December 11, 2002
Mr. Jonathan G. Katz
RE: FILE NO. S7-43-02
Dear Mr. Katz:
The Chubb Corporation (Chubb) is a holding company with subsidiaries principally engaged in the property and casualty insurance business. We appreciate the opportunity to respond to the proposed rule that would address public companies' disclosure of certain financial information that is derived on the basis of methodologies other than in accordance with generally accepted accounting principles (GAAP).
We support the Commission's objectives to improve the transparency and quality of disclosure of non-GAAP financial measures and related information and to enhance the reporting of earnings information. We agree with the requirement in proposed Regulation G that a non-GAAP financial measure, taken together with the information accompanying that measure, may not contain an untrue statement of a material fact or omit to state a material fact necessary to make the presentation of the non-GAAP financial measure not misleading.
Given that overriding limitation, we believe that non-GAAP financial measures often can provide information that will enhance a reader's understanding of a company's financial condition and results of operations.
We agree with the additional proposed limitations and conditions in Item 10(e)(1)(i) of Regulation S-K that would require companies using non-GAAP financial measures in filings with the Commission to provide:
We believe that such limitations and conditions on the disclosure of non-GAAP financial measures should ensure that investors and analysts fully understand how such non-GAAP measures compare and reconcile to similar GAAP measures and why management believes such non-GAAP measures are useful.
We also support the proposal in Item 10(e)(1)(ii) of Regulation S-K that would prohibit the presentation of non-GAAP financial measures on the face of the financial statements prepared in accordance with GAAP or in the accompanying notes.
We believe, however, that certain of the other proposed prohibitions in Item 10(e)(1)(ii) should be eliminated from any final rule. These are the prohibition on adjusting a non-GAAP performance measure to eliminate items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur, and the prohibition on presenting a non-GAAP per share measure.
We believe that non-GAAP performance measures that eliminate non-recurring, infrequent or unusual items should not be prohibited from a company's filings with the Commission. If a company deems a non-GAAP financial measure to be valuable in evaluating its financial condition and results of operations, it should not be prohibited from presenting and discussing that non-GAAP financial measure as long as the disclosure complies with the limitations and conditions in proposed Item 10 (e)(1)(i) of Regulation S-K and as long as the non-GAAP financial measure does not misstate a material fact or omit to state a material fact.
In the Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, the Commission states that "investors may be better able to see the company through management's eyes if MD&A includes information about the trends that a company's management follows and evaluates in making decisions about how to guide the company's business." We believe that the proposed prohibition of certain non-GAAP financial measures is inconsistent with the Commission's objective to allow investors to see a company through management's eyes.
For Chubb, a property and casualty insurance company, the tragic September 11, 2001 attack in the United States is a recent example of an unusual item that distorted our operating results. We believe that our presentation, which both included and excluded the effects of the September 11 attack, and the discussion of our operating results, which excluded the impact of the September 11 attack, enhanced the reader's understanding of our results of operations. Such disclosure enabled investors and analysts to better evaluate our performance in 2001 and will enable them to compare our 2001 results with our results in 2002 without the distortive effect of the September 11 attack. Without such exclusion, our 2002 results could look significantly better in comparison with our 2001 results, which could create a misleading impression for the reader.
We believe that the prohibition on presenting a non-GAAP per share amount is unnecessary for reasons similar to those described above relating to non-recurring, infrequent or unusual items. We believe it would be sufficient to reconcile both the numerator and denominator of the non-GAAP per share measure with comparable GAAP measures.
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The proposal would also amend Form 8-K to require companies to file a Form 8-K within two days of any earnings release and to file the release as an exhibit.
Historically, companies have included non-GAAP financial measures that eliminate non-recurring, infrequent or unusual items, including related non-GAAP per share measures, in the earnings release to discuss and explain operating trends in a manner that management believed would enhance a reader's understanding of the company's financial condition and results of operations.
As proposed, the earnings release would be subject to the guidance in Item 10(e) of Regulation S-K. Therefore, companies would no longer be able to include certain non-GAAP financial disclosures in the earnings release.
If the Commission decides not to remove from Item 10(e)(1)(ii) of Regulation S-K the prohibitions on adjusting a non-GAAP performance measure to eliminate non-recurring, infrequent or unusual items and on presenting a non-GAAP per share measure, we recommend that the Commission consider amending any final rule to subject the earnings release to the less restrictive Regulation G guidance relating to disclosure of non-GAAP financial measures.
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In summary, we support the Commission's objectives to improve the transparency and quality of disclosure of non-GAAP financial measures and related information and to enhance the reporting of earning information. We agree with the limitations and conditions on disclosing non-GAAP financial measures included in proposed Item 10 (e)(1)(i) of Regulation S-K. However, we believe that if a company complies with these proposed limitations and conditions, it should not be prohibited from making any non-GAAP financial measure disclosures, in total or on a per share basis, that management believes will enhance a reader's understanding of the company's financial condition and results of operations.
We would be pleased to discuss our comments with the Commission or its staff.