175 million of
commercial properties and land parcels under lease. We are continuing to explore
the sale of certain of our remaining properties.
Loans receivable, which amounted to $86 million at June 30, 2003, are
primarily purchase money mortgages. Such loans, which were issued in connection
with our joint venture activities and other property sales, are generally
collateralized by buildings and, in some cases, land. We continually evaluate
the ultimate collectibility of such loans and establish appropriate reserves.
The recoverability of the carrying value of our real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The assumptions used reflect future improvement in demand for office
space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. We believe that we have made adequate provisions
for impairment of real estate assets. However, if the assets are not sold or
developed or if leased properties do not perform as presently contemplated, it
is possible that additional impairment losses may be recognized that would have
a material adverse effect on the Corporation's results of operations.
INVESTMENT GAINS AND LOSSES
Net realized investment gains before taxes were $25.2 million in the
first six months of 2003 compared with net gains of $31.6 million for the same
period in 2002.
We regularly review the value of our invested assets for other than
temporary impairment. In evaluating whether a decline in value is other than
temporary, we consider various factors including the length of time and the
extent to which the fair value has been less than the cost, the financial
condition and near term prospects of the issuer, whether the debtor is current
on contractually obligated interest and principal payments, and our intent and
ability to hold the investment for a period of time sufficient to allow us to
recover our cost. If a decline in the fair value of an individual security is
deemed to be other than temporary, the difference between cost and estimated
fair value is charged to income as a realized investment loss. In the first six
months of 2003 and 2002, net realized investment gains and losses reflected
writedowns of $46.9 million and $55.3 million, respectively, due to the
recognition of other than temporary impairment on certain securities.
INCOME TAXES
We establish deferred income taxes on the undistributed earnings of
foreign subsidiaries. Similarly, we establish deferred tax assets related to the
expected future U.S. tax benefit of losses and foreign taxes incurred by our
foreign subsidiaries.
Page 27
At December 31, 2002, the deferred income tax asset related to the
expected future U.S. tax benefit of the losses and foreign taxes incurred by
Chubb Insurance Company of Europe (Chubb Europe) was $140 million. Results in
Chubb Europe were profitable in the first six months of 2003. As a result, this
deferred tax asset was reduced to $120 million at June 30, 2003.
To evaluate the realization of this deferred tax asset, management must
consider whether it is more likely than not that Chubb Europe will generate
sufficient taxable income to realize the future tax benefit of the deferred tax
asset. Management's judgment is based on its assessment of business plans and
related projections of future taxable income that reflect assumptions about
increased premium volume, higher rates and improved policy terms as well as
available tax planning strategies. While the tax loss carryforwards and foreign
tax credits have no expiration and we expect to generate sufficient taxable
income to realize these benefits in the future, we are required under generally
accepted accounting principles to consider a relatively near term horizon when
we evaluate the likelihood of realizing future tax benefits.
During the fourth quarter of 2002, we established a valuation allowance
of $40 million for the portion of the deferred tax asset that we cannot realize
for accounting purposes. We did not adjust the valuation allowance in the first
six months of 2003. If our estimates of future taxable income in Chubb Europe
were revised, we would need to adjust the valuation allowance accordingly.
Depending on the amount of any such adjustment, the effect on the Corporation's
results of operations could be significant.
INVESTED ASSETS
Our investment portfolio is primarily comprised of high quality bonds,
principally tax-exempt, U.S. Treasury, government agency, mortgage-backed
securities and corporate issues. In addition, the portfolio includes equity
securities held primarily with the objective of capital appreciation.
In the first six months of 2003, we invested new cash in tax-exempt
bonds and, to a lesser extent, U.S. Treasury securities and equity securities.
Our objective is to try to achieve the appropriate mix of taxable and tax-exempt
securities in our portfolio to balance both investment and tax strategies.
The unrealized appreciation before tax of investments carried at market
value, which includes fixed maturities classified as available-for-sale and
equity securities, was $1,271 million and $901 million at June 30, 2003 and
December 31, 2002, respectively. Such unrealized appreciation is reflected in a
separate component of other comprehensive income, net of applicable deferred
income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $46 million at June 30, 2003 and $56 million at
December 31, 2002. Such unrealized appreciation was not reflected in the
consolidated financial statements.
Changes in unrealized market appreciation or depreciation of fixed
maturities were due primarily to fluctuations in interest rates.
Page 28
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial
strength of the Corporation and its ability to generate cash flow from its
operating subsidiaries and to borrow funds at competitive rates and raise new
capital to meet operating and growth needs.
CAPITAL RESOURCES
In February 2003, $100 million of 6 7/8% notes were paid when due.
In March 2003, the Corporation issued $225 million of unsecured 3.95%
notes due in 2008 and $275 million of unsecured 5.2% notes due in 2013. Net
proceeds from the issuance of the notes were $495 million.
In June 2003, the 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. In June 2003, the Corporation completed the
following offerings of securities under the shelf registration statement. At
June 30, 2003, the Corporation had approximately $650 million remaining under
the shelf.
The Corporation sold 15,525,000 shares of common stock. Net proceeds
from the sale of the shares were $887 million. Concurrently, the Corporation
issued $460 million of unsecured 2.25% senior notes due in 2008 and 18.4 million
purchase contracts. The senior notes and purchase contracts were issued together
in the form of 7% equity units, each of which initially represents $25 principal
amount of senior notes and one purchase contract. The net proceeds from this
offering were $446 million. Each purchase contract obligates the investor to
purchase for $25 a variable number of shares of the Corporation's common stock
on August 16, 2006. The number of shares to be purchased will be determined
based on a formula that considers the market price of our common stock
immediately prior to the time of settlement in relation to the $59.50 per share
sale price of our common stock at the time the equity units were offered. Upon
settlement of the purchase contracts, the Corporation will receive proceeds of
approximately $460 million and will issue between approximately 6,500,000 and
7,700,000 shares of common stock.
The aggregate net proceeds from the issuance of the notes, the common
stock and the equity units are being used for general corporate purposes,
including capital contributions to our property and casualty subsidiaries to
support growth.
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.
Page 29
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; the 2001 authorization expired on June
30, 2003. The Corporation made no share repurchases during the first six months
of 2003. As of June 30, 2003, 3,287,100 shares remained under the 1998 share
repurchase authorization. We do not anticipate that we will repurchase any
shares of our common stock in 2003.
RATINGS
The Corporation and its insurance subsidiaries are rated by major
rating agencies. These ratings reflect the rating agency's opinion of our
financial strength, operating performance, capital resources, strategic position
and ability to meet our obligations to policyholders.
Ratings are an important factor in establishing our competitive
position in our operating businesses. There can be no assurance that our ratings
will continue for any given period of time or that they will not be changed.
Further reductions in our ratings could adversely affect the competitive
position of our operating businesses.
LIQUIDITY
Liquidity is a measure of our ability to generate sufficient cash flows
to meet the short and long term cash requirements of our business operations.
In our property and casualty subsidiaries, premiums are generally
received months or even years before losses are paid under the policies
purchased by such premiums. These funds are used first to make current claim and
expense payments. The balance is invested to augment the investment income
generated by the existing portfolio. Historically, cash receipts from
operations, consisting of insurance premiums and investment income, have
provided more than sufficient funds to pay losses, operating expenses and
dividends to the Corporation.
New cash from operations available for investment by the property and
casualty subsidiaries was approximately $1,070 million in the first six months
of 2003 compared with $450 million in the same period in 2002. The increase in
new cash in 2003 was due to the significant growth in premium receipts without a
commensurate increase in paid losses or operating expenses.
In addition to the cash from operations, the property and casualty
subsidiaries received a capital contribution from the Corporation of $800
million in June 2003.
Our property and casualty subsidiaries maintain investments in highly
liquid, short-term and other marketable securities to provide for immediate cash
needs.
The Corporation's liquidity requirements are met by dividends from its
property and casualty subsidiaries and the issuance of commercial paper and debt
and equity securities.
Page 30
The Corporation has lines of credit with a group of banks pursuant to
two agreements that provide for unsecured borrowings of up to $500 million in
the aggregate. The $250 million short term revolving credit facility, which was
to have terminated on June 27, 2003, was extended to June 24, 2004. The $250
million medium term revolving credit facility terminates on June 28, 2007. There
have been no borrowings under these agreements.
ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (FIN 46), which requires
an enterprise to assess its interests in a variable interest entity to determine
whether to consolidate that entity. The provisions of FIN 46 are generally
effective for the Corporation beginning in the quarter ending September 30,
2003. The adoption of FIN 46 is not expected to have a significant effect on the
Corporation's financial position or results of operations. FIN 46 is discussed
further in Note (3) of the Notes to Consolidated Financial Statements.
Page 31
Item 4 - Controls and Procedures
As of June 30, 2003, 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 June 30, 2003, 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 32
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
As previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2002, beginning in December 2002, Chubb Indemnity Insurance
Company was served with a number of complaints related to a series of actions
commenced by various plaintiffs against Chubb Indemnity and other non-affiliated
insurers in the District Courts of Nueces and Bexar Counties in Texas. To date,
Chubb Indemnity has been served with a total of 20 complaints in the Texas
actions. The plaintiffs generally allege that Chubb Indemnity and the other
defendants breached duties to asbestos product end-users and conspired to
conceal risks associated with asbestos exposure. The plaintiffs seek to impose
liability on insurers directly. The plaintiffs seek unspecified monetary damages
and punitive damages. In July 2003, the trial court ordered dismissal of seven
of the Nueces County cases and one Nueces County case was voluntarily dismissed
by plaintiffs. Beginning in June 2003, Chubb Indemnity was served with similar
cases in Cuyahoga County, Ohio. To date, Chubb Indemnity has been served in
seven cases in Ohio. The allegations and the damages sought in the Ohio actions
are substantially similar to those in the Texas actions. Chubb Indemnity is
vigorously defending all of these actions.
Page 33
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 April 30, 2003
furnishing under Item 12 thereof (but provided under Item 9 pursuant to
SEC interim filing guidance for Item 12) information with respect to
the issuance of a press release announcing its results for the quarter
ended March 31, 2003 and announcing the availability of a report on the
Registrant's website detailing its previously disclosed year-end 2002
asbestos review and providing copies of such press release and asbestos
review.
The Registrant filed a current report on Form 8-K on June 6, 2003
reporting under Item 5 thereof (a) the election of Robert C. Cox to the
position of Executive Vice President of Chubb & Son and head of Chubb
Specialty Insurance, (b) announcing its preliminary estimate for
after-tax catastrophe losses in the two months ended May 31, 2003 and
(c) announcing that it expected to record in the second quarter an
after-tax charge of $17 million as a result of an adverse arbitration
decision rendered against an insurance pool in which Chubb was formerly
a participant. Reporting under Item 9, the Registrant announced that
its Chief Executive Officer reaffirmed the company's earnings guidance
for 2003.
The Registrant filed a current report on Form 8-K on June 25, 2003
reporting under Item 7 with respect to two underwriting agreements, a
purchase contract agreement and a pledge agreement.
The Registrant filed a current report on Form 8-K on July 30, 2003
furnishing under Item 12 information with respect to the issuance of a
press release announcing its results for the quarter ended June 30,
2003.
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: August 13, 2003