FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 |
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OR |
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO |
Commission File No. 1-8661 |
The Chubb Corporation
(Exact name of registrant as specified in its charter)
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New Jersey
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13-2595722 |
(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.) |
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15 Mountain View Road |
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Warren, New Jersey
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07059 |
(Address of principal executive offices) |
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(Zip Code) |
(908) 903-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of each class) |
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(Name of each exchange on which registered)
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Common Stock, par value $1 per share |
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New York Stock Exchange
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Series B Participating Cumulative |
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New York Stock Exchange
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Preferred Stock Purchase Rights |
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ü] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes [ ] No
[ü]
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
[ü] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer [ü]
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Accelerated filer [ ] |
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company) |
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Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
[ ]
No [ü]
The aggregate market value of common stock held by
non-affiliates of the registrant was $21,242,705,472 as of
June 30, 2007, computed on the basis of the closing sale
price of the common stock on that date.
370,249,648
Number of shares of common stock outstanding as of
February 15, 2008
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the 2008 Annual
Meeting of Shareholders are incorporated by reference in
Part III of this Form 10-K.
CONTENTS
2
PART I.
Item 1. Business
General
The Chubb Corporation (Chubb) was incorporated as a business
corporation under the laws of the State of New Jersey in June
1967. Chubb and its subsidiaries are referred to collectively as
the Corporation. Chubb is a holding company for a family of
property and casualty insurance companies known informally as
the Chubb Group of Insurance Companies (the P&C Group).
Since 1882, the P&C Group has provided property and casualty
insurance to businesses and individuals around the world.
According to A.M. Best, the P&C Group is the 11th
largest U.S. property and casualty insurance group based on 2006
net written premiums.
At December 31, 2007, the Corporation had total assets of
$51 billion and shareholders equity of
$14 billion. Revenues, income before income tax and assets
for each operating segment for the three years ended
December 31, 2007 are included in Note (12) of the
Notes to Consolidated Financial Statements. The Corporation
employed approximately 10,600 persons worldwide on
December 31, 2007.
The Corporations principal executive offices are located
at 15 Mountain View Road, Warren, New Jersey 07059, and our
telephone number is (908) 903-2000.
The Corporations internet address is www.chubb.com. The
Corporations annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a)of the Securities Exchange Act of 1934 are
available free of charge on this website as soon as reasonably
practicable after they have been electronically filed with or
furnished to the Securities and Exchange Commission.
Chubbs Corporate Governance Guidelines, charters of
certain key committees of its Board of Directors, Restated
Certificate of Incorporation, By-Laws, Code of Business Conduct
and Code of Ethics for CEO and Senior Financial Officers are
also available on the Corporations website or by writing
to the Corporations Corporate Secretary.
Property and Casualty Insurance
The P&C Group is divided into three strategic business
units. Chubb Commercial Insurance offers a full range of
commercial insurance products, including coverage for multiple
peril, casualty, workers compensation and property and
marine. Chubb Commercial Insurance is known for writing niche
business, where our expertise can add value for our agents,
brokers and policyholders. Chubb Specialty Insurance offers a
wide variety of specialized professional liability products for
privately and publicly owned companies, financial institutions,
professional firms and healthcare organizations. Chubb Specialty
Insurance also includes our surety business. Chubb Personal
Insurance offers products for individuals with fine homes and
possessions who require more coverage choices and higher limits
than standard insurance policies.
In December 2005, the Corporation transferred its ongoing
reinsurance assumed business to Harbor Point Limited. For a
transition period of about two years, Harbor Point underwrote
specific reinsurance business on the P&C Groups
behalf. The P&C Group retained a portion of this business
and ceded the balance to Harbor Point.
The P&C Group provides insurance coverages principally in
the United States, Canada, Europe, Australia, and parts of Latin
America and Asia. Revenues of the P&C Group by geographic
area for the three years ended December 31, 2007 are
included in Note (12) of the Notes to Consolidated
Financial Statements.
The principal members of the P&C Group are Federal Insurance
Company (Federal), Pacific Indemnity Company (Pacific
Indemnity), Vigilant Insurance Company (Vigilant), Great
Northern Insurance Company (Great Northern), Chubb Custom
Insurance Company (Chubb Custom), Chubb National Insurance
Company (Chubb National), Chubb Indemnity Insurance Company
(Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb
New Jersey), Texas Pacific Indemnity
3
Company, Northwestern Pacific Indemnity Company, Executive Risk
Indemnity Inc. (Executive Risk Indemnity) and Executive
Risk Specialty Insurance Company (Executive Risk Specialty) in
the United States, as well as Chubb Atlantic Indemnity Ltd. (a
Bermuda company), Chubb Insurance Company of Canada, Chubb
Insurance Company of Europe, S.A., Chubb Insurance Company of
Australia Limited, Chubb Argentina de Seguros, S.A. and Chubb do
Brasil Companhia de Seguros.
Federal is the manager of Vigilant, Pacific Indemnity, Great
Northern, Chubb National, Chubb Indemnity, Chubb New Jersey,
Executive Risk Indemnity and Executive Risk Specialty. Federal
also provides certain services to other members of the P&C
Group. Acting subject to the supervision and control of the
boards of directors of the members of the P&C Group, Federal
provides day to day executive management and operating personnel
and makes available the economy and flexibility inherent in the
common operation of a group of insurance companies.
Premiums Written
A summary of the P&C Groups premiums written during
the past three years is shown in the following table:
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Direct |
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Reinsurance |
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Reinsurance |
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Net |
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Premiums |
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Premiums |
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Premiums |
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Premiums |
Year |
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Written |
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Assumed(a) |
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Ceded(a) |
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Written |
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(in millions) |
2005
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$ |
12,180 |
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$ |
1,120 |
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$ |
1,017 |
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$ |
12,283 |
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2006
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12,224 |
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954 |
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1,204 |
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11,974 |
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2007
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12,432 |
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775 |
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1,335 |
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11,872 |
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(a) Intercompany items eliminated.
The net premiums written during the last three years for major
classes of the P&C Groups business are included in the
Property and Casualty Insurance Underwriting Results
section of Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A).
One or more members of the P&C Group are licensed and
transact business in each of the 50 states of the United
States, the District of Columbia, Puerto Rico, the Virgin
Islands, Canada, Europe, Australia, and parts of Latin America
and Asia. In 2007, approximately 78% of the
P&C Groups direct business was produced in the
United States, where the P&C Groups businesses enjoy
broad geographic distribution with a particularly strong market
presence in the Northeast. The five states accounting for the
largest amounts of direct premiums written were New York with
12%, California with 9%, Texas with 5%, New Jersey with 5% and
Florida with 5%. No other state accounted for 5% of such
premiums. Approximately 11% of the P&C Groups direct
premiums written was produced in Europe and 5% was produced in
Canada.
Underwriting Results
A frequently used industry measurement of property and casualty
insurance underwriting results is the combined loss and expense
ratio. The P&C Group uses the combined loss and expense
ratio calculated in accordance with statutory accounting
principles applicable to property and casualty insurance
companies. This ratio is the sum of the ratio of losses and loss
expenses 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. Investment income is not
reflected in the combined ratio. The profitability of property
and casualty insurance companies depends on the results of both
underwriting and investments operations.
4
The combined loss and expense ratios during the last three years
in total and for the major classes of the
P&C Groups business are included in the Property
and Casualty Insurance Underwriting Operations
section of MD&A.
Another frequently used measurement in the property and casualty
insurance industry is the ratio of statutory net premiums
written to policyholders surplus. At December 31,
2007 and 2006, the ratio for the P&C Group was .91 and 1.05,
respectively.
Producing and Servicing of Business
The P&C Group does not utilize a significant in-house
distribution model for its products. Instead, in the United
States, the P&C Group offers products through approximately
5,000 independent insurance agencies and accepts business on a
regular basis from approximately 500 insurance brokers. In
most instances, these agencies and brokers also offer products
of other companies that compete with the P&C Group. The
P&C Groups branch and service offices assist these
agencies and brokers in producing and servicing the P&C
Groups business. In addition to the administrative offices
in Warren and Whitehouse Station, New Jersey, the P&C Group
has zone, branch and service offices throughout the United
States.
The P&C Group offers products through approximately
3,000 insurance brokers outside the United States. Local
branch offices of the P&C Group assist the brokers in
producing and servicing the business. In conducting its foreign
business, the P&C Group mitigates the risks relating to
currency fluctuations by generally maintaining investments in
those foreign currencies in which the P&C Group has loss
reserves and other liabilities. The net asset or liability
exposure to the various foreign currencies is regularly reviewed.
Business for the P&C Group is also produced through
participation in certain underwriting pools and syndicates. Such
pools and syndicates provide underwriting capacity for risks
which an individual insurer cannot prudently underwrite because
of the magnitude of the risk assumed or which can be more
effectively handled by one organization due to the need for
specialized loss control and other services.
Reinsurance Ceded
In accordance with the normal practice of the insurance
industry, the P&C Group cedes reinsurance to other insurance
companies. Reinsurance is ceded to provide greater
diversification of risk and to limit the P&C Groups
maximum net loss arising from large risks or from catastrophic
events.
A large portion of the P&C Groups ceded reinsurance is
effected under contracts known as treaties under which all risks
meeting prescribed criteria are automatically covered. Most of
the P&C Groups treaty reinsurance arrangements consist
of excess of loss and catastrophe contracts that protect against
a specified part or all of certain types of losses over
stipulated amounts arising from any one occurrence or event. In
certain circumstances, reinsurance is also effected by
negotiation on individual risks. The amount of each risk
retained by the P&C Group is subject to maximum limits that
vary by line of business and type of coverage. Retention limits
are regularly reviewed and are revised periodically as the
P&C Groups capacity to underwrite risks changes. For a
discussion of the P&C Groups reinsurance program and
the cost and availability of reinsurance, see the Property and
Casualty Insurance Underwriting Results section of
MD&A.
Ceded reinsurance contracts do not relieve the P&C Group of
the primary obligation to its policyholders. Thus, an exposure
exists with respect to reinsurance recoverable to the extent
that any reinsurer is unable to meet its obligations or disputes
the liabilities assumed under the reinsurance contracts. The
collectibility of reinsurance is subject to the solvency of the
reinsurers, coverage interpretations and other factors. The
P&C Group is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers that the P&C Group
believes have strong balance sheets and superior underwriting
ability. The P&C Group monitors the financial strength of
its reinsurers on an ongoing basis.
5
Unpaid Losses and Loss Adjustment Expenses and
Related Amounts Recoverable from Reinsurers
Insurance companies are required to establish a liability in
their accounts for the ultimate costs (including loss adjustment
expenses) of claims that have been reported but not settled and
of claims that have been incurred but not reported. Insurance
companies are also required to report as assets the portion of
such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid losses and
loss adjustment expenses is complex and imprecise as it must
take into consideration many variables that are subject to the
outcome of future events. As a result, informed subjective
estimates and judgments as to our ultimate exposure to losses
are an integral component of our loss reserving process.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for unpaid losses and loss
adjustment expenses. Estimates of the ultimate value of all
unpaid losses are based in part on the development of paid
losses, which reflect actual inflation. Inflation is also
reflected in the case estimates established on reported open
claims which, when combined with paid losses, form another basis
to derive estimates of reserves for all unpaid losses. There is
no precise method for subsequently evaluating the adequacy of
the consideration given to inflation, since claim settlements
are affected by many factors.
The P&C Group continues to emphasize early and accurate
reserving, inventory management of claims and suits, and control
of the dollar value of settlements. The number of outstanding
claims at year-end 2007 was approximately 9% lower than the
number at year-end 2006. The number of new arising claims during
2007 was 4% lower than in the prior year.
Additional information related to the P&C Groups
estimates related to unpaid losses and loss adjustment expenses
and the uncertainties in the estimation process is presented in
the Property and Casualty Insurance Loss Reserves
section of MD&A.
The table on page 7 presents the subsequent development of
the estimated year-end liability for unpaid losses and loss
adjustment expenses, net of reinsurance recoverable, for the ten
years prior to 2007. The Corporation acquired Executive Risk
Inc. in 1999. The amounts in the table for the years 1997 and
1998 do not include Executive Risks unpaid losses and loss
adjustment expenses.
The top line of the table shows the estimated net liability for
unpaid losses and loss adjustment expenses recorded at the
balance sheet date for each of the indicated years. This
liability represents the estimated amount of losses and loss
adjustment expenses for claims arising in all years prior to the
balance sheet date that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to
the P&C Group.
The upper section of the table shows the reestimated amount of
the previously recorded net liability based on experience as of
the end of each succeeding year. The estimate is increased or
decreased as more information becomes known about the frequency
and severity of losses for each individual year. The increase or
decrease is reflected in operating results of the period in
which the estimate is changed. The cumulative deficiency
(redundancy) as shown in the table represents the
aggregate change in the reserve estimates from the original
balance sheet dates through December 31, 2007. The amounts
noted are cumulative in nature; that is, an increase in a loss
estimate that is related to a prior period occurrence generates
a deficiency in each intermediate year. For example, a
deficiency recognized in 2007 relating to losses incurred prior
to December 31, 1997 would be included in the cumulative
deficiency amount for each year in the period 1997 through 2006.
Yet, the deficiency would be reflected in operating results only
in 2007. The effect of changes in estimates of the liabilities
for losses occurring in prior years on income before income
taxes in each of the past three years is shown in the
reconciliation of the beginning and ending liability for unpaid
losses and loss adjustment expenses in the Property and Casualty
Insurance Loss Reserves section of MD&A.
6
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
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December 31 |
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Year Ended |
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1997 |
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1998 |
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1999 |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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(in millions) |
Net Liability for Unpaid Losses and Loss Adjustment Expenses
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$ |
8,564 |
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$ |
9,050 |
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$ |
9,749 |
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$ |
10,051 |
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$ |
11,010 |
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$ |
12,642 |
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$ |
14,521 |
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$ |
16,809 |
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$ |
18,713 |
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$ |
19,699 |
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$ |
20,316 |
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Net Liability Reestimated as of:
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One year later
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8,346 |
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8,855 |
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9,519 |
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9,856 |
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11,799 |
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13,039 |
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14,848 |
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16,972 |
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18,417 |
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19,002 |
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Two years later
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7,900 |
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8,517 |
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9,095 |
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10,551 |
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12,143 |
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13,634 |
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15,315 |
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17,048 |
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17,861 |
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Three years later
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7,565 |
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8,058 |
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9,653 |
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10,762 |
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12,642 |
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14,407 |
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15,667 |
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16,725 |
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Four years later
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7,145 |
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8,527 |
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9,740 |
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11,150 |
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13,246 |
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14,842 |
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15,584 |
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Five years later
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7,571 |
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8,656 |
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9,999 |
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11,605 |
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13,676 |
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14,907 |
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Six years later
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7,694 |
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8,844 |
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10,373 |
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11,936 |
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13,812 |
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Seven years later
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7,822 |
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9,119 |
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10,602 |
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12,019 |
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Eight years later
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8,061 |
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9,324 |
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10,702 |
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Nine years later
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8,247 |
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9,434 |
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Ten years later
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8,383 |
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Total Cumulative Net Deficiency
(Redundancy)
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(181 |
) |
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384 |
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953 |
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1,968 |
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2,802 |
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2,265 |
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1,063 |
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(84 |
) |
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(852 |
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(697 |
) |
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Cumulative Net Deficiency Related to Asbestos and Toxic Waste
Claims (Included in Above Total)
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1,420 |
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1,352 |
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1,305 |
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1,274 |
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1,213 |
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472 |
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222 |
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147 |
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112 |
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88 |
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Cumulative Amount of
Net Liability Paid as of:
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One year later
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1,798 |
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2,520 |
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2,483 |
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2,794 |
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3,085 |
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3,399 |
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3,342 |
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4,031 |
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3,948 |
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3,873 |
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Two years later
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3,444 |
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3,708 |
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4,079 |
|
|
|
4,669 |
|
|
|
5,354 |
|
|
|
5,671 |
|
|
|
6,095 |
|
|
|
6,594 |
|
|
|
6,586 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
4,161 |
|
|
|
4,653 |
|
|
|
5,286 |
|
|
|
5,981 |
|
|
|
6,932 |
|
|
|
7,753 |
|
|
|
8,039 |
|
|
|
8,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
4,711 |
|
|
|
5,351 |
|
|
|
6,139 |
|
|
|
7,012 |
|
|
|
8,390 |
|
|
|
9,147 |
|
|
|
9,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
5,133 |
|
|
|
5,894 |
|
|
|
6,829 |
|
|
|
7,894 |
|
|
|
9,378 |
|
|
|
10,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
5,481 |
|
|
|
6,326 |
|
|
|
7,382 |
|
|
|
8,635 |
|
|
|
10,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
5,807 |
|
|
|
6,680 |
|
|
|
7,926 |
|
|
|
9,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
6,060 |
|
|
|
7,040 |
|
|
|
8,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
6,335 |
|
|
|
7,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
6,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Liability, End of Year
|
|
$ |
9,772 |
|
|
$ |
10,357 |
|
|
$ |
11,435 |
|
|
$ |
11,904 |
|
|
$ |
15,515 |
|
|
$ |
16,713 |
|
|
$ |
17,948 |
|
|
$ |
20,292 |
|
|
$ |
22,482 |
|
|
$ |
22,293 |
|
|
$ |
22,623 |
|
Reinsurance Recoverable, End of Year
|
|
|
1,208 |
|
|
|
1,307 |
|
|
|
1,686 |
|
|
|
1,853 |
|
|
|
4,505 |
|
|
|
4,071 |
|
|
|
3,427 |
|
|
|
3,483 |
|
|
|
3,769 |
|
|
|
2,594 |
|
|
|
2,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability, End of Year
|
|
$ |
8,564 |
|
|
$ |
9,050 |
|
|
$ |
9,749 |
|
|
$ |
10,051 |
|
|
$ |
11,010 |
|
|
$ |
12,642 |
|
|
$ |
14,521 |
|
|
$ |
16,809 |
|
|
$ |
18,713 |
|
|
$ |
19,699 |
|
|
$ |
20,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Gross Liability
|
|
$ |
9,807 |
|
|
$ |
11,050 |
|
|
$ |
13,117 |
|
|
$ |
14,828 |
|
|
$ |
19,243 |
|
|
$ |
19,688 |
|
|
$ |
19,318 |
|
|
$ |
20,119 |
|
|
$ |
21,410 |
|
|
$ |
21,565 |
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
1,424 |
|
|
|
1,616 |
|
|
|
2,415 |
|
|
|
2,809 |
|
|
|
5,431 |
|
|
|
4,781 |
|
|
|
3,734 |
|
|
|
3,394 |
|
|
|
3,549 |
|
|
|
2,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Net Liability
|
|
$ |
8,383 |
|
|
$ |
9,434 |
|
|
$ |
10,702 |
|
|
$ |
12,019 |
|
|
$ |
13,812 |
|
|
$ |
14,907 |
|
|
$ |
15,584 |
|
|
$ |
16,725 |
|
|
$ |
17,861 |
|
|
$ |
19,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gross Deficiency
(Redundancy)
|
|
$ |
35 |
|
|
$ |
693 |
|
|
$ |
1,682 |
|
|
$ |
2,924 |
|
|
$ |
3,728 |
|
|
$ |
2,975 |
|
|
$ |
1,370 |
|
|
$ |
(173 |
) |
|
$ |
(1,072 |
) |
|
$ |
(728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts for the years 1997 and 1998 do not include the
unpaid losses and loss adjustment expenses of Executive Risk,
which was acquired in 1999.
7
The subsequent development of the net liability for unpaid
losses and loss adjustment expenses as of year-ends 1997 through
2003 was adversely affected by substantial unfavorable
development related to asbestos and toxic waste claims. The
cumulative net deficiencies experienced related to asbestos and
toxic waste claims were the result of: (1) an increase in the
actual number of claims filed; (2) an increase in the estimated
number of potential claims; (3) an increase in the severity of
actual and potential claims; (4) an increasingly adverse
litigation environment; and (5) an increase in litigation costs
associated with such claims. For the years 1997 through 1999,
the unfavorable development related to asbestos and toxic waste
claims was offset in varying degrees by favorable loss
experience in the professional liability classes, particularly
directors and officers liability and fiduciary liability. For
2000, in addition to the unfavorable development related to
asbestos and toxic waste claims, there was significant
unfavorable development in the commercial casualty and
workers compensation classes. For the years 2001 through
2003, in addition to the unfavorable development related to
asbestos and toxic waste claims, there was significant
unfavorable development in the professional liability
classes principally directors and officers liability
and errors and omissions liability, due in large part to adverse
loss trends related to corporate failures and allegations of
management misconduct and accounting irregularities
and the commercial casualty classes and, to a lesser extent,
workers compensation. For the years 2005 and 2006, there
was significant favorable development, primarily in the
professional liability classes due to favorable loss trends in
recent years and in the homeowners and commercial property
classes due to lower than expected emergence of losses.
Conditions and trends that have affected development of the
liability for unpaid losses and loss adjustment expenses in the
past will not necessarily recur in the future. Accordingly, it
is not appropriate to extrapolate future redundancies or
deficiencies based on the data in this table.
The middle section of the table on page 7 shows the
cumulative amount paid with respect to the reestimated net
liability as of the end of each succeeding year. For example, in
the 1997 column, as of December 31, 2007 the P&C Group had
paid $6,599 million of the currently estimated
$8,383 million of net losses and loss adjustment expenses
that were unpaid at the end of 1997; thus, an estimated
$1,784 million of net losses incurred on or before December
31, 1997 remain unpaid as of December 31, 2007,
approximately 53% of which relates to asbestos and toxic waste
claims.
The lower section of the table on page 7 shows the gross
liability, reinsurance recoverable and net liability recorded at
the balance sheet date for each of the indicated years and the
reestimation of these amounts as of December 31, 2007.
The liability for unpaid losses and loss adjustment expenses,
net of reinsurance recoverable, reported in the accompanying
consolidated financial statements prepared in accordance with
generally accepted accounting principles (GAAP) comprises the
liabilities of U.S. and foreign members of the P&C Group as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
(in millions) |
U.S. subsidiaries
|
|
$ |
16,597 |
|
|
$ |
16,492 |
|
Foreign subsidiaries
|
|
|
3,719 |
|
|
|
3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,316 |
|
|
$ |
19,699 |
|
|
|
|
|
|
|
|
|
|
Members of the P&C Group are required to file annual
statements with insurance regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities
(statutory basis). The difference between the liability for
unpaid losses and loss expenses reported in the statutory basis
financial statements of the U.S. members of the P&C Group
and such liability reported on a GAAP basis in the consolidated
financial statements is not significant.
8
Investments
Investment decisions are centrally managed by investment
professionals based on guidelines established by management and
approved by the respective boards of directors for each company
in the P&C Group.
Additional information about the Corporations investment
portfolio as well as its approach to managing risks is presented
in the Invested Assets section of MD&A, the Investment
Portfolio section of Quantitative and Qualitative Disclosures
About Market Risk and Note (4) of the Notes to Consolidated
Financial Statements.
The investment results of the P&C Group for each of the past
three years are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Percent Earned |
|
|
Invested |
|
Investment |
|
|
Year |
|
Assets(a) |
|
Income(b) |
|
Before Tax |
|
After Tax |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
2005
|
|
$ |
30,570 |
|
|
$ |
1,315 |
|
|
|
4.30 |
% |
|
|
3.45 |
% |
2006
|
|
|
33,492 |
|
|
|
1,454 |
|
|
|
4.34 |
|
|
|
3.48 |
|
2007
|
|
|
36,406 |
|
|
|
1,590 |
|
|
|
4.37 |
|
|
|
3.50 |
|
|
|
|
|
(a) |
Average of amounts with fixed maturity securities at amortized
cost, equity securities at market value and other invested
assets, which include private equity limited partnerships, at
the P&C Groups equity in the net assets of the
partnerships. |
|
|
|
|
(b) |
Investment income after deduction of investment expenses, but
before applicable income tax. |
Competition
The property and casualty insurance industry is highly
competitive both as to price and service. Members of the P&C
Group compete not only with other stock companies but also with
mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors produce
their business at a lower cost through the use of salaried
personnel rather than independent agents and brokers. Rates are
not uniform among insurers and vary according to the types of
insurers, product coverage and methods of operation. The P&C
Group competes for business not only on the basis of price, but
also on the basis of financial strength, availability of
coverage desired by customers and quality of service, including
claim adjustment service. The P&C Groups products and
services are generally designed to serve specific customer
groups or needs and to offer a degree of customization that is
of value to the insured. The P&C Group continues to work
closely with its customers and to reinforce with them the
stability, expertise and added value the P&C Groups
products provide.
There are approximately 3,100 property and casualty insurance
companies in the United States operating independently or in
groups and no single company or group is dominant. However, the
relatively large size and underwriting capacity of the P&C
Group provide it opportunities not available to smaller
companies.
Regulation and Premium Rates
Chubb is a holding company with subsidiaries primarily engaged
in the property and casualty insurance business and is therefore
subject to regulation by certain states as an insurance holding
company. All states have enacted legislation that regulates
insurance holding company systems such as the Corporation. This
legislation generally provides that each insurance company in
the system is required to register with the department of
insurance of its state of domicile and furnish information
concerning the operations of companies within the holding
company system that may materially affect the operations,
management or financial condition of the insurers within the
system. All transactions within a holding company system
affecting insurers must be fair and equitable. Notice to the
insurance commissioners is required prior to the consummation of
transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any
person in its
9
holding company system and, in addition, certain of such
transactions cannot be consummated without the
commissioners prior approval.
Companies within the P&C Group are subject to regulation and
supervision in the respective states in which they do business.
In general, such regulation is designed to protect the interests
of policyholders, and not necessarily the interests of insurers,
their shareholders and other investors. The extent of such
regulation varies but generally has its source in statutes that
delegate regulatory, supervisory and administrative powers to a
department of insurance. The regulation, supervision and
administration relate, among other things, to: the
standards of solvency that must be met and maintained; the
licensing of insurers and their agents; restrictions on
insurance policy terminations; unfair trade practices; the
nature of and limitations on investments; premium rates;
restrictions on the size of risks that may be insured under a
single policy; deposits of securities for the benefit of
policyholders; approval of policy forms; periodic examinations
of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of companies or
for other purposes; limitations on dividends to policyholders
and shareholders; and the adequacy of provisions for unearned
premiums, unpaid losses and loss adjustment expenses, both
reported and unreported, and other liabilities.
The extent of insurance regulation on business outside the
United States varies significantly among the countries in which
the P&C Group operates. Some countries have minimal
regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are subject to
greater restrictions than domestic competitors. In certain
countries, the P&C Group has incorporated insurance
subsidiaries locally to improve its competitive position.
The National Association of Insurance Commissioners (NAIC) has a
risk-based capital requirement for property and casualty
insurance companies. The risk-based capital formula is used by
state regulatory authorities to identify insurance companies
that may be undercapitalized and that merit further regulatory
attention. The formula prescribes a series of risk measurements
to determine a minimum capital amount for an insurance company,
based on the profile of the individual company. The ratio of a
companys actual policyholders surplus to its minimum
capital requirement will determine whether any state regulatory
action is required. At December 31, 2007, each member of
the P&C Group had more than sufficient capital to meet
the risk-based capital requirement. The NAIC periodically
reviews the risk-based capital formula and changes to the
formula could be considered in the future.
Regulatory requirements applying to premium rates vary from
state to state, but generally provide that rates cannot be
excessive, inadequate or unfairly discriminatory. In many
states, these regulatory requirements can impact the P&C
Groups ability to change rates, particularly with respect
to personal lines products such as automobile and homeowners
insurance, without prior regulatory approval. For example, in
certain states there are measures that limit the use of
catastrophe models or credit scoring as well as premium rate
freezes or limitations on the ability to cancel or nonrenew
certain policies, which can affect the P&C Groups
ability to charge adequate rates.
Subject to legislative and regulatory requirements, the P&C
Groups management determines the prices charged for its
policies based on a variety of factors including loss and loss
adjustment expense experience, inflation, anticipated changes in
the legal environment, both judicial and legislative, and tax
law and rate changes. Methods for arriving at prices vary by
type of business, exposure assumed and size of risk.
Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to
approve changes in those rates that they control and by certain
other matters, such as underwriting selectivity and expense
control.
In all states, insurers authorized to transact certain classes
of property and casualty insurance are required to become
members of an insolvency fund. In the event of the insolvency of
a licensed insurer writing a class of insurance covered by the
fund in the state, companies in the P&C Group, together with
the other fund members, are assessed in order to provide the
funds necessary to pay certain claims against the insolvent
insurer. Generally, fund assessments are proportionately based
on the members written premiums for the classes of
insurance written by the insolvent insurer. In certain states,
the P&C Group can recover a portion of these assessments
through premium tax offsets and
10
policyholder surcharges. In 2007, assessments of the members of
the P&C Group amounted to $9 million. The amount of
future assessments cannot be reasonably estimated.
Insurance regulation in certain states requires the companies in
the P&C Group, together with other insurers operating in the
state, to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations, which are
mechanisms that generally provide applicants with various basic
insurance coverages when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and
workers compensation insurance, but a majority of states
also mandate that insurers, such as the P&C Group,
participate in Fair Plans or Windstorm Plans, which offer basic
property coverages to insureds where not otherwise available.
Some states also require insurers to participate in facilities
that provide homeowners, crime and other classes of insurance
where periodic market constrictions may occur. Participation is
based upon the amount of a companys voluntary written
premiums in a particular state for the classes of insurance
involved. These involuntary market plans generally are
underpriced and produce unprofitable underwriting results.
In several states, insurers, including members of the P&C
Group, participate in market assistance plans. Typically, a
market assistance plan is voluntary, of limited duration and
operates under the supervision of the insurance commissioner to
provide assistance to applicants unable to obtain commercial and
personal liability and property insurance. The assistance may
range from identifying sources where coverage may be obtained to
pooling of risks among the participating insurers. A few states
require insurers, including members of the P&C Group, to
purchase reinsurance from a mandatory reinsurance fund.
Although the federal government and its regulatory agencies
generally do not directly regulate the business of insurance,
federal initiatives often have an impact on the business in a
variety of ways. Current and proposed federal measures that may
significantly affect the P&C Groups business and the
market as a whole include federal terrorism insurance, asbestos
liability reform measures, tort reform, natural catastrophes,
corporate governance, ergonomics, health care reform including
the containment of medical costs, medical malpractice reform and
patients rights, privacy,
e-commerce,
international trade, federal regulation of insurance companies
and the taxation of insurance companies.
Companies in the P&C Group are also affected by a variety of
state and federal legislative and regulatory measures as well as
by decisions of their courts that define and extend the risks
and benefits for which insurance is provided. These include:
redefinitions of risk exposure in areas such as water damage,
including mold, flood and storm surge; products liability and
commercial general liability; credit scoring; and extension and
protection of employee benefits, including workers
compensation and disability benefits.
Pursuant to a December 2006 settlement agreement with the
Attorneys General of New York, Connecticut and Illinois, the
Corporation, among other things, agreed to no longer pay
compensation to agents and brokers in the form of contingent
commissions on all lines of its business. A number of other
property and casualty insurance carriers and a number of
insurance producers also have agreed with various regulatory
agencies to no longer pay or accept, as applicable, contingent
commissions in some or all lines of business. A small number of
states have enacted compensation disclosure rules and it is
possible that additional states may adopt such rules in the
future.
Legislative and judicial developments pertaining to asbestos and
toxic waste exposures are discussed in the Property and Casualty
Insurance Loss Reserves section of MD&A.
Real Estate
The Corporations wholly owned subsidiary, Bellemead
Development Corporation (Bellemead), and its subsidiaries were
involved in commercial development activities primarily in
New Jersey and
11
residential development activities primarily in central Florida.
The real estate operations are in run-off. Additional
information related to the Corporations real estate
operations is included in the Corporate and Other
Real Estate section of MD&A.
Chubb Financial Solutions
Chubb Financial Solutions (CFS) provided customized financial
products to corporate clients. CFSs business was primarily
structured credit derivatives, principally as a counterparty in
portfolio credit default swaps. CFS has been in run-off since
April 2003. Since that date, CFS has terminated early or run-off
nearly all of its contractual obligations within its financial
products portfolio. Additional information related to CFSs
operations is included in the Corporate and Other
Chubb Financial Solutions section of MD&A.
The Corporations business is subject to a number of risks,
including those described below, that could have a material
effect on the Corporations results of operations,
financial condition or liquidity and that could cause our
operating results to vary significantly from period to period.
References to we, us and our
appearing in this
Form 10-K should
be read to refer to the Corporation.
If our property and casualty loss reserves are insufficient,
our results could be adversely affected.
The process of establishing loss reserves is complex and
imprecise as it must take into consideration many variables that
are subject to the outcome of future events. As a result,
informed subjective estimates and judgments as to our ultimate
exposure to losses are an integral component of our loss
reserving process. Variations between our loss reserve estimates
and the actual emergence of losses could be material and could
have a material adverse effect on our results of operations and
financial condition.
A further discussion of the risk factors related to our property
and casualty loss reserves is presented in the Property and
Casualty Insurance Loss Reserves section of MD&A.
The effects of emerging claim and coverage issues on our
business are uncertain.
As industry practices and legal, judicial, social, environmental
and other conditions change, unexpected or unintended issues
related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these issues may not become
apparent for some time after we have written the insurance
policies that are affected by such issues. As a result, the full
extent of liability under our insurance policies may not be
known for many years after the policies are issued. Emerging
claim and coverage issues could have a material adverse effect
on our results of operations and financial condition.
Catastrophe losses could materially and adversely affect our
business.
As a property and casualty insurance holding company, our
insurance operations expose us to claims arising out of
catastrophes. Catastrophes can be caused by various natural
perils, including hurricanes and other windstorms, earthquakes,
severe winter weather and brush fires. Catastrophes can also be
man-made, such as a terrorist attack. The frequency and severity
of catastrophes are inherently unpredictable. It is possible
that both the frequency and severity of natural and man-made
catastrophic events will increase.
The extent of losses from a catastrophe is a function of both
the total amount of exposure under our insurance policies in the
area affected by the event and the severity of the event. Most
catastrophes are restricted to relatively small geographic
areas; however, hurricanes and earthquakes may produce
significant damage over larger areas, especially those that are
heavily populated. Natural or man-made catastrophic events could
cause claims under our insurance policies to be higher than we
12
anticipated and could cause substantial volatility in our
financial results for any fiscal quarter or year. Our ability to
write new business could also be affected. We believe that
increases in the value and geographic concentration of insured
property and the effects of inflation could increase the
severity of claims from catastrophic events in the future. In
addition, states have from time to time passed legislation that
has the effect of limiting the ability of insurers to manage
catastrophe risk, such as legislation prohibiting insurers from
withdrawing from catastrophe-exposed areas.
As a result of the foregoing, it is possible that the occurrence
of any natural or man-made catastrophic event could have a
material adverse effect on our business, results of operations,
financial condition and liquidity. A further discussion of the
risk factors related to catastrophes is presented in the
Property and Casualty Insurance Catastrophe Risk
Management section of MD&A.
The occurrence of certain catastrophic events could have a
materially adverse effect on our systems and could impact our
ability to conduct business effectively.
Our computer, information technology and telecommunications
systems, which we use to conduct our business, interface with
and rely upon third-party systems. Systems failures or outages
could compromise our ability to perform business functions in a
timely manner, which could harm our ability to conduct business
and hurt our relationships with our business partners and
customers. In the event of a disaster such as a natural
catastrophe, an industrial accident, a blackout, a computer
virus, a terrorist attack or war, our systems may be
inaccessible to our employees, customers or business partners
for an extended period of time. Even if our employees or third
party providers are able to report to work, they may be unable
to perform their duties for an extended period of time if our
computer, information technology or telecommunication systems
are disabled or destroyed. Our systems could also be subject to
physical and electronic break-ins, and subject to similar
disruptions from unauthorized tampering. This may impede or
interrupt our business operations, which could have a material
adverse effect on our results of operations and financial
condition.
If we experience difficulties with outsourcing relationships,
our ability to conduct our business might be negatively
impacted.
We outsource certain business and administrative functions to
third parties. If we fail to develop and implement our
outsourcing strategies or our third party providers fail to
perform as anticipated, we may experience operational
difficulties, increased costs and a loss of business that may
have a material adverse effect on our results of operations and
financial condition.
The failure of the risk mitigation strategies we utilize
could have a material adverse effect on our financial condition
or results of operations.
We utilize a number of strategies to mitigate our risk exposure,
such as:
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engaging in vigorous underwriting; |
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carefully evaluating terms and conditions of our policies; |
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focusing on our risk aggregations by geographic zones, industry
type, credit exposure and other bases; and |
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ceding reinsurance. |
However, there are inherent limitations in all of these tactics
and no assurance can be given that an event or series of
unanticipated events will not result in loss levels in excess of
our probable maximum loss models, which could have a material
adverse effect on our financial condition or results of
operations.
13
Reinsurance coverage may not be available to us in the future
at commercially reasonable rates or at all and we may not be
able to collect all amounts due to us from reinsurers from whom
we have purchased coverage.
The availability and cost of reinsurance are subject to
prevailing market conditions that are beyond our control. No
assurances can be made that reinsurance will remain continuously
available to us in amounts that we consider sufficient and at
prices that we consider acceptable, which would cause us to
increase the amount of risk we retain, reduce the amount of
business we underwrite or look for alternatives to reinsurance.
This, in turn, could have a material adverse effect on our
financial condition or results of operations.
With respect to reinsurance coverages we have purchased, our
ability to recover amounts due from reinsurers may be affected
by the creditworthiness and willingness to pay of the reinsurers
from whom we have purchased coverage. The inability or
unwillingness of any of our reinsurers to meet their obligations
to us could have a material adverse effect on our results of
operations.
Cyclicality of the property and casualty insurance industry
may cause fluctuations in our results.
The property and casualty insurance business historically has
been cyclical, experiencing periods characterized by intense
price competition, relatively low premium rates and less
restrictive underwriting standards followed by periods of
relatively low levels of competition, high premium rates and
more selective underwriting standards. We expect this
cyclicality to continue. The periods of intense price
competition in the cycle could adversely affect our financial
condition, profitability or cash flows.
A number of factors, including many that are volatile and
unpredictable, can have a significant impact on cyclical trends
in the property and casualty insurance industry and the
industrys profitability. These factors include:
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an apparent trend of courts to grant increasingly larger awards
for certain damages; |
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catastrophic hurricanes, windstorms, earthquakes and other
natural disasters, as well as the occurrence of man-made
disasters (e.g., a terrorist attack); |
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availability, price and terms of reinsurance; |
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fluctuations in interest rates; |
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changes in the investment environment that affect market prices
of and income and returns on investments; and |
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inflationary pressures that may tend to affect the size of
losses experienced by insurance companies. |
We cannot predict whether or when market conditions will
improve, remain constant or deteriorate. Negative market
conditions may impair our ability to write insurance at rates
that we consider appropriate relative to the risk assumed. If we
cannot write insurance at appropriate rates, our ability to
transact business would be materially and adversely affected.
Payment of obligations under surety bonds could adversely
affect our future operating results.
The surety business tends to be characterized by infrequent but
potentially high severity losses. The majority of our surety
obligations are intended to be performance-based guarantees.
When losses occur, they may be mitigated, at times, by recovery
rights to the customers assets, contract payments,
collateral and bankruptcy recoveries. We have substantial
commercial and construction surety exposure for current and
prior customers. In that regard, we have exposures related to
surety bonds issued on behalf of companies that have experienced
or may experience deterioration in creditworthiness. If the
financial condition of these companies were adversely affected
by the economy or otherwise, we may experience an increase in
filed claims and may incur high severity losses, which could
have a material adverse effect on our results of operations.
14
A downgrade in our credit ratings and financial strength
ratings could adversely impact the competitive positions of our
operating businesses.
Credit ratings and financial strength ratings can be important
factors in establishing our competitive position in the
insurance markets. There can be no assurance that our ratings
will continue for any given period of time or that they will not
be changed. If our credit ratings were downgraded in the future,
we could incur higher borrowing costs and may have more limited
means to access capital. In addition, a downgrade in our
financial strength ratings could adversely affect the
competitive position of our insurance operations, including a
possible reduction in demand for our products in certain markets.
Our businesses are heavily regulated, and changes in
regulation may reduce our profitability and limit our growth.
Our insurance subsidiaries are subject to extensive regulation
and supervision in the jurisdictions in which they conduct
business. This regulation is generally designed to protect the
interests of policyholders, and not necessarily the interests of
insurers, their shareholders or other investors. The regulation
relates to authorization for lines of business, capital and
surplus requirements, investment limitations, underwriting
limitations, transactions with affiliates, dividend limitations,
changes in control, premium rates and a variety of other
financial and nonfinancial components of an insurance
companys business.
Virtually all states in which we operate require us, together
with other insurers licensed to do business in that state, to
bear a portion of the loss suffered by some insureds as the
result of impaired or insolvent insurance companies. In
addition, in various states, our insurance subsidiaries must
participate in mandatory arrangements to provide various types
of insurance coverage to individuals or other entities that
otherwise are unable to purchase that coverage from private
insurers. A few states require us to purchase reinsurance from a
mandatory reinsurance fund. Such reinsurance funds can create a
credit risk for insurers if not adequately funded by the state
and, in some cases, the existence of a reinsurance fund could
affect the prices charged for our policies. The effect of these
and similar arrangements could reduce our profitability in any
given period or limit our ability to grow our business.
In recent years, the state insurance regulatory framework has
come under increased scrutiny, including scrutiny by federal
officials, and some state legislatures have considered or
enacted laws that may alter or increase state authority to
regulate insurance companies and insurance holding companies.
Further, the NAIC and state insurance regulators are continually
reexamining existing laws and regulations, specifically focusing
on modifications to statutory accounting principles,
interpretations of existing laws and the development of new laws
and regulations. Any proposed or future legislation or NAIC
initiatives, if adopted, may be more restrictive on our ability
to conduct business than current regulatory requirements or may
result in higher costs.
We cannot predict the outcome of the investigations into
business practices in the property and casualty insurance
industry or related legal proceedings, including any potential
amounts that we may be required to pay.
In recent years, Attorneys General and regulatory authorities of
several states, the U.S. Securities and Exchange Commission, the
U.S. Attorney for the Southern District of New York and
certain non-U.S. regulatory authorities commenced
investigations into certain business practices in the property
and casualty insurance industry involving, among other things,
(1) the payment of contingent commissions to brokers and
agents and (2) loss mitigation and finite reinsurance
arrangements. We have received, and may continue to receive,
subpoenas and other information requests from Attorneys General
or other regulatory agencies regarding similar issues.
15
In August 2007, the Attorney General of Ohio filed an action
against us, as well as several other insurers and one broker, as
a result of the Ohio Attorney Generals business practices
investigation. Although no other Attorney General or regulator
has initiated an action against us and we have settled matters
arising out of the investigations into business practices in the
property and casualty insurance market by the Attorneys General
of Connecticut, Illinois and New York, it is possible that such
an action may be brought against us with respect to some or all
of the issues that are the focus of the ongoing investigations.
In addition, we have been named in legal proceedings brought by
private plaintiffs arising out of these investigations. We
cannot predict the ultimate outcome of these or any future
investigations or legal proceedings, including any potential
amounts that we may be required to pay in connection with them.
In addition, it is possible that one or more jurisdictions may
adopt regulatory reforms as a result of these investigations. We
cannot predict the impact of any such regulatory reforms on our
ability to renew business or write new business.
Intense competition for our products could harm our ability
to maintain or increase our profitability and premium volume.
The property and casualty insurance industry is highly
competitive. We compete not only with other stock companies but
also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. We compete for business not
only on the basis of price, but also on the basis of financial
strength, availability of coverage desired by customers and
quality of service, including claim adjustment service. We may
have difficulty in continuing to compete successfully on any of
these bases in the future.
If competition limits our ability to write new business at
adequate rates, our results of operations could be adversely
affected.
We are dependent on a distribution network comprised of
independent insurance brokers and agents to distribute our
products.
We generally do not use salaried employees to promote or
distribute our insurance products. Instead, we rely on a large
number of independent insurance brokers and agents. Accordingly,
our business is dependent on the willingness of these brokers
and agents to recommend our products to their customers.
Deterioration in relationships with our broker and agent
distribution network could materially and adversely affect our
ability to sell our products, which, in turn, could have a
material adverse effect on our results of operations and
financial condition.
The inability of our insurance subsidiaries to pay dividends
in sufficient amounts would harm our ability to meet our
obligations and to pay future dividends.
As a holding company, Chubb relies primarily on dividends from
its insurance subsidiaries to meet its obligations for payment
of interest and principal on outstanding debt obligations and to
pay dividends to shareholders. The ability of our insurance
subsidiaries to pay dividends in the future will depend on their
statutory surplus, on earnings and on regulatory restrictions.
We are subject to regulation by some states as an insurance
holding company system. Such regulation generally provides that
transactions between companies within the holding company system
must be fair and equitable. Transfers of assets among affiliated
companies, certain dividend payments from insurance subsidiaries
and certain material transactions between companies within the
system may be subject to prior notice to, or prior approval by,
state regulatory authorities. The ability of our insurance
subsidiaries to pay dividends is also restricted by regulations
that set standards of solvency that must be met and maintained,
that limit investments and that limit dividends to shareholders.
These regulations may affect Chubbs insurance
subsidiaries ability to provide Chubb with dividends.
16
Our investments may suffer reduced returns or losses.
The returns on our investment portfolio may be reduced or we may
incur losses as a result of changes in general economic
conditions, exchange rates, global capital market conditions and
numerous other factors that are beyond our control. These
factors may cause us to realize less than expected returns on
invested assets, sell investments for a loss or write off or
write down investments, any of which could have a material
adverse effect on our results of operations or financial
condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The executive offices of the Corporation are in Warren, New
Jersey. The administrative offices of the P&C Group are
located in Warren and Whitehouse Station, New Jersey. The
P&C Group maintains zone, branch and service offices in
major cities throughout the United States and also has offices
in Canada, Europe, Australia, Latin America and Asia. Office
facilities are leased with the exception of buildings in
Whitehouse Station, New Jersey and Simsbury, Connecticut.
Management considers its office facilities suitable and adequate
for the current level of operations.
Item 3. Legal Proceedings
As previously disclosed, beginning in December 2002, Chubb
Indemnity was named in a series of actions commenced by various
plaintiffs against Chubb Indemnity and other non-affiliated
insurers in the District Courts in Nueces, Travis and Bexar
Counties in Texas. 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. Pursuant to the asbestos reform
bill passed by the Texas legislature in May 2005, these actions
were transferred to the Texas state asbestos Multidistrict
Litigation on December 1, 2005. Chubb Indemnity is
vigorously defending all of these actions and has been
successful in getting a number of them dismissed through summary
judgment, special exceptions, or voluntary withdrawal by the
plaintiff.
Beginning in June 2003, Chubb Indemnity was also named in a
number of similar cases in Cuyahoga, Mahoning, and Trumbull
Counties in Ohio. The allegations and the damages sought in the
Ohio actions are substantially similar to those in the Texas
actions. In May 2005, the Ohio Court of Appeals sustained the
trial courts dismissal of a group of nine cases for
failure to state a claim. Following the appellate courts
decision, Chubb Indemnity and other non-affiliated insurers were
dismissed from the remaining cases filed in Ohio, except for a
single case which had been removed to federal court and
transferred to the federal asbestos Multidistrict Litigation.
There has been no activity in that case since its removal.
In December 2007, certain of Chubbs subsidiaries were
named in an action filed in the Superior Court of Los Angeles
County, California that contains allegations similar to those
made in the Texas and Ohio actions. The subsidiaries are
vigorously defending this action.
As previously disclosed, Chubb and certain of its subsidiaries
have been involved in the investigations of certain business
practices in the property and casualty insurance industry by
various Attorneys General and other regulatory authorities of
several states, the U.S. Securities and Exchange
Commission, the U.S. Attorney for the Southern District of
New York and certain non-U.S. regulatory authorities with
respect to, among other things, (1) potential conflicts of
interest and anti-competitive behavior arising from the payment
of contingent commissions to brokers and agents and
(2) loss mitigation and finite reinsurance arrangements. In
connection with these investigations, Chubb and certain of its
subsidiaries received subpoenas and other requests for
information from various regulators. The Corporation has been
cooperating fully with these investigations. In December 2006,
the Corporation settled with the Attorneys General of New York,
Connecticut and Illinois all issues arising out of their
investigations. As described in more detail below, the Attorney
General of Ohio in
17
August 2007 filed an action against Chubb and certain of its
subsidiaries, as well as several other insurers and one broker,
as a result of the Ohio Attorney Generals business
practices investigation. Although no other Attorney General or
regulator has initiated an action against the Corporation, it is
possible that such an action may be brought against the
Corporation with respect to some or all of the issues that are
the focus of these ongoing investigations.
As previously disclosed, individual actions and purported class
actions arising out of the investigations into the payment of
contingent commissions to brokers and agents have been filed in
a number of federal and state courts. On August 1, 2005,
Chubb and certain of its subsidiaries were named in a putative
class action entitled In re Insurance Brokerage Antitrust
Litigation in the U.S. District Court for the District
of New Jersey. This action, brought against several brokers and
insurers on behalf of a class of persons who purchased insurance
through the broker defendants, asserts claims under the Sherman
Act and state law and the Racketeer Influenced and Corrupt
Organizations Act (RICO) arising from the alleged unlawful use
of contingent commission agreements.
Chubb and certain of its subsidiaries have also been named as
defendants in two purported class actions relating to
allegations of unlawful use of contingent commission
arrangements that were originally filed in state court. The
first was filed on February 16, 2005 in Seminole County,
Florida. The second was filed on May 17, 2005 in Essex
County, Massachusetts. Both cases were removed to federal court
and then transferred by the Judicial Panel on Multidistrict
Litigation to the U.S. District Court for the District of
New Jersey for consolidation with the In re Insurance
Brokerage Antitrust Litigation. Since being transferred to
the District of New Jersey, the plaintiff in the former action
has been inactive, and that action currently is stayed. The
latter action has been voluntarily dismissed. On
September 28, 2007, the U.S. District Court for the
District of New Jersey dismissed the second amended complaint
filed by the plaintiffs in In re Insurance Brokerage
Antitrust Litigation in its entirety. In so doing, the court
dismissed the plaintiffs Sherman Act and RICO claims with
prejudice for failure to state a claim, and it dismissed the
plaintiffs state law claims without prejudice because it
declined to exercise supplemental jurisdiction over them. The
plaintiffs have appealed the dismissal of their second amended
complaint to the U.S. Court of Appeals for the Third Circuit,
and that appeal is currently pending.
In December 2005, Chubb and certain of its subsidiaries were
named in a putative class action similar to the In re
Insurance Brokerage Antitrust Litigation. The action is
pending in the U.S. District Court for the District of New
Jersey and has been assigned to the judge who is presiding over
the In re Insurance Brokerage Antitrust Litigation. The
complaint has never been served in this matter. Separately, in
April 2006, Chubb and one of its subsidiaries were named in an
action similar to the In re Insurance Brokerage Antitrust
Litigation. This action was filed in the U.S. District Court
for the Northern District of Georgia and subsequently was
transferred by the Judicial Panel on Multidistrict Litigation to
the U.S. District for the District of New Jersey for
consolidation with the In re Insurance Brokerage Antitrust
Litigation. This action currently is stayed. On May 21,
2007, Chubb and one of its subsidiaries were named as defendants
in another action similar to In re Insurance Brokerage
Antitrust Litigation. This action was filed in the
U.S. District Court for the District of New Jersey and
consolidated with In re Insurance Brokerage Antitrust
Litigation. This action currently is stayed.
On October 12, 2007, certain of Chubbs subsidiaries
were named as defendants in an action similar to In re
Insurance Brokerage Antitrust Litigation. This action was
filed in the U.S. District Court for the Northern District
of Georgia. This action has been identified to the Judicial
Panel on Multidistrict Litigation as a potential tag-along
action to In re Insurance Brokerage Antitrust
Litigation. The Corporation currently anticipates that this
action will be transferred by the Judicial Panel on
Multidistrict Litigation to the U.S. District Court for the
District of New Jersey and consolidated with In re Insurance
Brokerage Antitrust Litigation.
On August 24, 2007, Chubb and certain of its subsidiaries
were named as defendants in an action filed by the Ohio Attorney
General against several insurers and one broker. This action
alleges
18
violations of Ohios antitrust laws. On November 18,
2007, the Corporation filed a motion to dismiss the Attorney
Generals complaint which is still pending.
In these actions, the plaintiffs generally allege that the
defendants unlawfully used contingent commission agreements and
conspired to reduce competition in the insurance markets. The
actions seek treble damages, injunctive and declaratory relief,
and attorneys fees. The Corporation believes it has
substantial defenses to all of the aforementioned legal
proceedings and intends to defend the actions vigorously. It is
possible that the Corporation may become involved in additional
litigation of this sort.
Information regarding certain litigation to which the P&C
Group is a party is included in the Property and Casualty
Insurance Loss Reserves section of MD&A.
Chubb and its subsidiaries are also defendants in various
lawsuits arising out of their businesses. It is the opinion of
management that the final outcome of these matters will not
materially affect the Corporations results of operations
or financial condition.
Item 4. Submission of Matters to a Vote of
Security Holders
No matters were submitted to a vote of the shareholders during
the quarter ended December 31, 2007.
Executive Officers of the Registrant
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Year of |
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Age(a) |
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Election(b) |
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John D. Finnegan, Chairman, President and Chief Executive Officer
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59 |
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2002 |
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Maureen A. Brundage, Executive Vice President and General Counsel
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51 |
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2005 |
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Robert C. Cox, Executive Vice President of Chubb & Son,
a division of Federal
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50 |
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2003 |
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John J. Degnan, Vice Chairman and Chief Administrative Officer
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63 |
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1994 |
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Paul J. Krump, Executive Vice President of Chubb & Son, a
division of Federal
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48 |
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2001 |
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Andrew A. McElwee, Jr., Executive Vice President of Chubb &
Son, a division of Federal
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53 |
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1997 |
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Thomas F. Motamed, Vice Chairman and Chief Operating Officer
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59 |
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1997 |
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Dino E. Robusto, Executive Vice President of Chubb & Son, a
division of Federal
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49 |
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2006 |
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Michael OReilly, Vice Chairman and Chief Financial Officer
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64 |
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1976 |
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Henry B. Schram, Senior Vice President and Chief Accounting
Officer
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61 |
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1985 |
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(a) Ages listed above are as of April 29, 2008.
(b) Date indicates year first elected or designated as an
executive officer.
All of the foregoing officers serve at the pleasure of the Board
of Directors of the Corporation and have been employees of the
Corporation for more than five years except for
Ms. Brundage.
Before joining the Corporation in 2005, Ms. Brundage was a
partner in the law firm of White & Case LLP, where
she headed the securities practice in New York and co-chaired
its global securities practice.
19
PART II.
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Item 5. |
Market for the Registrants Common Stock and Related
Stockholder Matters |
The common stock of Chubb is listed and principally traded on
the New York Stock Exchange (NYSE) under the trading symbol
CB. The following are the high and low closing sale
prices as reported on the NYSE Composite Tape and the quarterly
dividends declared per share for each quarter of 2007 and 2006.
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2007 |
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First |
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Second |
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Third |
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Fourth |
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Quarter |
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Quarter |
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Quarter |
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Quarter |
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Common stock prices
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High
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$ |
53.34 |
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|
$ |
55.91 |
|
|
$ |
54.63 |
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$ |
55.52 |
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Low
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|
48.82 |
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|
51.68 |
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|
47.36 |
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|
49.80 |
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Dividends declared
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|
.29 |
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|
.29 |
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.29 |
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.29 |
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2006 |
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First |
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Second |
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Third |
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Fourth |
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Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
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Common stock prices
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High
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|
$ |
49.45 |
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|
$ |
52.55 |
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|
$ |
52.55 |
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$ |
54.65 |
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Low
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|
46.80 |
|
|
|
47.60 |
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|
|
47.40 |
|
|
|
51.35 |
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Dividends declared
|
|
|
.25 |
|
|
|
.25 |
|
|
|
.25 |
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|
.25 |
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At February 15, 2008, there were approximately
9,300 common shareholders of record.
The declaration and payment of future dividends to Chubbs
shareholders will be at the discretion of Chubbs Board of
Directors and will depend upon many factors, including the
Corporations operating results, financial condition and
capital requirements, and the impact of regulatory constraints
discussed in Note (19)(f) of the Notes to Consolidated
Financial Statements.
The following table summarizes the stock repurchased by Chubb
during each month in the quarter ended December 31, 2007.
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Total Number of |
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Maximum Number of |
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Total |
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|
|
Shares Purchased as |
|
Shares that May Yet Be |
|
|
Number of |
|
|
|
Part of Publicly |
|
Purchased Under |
|
|
Shares |
|
Average Price |
|
Announced Plans or |
|
the Plans or |
Period |
|
Purchased(a) |
|
Paid Per Share |
|
Programs |
|
Programs(b) |
|
|
|
|
|
|
|
|
|
October 2007
|
|
|
1,183,564 |
|
|
$ |
53.96 |
|
|
|
1,183,564 |
|
|
|
6,742,558 |
|
November 2007
|
|
|
2,402,166 |
|
|
|
51.87 |
|
|
|
2,402,166 |
|
|
|
4,340,392 |
|
December 2007
|
|
|
6,227,722 |
|
|
|
54.07 |
|
|
|
6,227,722 |
|
|
|
26,112,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,813,452 |
|
|
|
53.52 |
|
|
|
9,813,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The stated amounts exclude 28,677 shares,
42,773 shares and 6,803 shares delivered to Chubb
during the months of October 2007, November 2007 and
December 2007, respectively, by employees of the
Corporation to cover option exercise prices and withholding
taxes in connection with the Corporations stock-based
compensation plans. |
|
|
(b) |
On December 7, 2006, the Board of Directors authorized the
repurchase of up to 20,000,000 shares of common stock. On
March 21, 2007, the Board of Directors authorized an
increase of 20,000,000 shares to the authorization approved
in December 2006. No shares remain under this share repurchase
authorization. On December 13, 2007, the Board of Directors
authorized the repurchase of up to 28,000,000 additional
shares of common stock. The authorization has no expiration date. |
20
Stock Performance Graph
The following performance graph compares the performance of
Chubbs common stock during the five-year period from
December 31, 2002 through December 31, 2007 with the
performance of the Standard & Poors 500 Index and
the Standard & Poors Property & Casualty Insurance
Index. The graph plots the changes in value of an initial
$100 investment over the indicated time periods, assuming
all dividends are reinvested.
Cumulative Total Return
Based upon an initial investment of $100 on December 31,
2002
with dividends reinvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chubb
|
|
$ |
100 |
|
|
$ |
134 |
|
|
$ |
154 |
|
|
$ |
200 |
|
|
$ |
221 |
|
|
$ |
233 |
|
S&P 500
|
|
|
100 |
|
|
|
129 |
|
|
|
143 |
|
|
|
150 |
|
|
|
173 |
|
|
|
183 |
|
S&P 500 Property & Casualty Insurance
|
|
|
100 |
|
|
|
126 |
|
|
|
140 |
|
|
|
161 |
|
|
|
181 |
|
|
|
156 |
|
Our filings with the Securities and Exchange Commission (SEC)
may incorporate information by reference, including this Form
10-K. Unless we specifically state otherwise, the information
under this heading Stock Performance Graph shall not
be deemed to be soliciting materials and shall not
be deemed to be filed with the SEC or incorporated
by reference into any of our filings under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.
21
Item 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions except for per share amounts) |
FOR THE YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$ |
11,946 |
|
|
$ |
11,958 |
|
|
$ |
12,176 |
|
|
$ |
11,636 |
|
|
$ |
10,183 |
|
|
|
Investment Income
|
|
|
1,622 |
|
|
|
1,485 |
|
|
|
1,342 |
|
|
|
1,207 |
|
|
|
1,083 |
|
|
|
Other Revenues
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
154 |
|
|
|
315 |
|
|
|
181 |
|
|
|
116 |
|
|
|
44 |
|
|
Realized Investment Gains
|
|
|
374 |
|
|
|
245 |
|
|
|
384 |
|
|
|
218 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
14,107 |
|
|
$ |
14,003 |
|
|
$ |
14,083 |
|
|
$ |
13,177 |
|
|
$ |
11,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Income (a)
|
|
$ |
2,116 |
|
|
$ |
1,905 |
|
|
$ |
921 |
(b) |
|
$ |
846 |
|
|
$ |
105 |
|
|
|
Investment Income
|
|
|
1,590 |
|
|
|
1,454 |
|
|
|
1,315 |
|
|
|
1,184 |
|
|
|
1,058 |
|
|
|
Other Income (Charges)
|
|
|
6 |
|
|
|
10 |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
Insurance Income
|
|
|
3,712 |
|
|
|
3,369 |
|
|
|
2,235 |
|
|
|
2,026 |
|
|
|
1,133 |
|
|
Corporate and Other
|
|
|
(149 |
) |
|
|
(89 |
) |
|
|
(172 |
) |
|
|
(176 |
) |
|
|
(283 |
) |
|
Realized Investment Gains
|
|
|
374 |
|
|
|
245 |
|
|
|
384 |
|
|
|
218 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
|
|
3,937 |
|
|
|
3,525 |
|
|
|
2,447 |
|
|
|
2,068 |
|
|
|
934 |
|
|
Federal and Foreign Income Tax
|
|
|
1,130 |
|
|
|
997 |
|
|
|
621 |
|
|
|
520 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
2,807 |
|
|
$ |
2,528 |
|
|
$ |
1,826 |
|
|
$ |
1,548 |
|
|
$ |
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
7.01 |
|
|
$ |
5.98 |
|
|
$ |
4.47 |
|
|
$ |
4.01 |
|
|
$ |
2.23 |
|
|
Dividends Declared on
Common Stock
|
|
|
1.16 |
|
|
|
1.00 |
|
|
|
.86 |
|
|
|
.78 |
|
|
|
.72 |
|
AT DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
50,574 |
|
|
$ |
50,277 |
|
|
$ |
48,061 |
|
|
$ |
44,260 |
|
|
$ |
38,361 |
|
Long Term Debt
|
|
|
3,460 |
|
|
|
2,466 |
|
|
|
2,467 |
|
|
|
2,814 |
|
|
|
2,814 |
|
Total Shareholders Equity
|
|
|
14,445 |
|
|
|
13,863 |
|
|
|
12,407 |
|
|
|
10,126 |
|
|
|
8,522 |
|
Book Value Per Share
|
|
|
38.56 |
|
|
|
33.71 |
|
|
|
29.68 |
|
|
|
26.28 |
|
|
|
22.67 |
|
|
|
(a) |
Underwriting income reflected net losses of $88 million
($57 million after-tax or $0.14 per share) in 2007,
$24 million ($16 million after-tax or $0.04 per
share) in 2006, $35 million ($23 million after-tax or
$0.06 per share) in 2005, $75 million ($49 million
after-tax or $0.13 per share) in 2004 and $250 million
($163 million after-tax or $0.45 per share) in 2003
related to asbestos and toxic waste claims. |
|
|
(b) |
Underwriting income in 2005 reflected net costs of
$462 million ($300 million
after-tax or
$0.74 per share) related to Hurricane Katrina. |
22
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses the financial condition of
the Corporation as of December 31, 2007 compared with
December 31, 2006 and the results of operations for each of
the three years in the period ended December 31, 2007. This
discussion should be read in conjunction with the consolidated
financial statements and related notes and the other information
contained in this report.
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
PAGE |
|
|
|
|
|
|
24 |
|
|
|
|
26 |
|
|
|
|
26 |
|
|
|
|
27 |
|
|
|
|
|
28 |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
53 |
|
|
|
|
|
53 |
|
|
|
|
53 |
|
|
|
|
|
53 |
|
|
|
|
|
54 |
|
|
|
|
54 |
|
|
|
|
55 |
|
|
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|
56 |
|
|
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|
56 |
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|
|
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|
57 |
|
|
|
|
|
58 |
|
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
23
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this document are forward-looking
statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 (PSLRA). These
forward-looking statements are made pursuant to the safe harbor
provisions of the PSLRA and include statements regarding our
loss reserve and reinsurance recoverable estimates; the impact
of future catastrophes on our results of operations, financial
condition or liquidity; asbestos liability developments; the
number and severity of surety-related claims; the impact of
changes to our reinsurance program in 2006 and 2007 on our
results of operations, financial condition or liquidity and the
cost and availability of reinsurance in 2008; the adequacy of
the rates at which we renewed and wrote new business; premium
volume and competition in 2008; the impact of investigations
into market practices in the property and casualty insurance
industry and any resulting business reforms; changes to our
producer compensation program; estimates with respect to our
credit derivatives exposure; provisions for impairment of our
real estate assets; the repurchase of common stock under our
share repurchase program; our capital adequacy and funding of
liquidity needs; and the overall effect of interest rate risk on
us. Forward-looking statements are made based upon
managements current expectations and beliefs concerning
trends and future developments and their potential effects on
us. These statements are not guarantees of future performance.
Actual results may differ materially from those suggested by
forward-looking statements as a result of risks and
uncertainties, which include, among others, those discussed or
identified from time to time in our public filings with the
Securities and Exchange Commission and those associated with:
|
|
|
|
|
global political conditions and the occurrence of terrorist
attacks, including any nuclear, biological, chemical or
radiological events; |
|
|
|
the effects of the outbreak or escalation of war or hostilities; |
|
|
|
premium pricing and profitability or growth estimates overall or
by lines of business or geographic area, and related
expectations with respect to the timing and terms of any
required regulatory approvals; |
|
|
|
adverse changes in loss cost trends; |
|
|
|
our ability to retain existing business; |
|
|
|
our expectations with respect to cash flow projections and
investment income and with respect to other income; |
|
|
|
the adequacy of loss reserves, including: |
|
|
|
|
|
our expectations relating to reinsurance recoverables; |
|
|
|
the willingness of parties, including us, to settle disputes; |
|
|
|
developments in judicial decisions or regulatory or legislative
actions relating to coverage and liability, in particular, for
asbestos, toxic waste and other mass tort claims; |
|
|
|
development of new theories of liability; |
|
|
|
our estimates relating to ultimate asbestos liabilities; |
|
|
|
the impact from the bankruptcy protection sought by various
asbestos producers and other related businesses; and |
|
|
|
the effects of proposed asbestos liability legislation,
including the impact of claims patterns arising from the
possibility of legislation and those that may arise if
legislation is not passed; |
|
|
|
|
|
the availability and cost of reinsurance coverage; |
|
|
|
the occurrence of significant weather-related or other natural
or human-made disasters, particularly in locations where we have
concentrations of risk; |
24
|
|
|
|
|
the impact of economic factors on companies on whose behalf we
have issued surety bonds, and in particular, on those companies
that file for bankruptcy or otherwise experience deterioration
in creditworthiness; |
|
|
|
the effects of disclosures by, and investigations of, companies
relating to possible accounting irregularities, practices in the
financial services industry, investment losses or other
corporate governance issues, including: |
|
|
|
|
|
claims and litigation arising out of stock option
backdating, spring loading and other
option grant practices by public companies; |
|
|
|
the effects on the capital markets and the markets for directors
and officers and errors and omissions insurance; |
|
|
|
claims and litigation arising out of actual or alleged
accounting or other corporate malfeasance by other companies; |
|
|
|
claims and litigation arising out of practices in the financial
services industry; and |
|
|
|
legislative or regulatory proposals or changes; |
|
|
|
|
|
the effects of changes in market practices in the
U.S. property and casualty insurance industry, in
particular contingent commissions and loss mitigation and finite
reinsurance arrangements, arising from any legal or regulatory
proceedings, related settlements and industry reform, including
changes that have been announced and changes that may occur in
the future; |
|
|
|
the impact of legislative and regulatory developments on our
business, including those relating to terrorism and catastrophes; |
|
|
|
any downgrade in our claims-paying, financial strength or other
credit ratings; |
|
|
|
the ability of our subsidiaries to pay us dividends; |
|
|
|
general economic and market conditions including: |
|
|
|
|
|
changes in interest rates, market credit spreads and the
performance of the financial markets; |
|
|
|
uncertainty in the credit markets and its impact on specific
types of investments as well as on the broader financial markets; |
|
|
|
the effects of inflation; |
|
|
|
changes in domestic and foreign laws, regulations and taxes; |
|
|
|
changes in competition and pricing environments; |
|
|
|
regional or general changes in asset valuations; |
|
|
|
the inability to reinsure certain risks economically; and |
|
|
|
changes in the litigation environment; and |
|
|
|
|
|
our ability to implement managements strategic plans and
initiatives. |
The Corporation assumes no obligation to update any
forward-looking information set forth in this document, which
speak as of the date hereof.
25
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on
informed estimates and judgments of management for transactions
that are not yet complete. Such estimates and judgments affect
the reported amounts in the financial statements. Those
estimates and judgments that were most critical to the
preparation of the financial statements involved the
determination of loss reserves and the recoverability of related
reinsurance recoverables. These estimates and judgments, which
are discussed within the following analysis of our results of
operations, require the use of assumptions about matters that
are highly uncertain and therefore are subject to change as
facts and circumstances develop. If different estimates and
judgments had been applied, materially different amounts might
have been reported in the financial statements.
OVERVIEW
The following highlights do not address all of the matters
covered in the other sections of Managements Discussion
and Analysis of Financial Condition and Results of Operations or
contain all of the information that may be important to
Chubbs shareholders or the investing public. This overview
should be read in conjunction with the other sections of
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
|
|
|
|
|
Net income was $2.8 billion in 2007 compared with
$2.5 billion in 2006 and $1.8 billion in 2005. Net
income in 2007 and 2006 benefited from substantially higher
underwriting income in our property and casualty insurance
business compared with 2005. |
|
|
|
Underwriting results were significantly more profitable in 2007
and 2006 compared with 2005. Our combined loss and expense ratio
was 82.9% in 2007 compared with 84.2% in 2006 and 92.3% in 2005.
The impact of catastrophes accounted for 3.0 percentage
points of the combined ratio in 2007 compared with
1.4 percentage points in 2006 and 5.6 percentage
points in 2005. The greater catastrophe impact in 2005 was due
to costs of $462 million related to Hurricane Katrina,
including estimated net losses of $403 million and net
reinsurance reinstatement premium costs of $59 million. |
|
|
|
Total net premiums written decreased by 1% in 2007 and 3% in
2006. Net premiums written in our insurance business increased
1% in 2007 and 2% in 2006. The low growth in our insurance
business in both years reflected our continued emphasis on
underwriting discipline in an increasingly competitive market
environment. In the reinsurance assumed business, net premiums
written decreased 65% in 2007 and 57% in 2006, reflecting our
sale of the ongoing business to Harbor Point Limited in December
2005. |
|
|
|
During 2007, we experienced overall favorable development of
$697 million on loss reserves established as of the
previous year end, due primarily to favorable loss trends in
recent years in the professional liability classes, lower than
expected emergence of losses in the homeowners and commercial
property classes and better than expected reported loss activity
in the run-off of our reinsurance assumed business. During 2006,
we experienced overall favorable development of
$296 million due primarily to lower than expected emergence
of losses in the homeowners and commercial property classes.
During 2005, we experienced overall unfavorable development of
$163 million due to adverse development in the professional
liability and commercial liability classes offset in part by
favorable development in the homeowners and commercial property
classes. |
|
|
|
Property and casualty investment income after tax increased by
9% in 2007 and 10% in 2006. The growth was due to an increase in
invested assets over the period. For more information on this
non-GAAP financial measure, see Property and Casualty
Insurance Investment Results. |
26
A summary of our consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
Property and casualty insurance
|
|
$ |
3,712 |
|
|
$ |
3,369 |
|
|
$ |
2,235 |
|
Corporate and other
|
|
|
(149 |
) |
|
|
(89 |
) |
|
|
(172 |
) |
Realized investment gains
|
|
|
374 |
|
|
|
245 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income tax
|
|
|
3,937 |
|
|
|
3,525 |
|
|
|
2,447 |
|
Federal and foreign income tax
|
|
|
1,130 |
|
|
|
997 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$ |
2,807 |
|
|
$ |
2,528 |
|
|
$ |
1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND CASUALTY INSURANCE
A summary of the results of operations of our property and
casualty insurance business is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
Underwriting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$ |
11,872 |
|
|
$ |
11,974 |
|
|
$ |
12,283 |
|
|
Decrease (increase) in unearned premiums
|
|
|
74 |
|
|
|
(16 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
11,946 |
|
|
|
11,958 |
|
|
|
12,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
6,299 |
|
|
|
6,574 |
|
|
|
7,813 |
|
|
Operating costs and expenses
|
|
|
3,564 |
|
|
|
3,467 |
|
|
|
3,436 |
|
|
Increase in deferred policy acquisition costs
|
|
|
(52 |
) |
|
|
(19 |
) |
|
|
(17 |
) |
|
Dividends to policyholders
|
|
|
19 |
|
|
|
31 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
2,116 |
|
|
|
1,905 |
|
|
|
921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses
|
|
|
1,622 |
|
|
|
1,485 |
|
|
|
1,342 |
|
|
Investment expenses
|
|
|
32 |
|
|
|
31 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,590 |
|
|
|
1,454 |
|
|
|
1,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (charges)
|
|
|
6 |
|
|
|
10 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax
|
|
$ |
3,712 |
|
|
$ |
3,369 |
|
|
$ |
2,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty investment income after tax
|
|
$ |
1,273 |
|
|
$ |
1,166 |
|
|
$ |
1,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax in 2007 was higher than
in 2006 which, in turn, was substantially higher than in 2005.
Income in each year, but more so in 2007 and 2006, benefited
from highly profitable underwriting results. Underwriting income
in 2007 was higher than in 2006, particularly in our specialty
insurance business unit. Underwriting income in 2006 was
substantially higher than in 2005, due largely to significantly
lower catastrophe losses, particularly in our commercial
insurance business unit, as well as improvement in our specialty
insurance business unit. Results in 2007 and 2006 also benefited
from significant increases in investment income due to an
increase in invested assets in both years.
27
The profitability of our property and casualty insurance
business depends on the results of both our underwriting and
investment operations. We view these as two distinct operations
since the underwriting functions are managed separately from the
investment function. Accordingly, in assessing our performance,
we evaluate underwriting results separately from investment
results.
Underwriting Operations
Underwriting Results
We evaluate the underwriting results of our property and
casualty insurance business in the aggregate and also for each
of our separate business units.
Net Premiums Written
Net premiums written amounted to $11.9 billion in 2007, a
decrease of 1% compared with 2006. Net premiums written in 2006
decreased 3% compared with 2005. In both years, a slight
increase in premiums from our insurance business was more than
offset by a substantial decline in premiums from our reinsurance
assumed business.
Net premiums written by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
% Increase |
|
|
|
% Increase |
|
|
|
|
|
|
(Decrease) |
|
|
|
(Decrease) |
|
|
|
|
2007 |
|
2007 vs. 2006 |
|
2006 |
|
2006 vs. 2005 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
Personal insurance
|
|
$ |
3,709 |
|
|
|
5 |
% |
|
$ |
3,518 |
|
|
|
6 |
% |
|
$ |
3,307 |
|
Commercial insurance
|
|
|
5,083 |
|
|
|
(1 |
) |
|
|
5,125 |
|
|
|
2 |
|
|
|
5,030 |
|
Specialty insurance
|
|
|
2,944 |
|
|
|
|
|
|
|
2,941 |
|
|
|
(3 |
) |
|
|
3,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
11,736 |
|
|
|
1 |
|
|
|
11,584 |
|
|
|
2 |
|
|
|
11,379 |
|
Reinsurance assumed
|
|
|
136 |
|
|
|
(65 |
) |
|
|
390 |
|
|
|
(57 |
) |
|
|
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11,872 |
|
|
|
(1 |
) |
|
$ |
11,974 |
|
|
|
(3 |
) |
|
$ |
12,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written from our insurance business grew 1% in 2007
and 2% in 2006. Premiums in 2005 were reduced by reinsurance
reinstatement premium costs of $102 million related to
Hurricane Katrina. Premiums in 2006 benefited from a
$20 million reduction of previously accrued reinsurance
reinstatement premium costs. Premiums in the United States,
which represent about 75% of our insurance premiums, decreased
1% in 2007 and increased 1% in 2006. Insurance premiums outside
the U.S. grew 10% in 2007 and 4% in 2006. In both years, such
growth was 3% when measured in local currencies.
The slight overall growth in net written premiums in our
insurance business in both 2007 and 2006 reflected our continued
emphasis on underwriting discipline in an increasingly
competitive market environment. Rates were under competitive
pressure that varied by class of business and geographic area.
In both years, we retained a high percentage of our existing
customers and renewed these accounts at prices we believe to be
appropriate relative to the exposure. In addition, while we
continued to be selective, we found opportunities to write new
business at acceptable rates; however, we saw fewer such
opportunities as 2007 progressed. We expect the competitive
market environment to continue in 2008. We expect that overall
premiums in our insurance business will be flat to modestly down
in 2008 compared with 2007, with a modest increase for personal
insurance and modest decreases for both commercial insurance and
specialty insurance.
Net reinsurance assumed premiums written decreased by 65% in
2007 and 57% in 2006. Premiums in 2005 included net
reinstatement premium revenue of $43 million related to
Hurricane Katrina. The significant premium decline reflects the
sale of our ongoing reinsurance assumed business to Harbor Point
Limited in December 2005, which is discussed below.
28
Reinsurance Ceded
Our premiums written are net of amounts ceded to reinsurers who
assume a portion of the risk under the insurance policies we
write that are subject to the reinsurance.
As a result of the substantial losses incurred by reinsurers
from the catastrophes in 2004 and 2005, the cost of property
catastrophe reinsurance increased significantly in 2006 and
there were capacity restrictions in the marketplace.
Although property catastrophe reinsurance rates increased in
2006, our overall ceded reinsurance premiums for our insurance
business, excluding the impact of reinstatement premiums related
to Hurricane Katrina, were only modestly higher than in 2005 due
to modifications to certain of our reinsurance treaties. On our
casualty clash treaty, our initial retention remained at
$75 million. We reduced our reinsurance coverage at the top
of the program by $50 million and increased our
participation in the program. On our commercial property per
risk treaty, we increased our retention from $15 million to
$25 million. Our property catastrophe treaty for events in
the United States was modified to increase our initial retention
from $250 million to $350 million and to increase our
participation in the program. At the same time, we increased the
insurance coverage in the northeastern part of the country by
$400 million. Our property catastrophe treaty for events
outside the United States was modified to increase our initial
retention from $50 million to $75 million.
Reinsurance rates generally remained steady in 2007, due in part
to a relatively low level of catastrophes in 2006. However,
capacity restrictions continued in some segments of the
marketplace. Our overall reinsurance costs in 2007 were similar
to those in 2006.
We did not renew our casualty clash treaty in 2007 as we
believed the cost was not justified given the limited capacity
and terms available. The treaty had provided coverage of
approximately 55% of losses between $75 million and
$150 million per insured event.
On our commercial property per risk treaty, we increased the
reinsurance coverage at the top of the program by
$100 million. This treaty now provides approximately
$500 million of coverage per risk in excess of our
$25 million retention.
The structure of our property catastrophe program for events in
the United States was modified in 2007 but the overall coverage
is similar to the previous program. The principal catastrophe
treaty provides coverage of approximately 70% of losses (net of
recoveries from other available reinsurance) between
$350 million and $1.3 billion, with additional
coverage of 55% of losses between $1.3 billion and
$2.05 billion in the northeastern part of the country,
where we have our greatest concentration of catastrophe exposure.
We also purchased in April 2007 fully collateralized four-year
reinsurance coverage for homeowners-related losses sustained
from qualifying hurricane loss events in the northeastern part
of the United States. This reinsurance was purchased from East
Lane Re Ltd., a Cayman Islands reinsurance company, which
financed the provision of reinsurance through the issuance of
$250 million in catastrophe bonds to investors under two
separate bond tranches. This reinsurance provides coverage of
approximately 30% of covered losses between $1.3 billion
and $2.05 billion.
We purchased additional reinsurance from the Florida Hurricane
Catastrophe Fund, which is a state-mandated fund designed to
reimburse insurers for a portion of their residential
catastrophic hurricane losses. Our participation in the Fund
limits our initial retention in Florida for homeowners related
losses to approximately $150 million.
Our property catastrophe treaty for events outside the United
States was renewed in 2007 with no modification of its terms.
The treaty provides coverage of approximately 90% of losses (net
of recoveries from other available reinsurance) between
$75 million and $275 million.
29
Our property reinsurance treaties generally contain limitations
on the losses that we can recover relating to acts of terrorism,
depending on the geographic location where the act is committed
and the class of business affected.
We do not expect the changes we made to our reinsurance program
during 2006 and 2007 to have a material effect on the
Corporations results of operations, financial condition or
liquidity.
Most of our ceded reinsurance arrangements consist of excess of
loss and catastrophe contracts that protect against a specified
part or all of certain types of losses over stipulated amounts
arising from any one occurrence or event. Therefore, unless we
incur losses that exceed our initial retention under these
contracts, we do not receive any loss recoveries. As a result,
in certain years, we cede premiums to other insurance companies
and receive few, if any, loss recoveries. However, in a year in
which there is a significant catastrophic event (such as
Hurricane Katrina) or a series of large individual losses, we
may receive substantial loss recoveries. The impact of ceded
reinsurance on net premiums written and earned and on net losses
and loss expenses incurred for the three years ended
December 31, 2007 is presented in Note (11) of the
Notes to Consolidated Financial Statements.
Our property reinsurance treaties expire on April 1, 2008.
While we expect that reinsurance rates for property risks will
decline somewhat in 2008, the final structure of our program and
amount of coverage purchased will be determinants of our ceded
reinsurance premium cost in 2008. We expect that the
availability of reinsurance for certain coverages, such as
terrorism, will continue to be very limited in 2008.
Profitability
The combined loss and expense ratio, expressed as a percentage,
is the key measure of underwriting profitability traditionally
used in the property and casualty insurance business. Management
evaluates the performance of our underwriting operations and of
each of our business units using, among other measures, the
combined loss and expense ratio calculated in accordance with
statutory accounting principles. It is the sum of the ratio of
losses and loss expenses to premiums earned (loss ratio) plus
the ratio of 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 applicable to property and
casualty insurance companies differ in certain respects from
generally accepted accounting principles (GAAP). Under statutory
accounting principles, policy acquisition and other underwriting
expenses are recognized immediately, not at the time premiums
are earned. Management uses underwriting results determined in
accordance with GAAP, among other measures, to assess the
overall performance of our underwriting operations. To convert
statutory underwriting results to a GAAP basis, policy
acquisition expenses are deferred and amortized over the period
in which the related premiums are earned. Underwriting income
determined in accordance with GAAP is defined as premiums earned
less losses and loss expenses incurred and GAAP underwriting
expenses incurred.
Underwriting results were significantly more profitable in 2007
and 2006 compared with 2005. The combined loss and expense ratio
for our overall property and casualty business was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Loss ratio
|
|
|
52.8 |
% |
|
|
55.2 |
% |
|
|
64.3 |
% |
Expense ratio
|
|
|
30.1 |
|
|
|
29.0 |
|
|
|
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined loss and expense ratio
|
|
|
82.9 |
% |
|
|
84.2 |
% |
|
|
92.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The loss ratio improved in 2006 and again in 2007, reflecting
the favorable loss experience which we believe resulted from our
disciplined underwriting in recent years as well as relatively
mild loss trends in certain classes of business. The loss ratio
in 2005 was adversely affected by higher catastrophe losses,
primarily from Hurricane Katrina.
In 2007, net catastrophe losses incurred were $363 million,
which represented 3.0 percentage points of the loss ratio.
Net catastrophe losses incurred in 2006 were $173 million,
which were offset in part by a $20 million reduction in
previously accrued reinsurance reinstatement premium costs
related to Hurricane Katrina. The net impact of catastrophes in
2006 accounted for 1.4 percentage points of the loss ratio. In
2005, we incurred $630 million of net catastrophe losses
and $59 million in related net reinsurance reinstatement
premium costs, which in the aggregate accounted for
5.6 percentage points of the loss ratio. The reinsurance
reinstatement premium costs and a substantial portion of the
catastrophe losses in 2005 related to Hurricane Katrina.
At the end of 2005, we estimated that our net losses from
Hurricane Katrina were $403 million and our net reinsurance
reinstatement premium costs related to the hurricane were
$59 million. In our insurance business, estimated net
losses were $335 million and reinstatement premium costs
were $102 million, for an aggregate cost of
$437 million. In our reinsurance assumed business,
estimated net losses were $68 million and net reinstatement
premium revenue was $43 million, for a net cost of
$25 million. We estimated that our gross losses from
Hurricane Katrina were about $1.2 billion. Almost all of
the losses were from property exposure and business interruption
claims. Our net losses of $403 million were significantly
lower than the gross amount due to a property per risk treaty
that limited our net loss per risk and our property catastrophe
treaty.
During 2006, a large percentage of our claims from Hurricane
Katrina were settled. As a result, there were many adjustments,
both favorable and unfavorable, to our loss estimates for
individual claims related to this event. These adjustments
produced a reduction in our estimates for gross losses and
reinsurance recoverable of $190 million and
$175 million, respectively, as well as a $20 million
reduction of previously accrued reinsurance reinstatement
premium costs.
Other than the reinsurance recoverable related to Hurricane
Katrina, we did not have any recoveries from our catastrophe
reinsurance treaties during the three year period ended
December 31, 2007 because there were no other individual
catastrophes for which our losses exceeded our initial retention
under the treaties.
Our expense ratio increased in both 2007 and 2006. The increase
in 2007 was due primarily to higher commissions, largely the
result of premium growth outside the United States in certain
classes of business for which commission rates are high. The
increase in 2006 was due to a decrease in net premiums written
whereas compensation and other operating costs increased.
In lieu of paying contingent commissions, beginning in 2007, we
implemented a new guaranteed supplemental compensation program
for agents and brokers in the United States with whom we
previously had contingent commission agreements. Under this
arrangement, agents and brokers are paid a percentage of written
premiums on eligible lines of business in a calendar year based
upon their prior performance. The total guaranteed supplemental
compensation payout for 2007 will be substantially the same as
the contingent commission payout for 2006. However, the change
in our commission arrangements created a difference in the
timing of expense recognition, which resulted in a one-time
benefit to income during the 2007 transition year. The impact of
the change in 2007 was to increase deferred policy acquisition
costs by approximately $70 million. The change had no
effect on the expense ratio.
31
|
|
|
Review of Underwriting Results by Business Unit |
Net premiums written from personal insurance, which represented
31% of our premiums written in 2007, increased by 5% in 2007 and
6% in 2006. Net premiums written for the classes of business
within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
% Increase |
|
|
|
% Increase |
|
|
|
|
2007 |
|
2007 vs. 2006 |
|
2006 |
|
2006 vs. 2005 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
Automobile
|
|
$ |
621 |
|
|
|
(7 |
)% |
|
$ |
670 |
|
|
|
4 |
% |
|
$ |
645 |
|
Homeowners
|
|
|
2,423 |
|
|
|
7 |
|
|
|
2,268 |
|
|
|
8 |
|
|
|
2,104 |
|
Other
|
|
|
665 |
|
|
|
15 |
|
|
|
580 |
|
|
|
4 |
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
$ |
3,709 |
|
|
|
5 |
|
|
$ |
3,518 |
|
|
|
6 |
|
|
$ |
3,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal automobile premiums in the U.S. decreased in 2007 and
2006 due to an increasingly competitive marketplace. The
termination of a collector vehicle program also contributed to
the decrease in 2007. The overall growth in personal automobile
premiums in 2006 was due to selective initiatives outside the
United States. The growth in our homeowners business in both
years was due primarily to increased insurance-to-value. The
in-force policy count for this class of business was relatively
flat over the period. Homeowners premiums in 2005 were reduced
by reinsurance reinstatement premium costs of $17 million
related to Hurricane Katrina. Our other personal business
includes insurance for excess liability, yacht and accident
coverages. The substantial growth in this business in 2007 was
due primarily to a significant increase in accident premiums,
particularly outside the United States. Excess liability
premiums also grew, due in part to a modest increase in rates.
Our personal insurance business produced highly profitable
underwriting results in each of the last three years. The
combined loss and expense ratios for the classes of business
within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Automobile
|
|
|
89.8 |
% |
|
|
90.4 |
% |
|
|
95.3 |
% |
Homeowners
|
|
|
80.2 |
|
|
|
74.6 |
|
|
|
81.2 |
|
Other
|
|
|
96.4 |
|
|
|
98.6 |
|
|
|
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
84.8 |
% |
|
|
81.7 |
% |
|
|
86.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our personal automobile results were profitable in each of the
past three years. Results in 2007 and 2006 were more profitable
than in 2005 due to lower claim frequency and modest favorable
prior year loss development.
Homeowners results were highly profitable in each of the last
three years. Results in all three years reflected adequate
pricing and a reduction in water damage losses primarily as a
result of policy wording changes related to mold coverage and
loss remediation measures that we have implemented over the past
several years. Results in 2006 benefited from lower catastrophe
losses. The impact of catastrophes accounted for
9.6 percentage points of the combined loss and expense
ratio for this class in 2007 compared with 5.7 percentage
points in 2006 and 9.8 percentage points in 2005.
Other personal business produced modestly profitable results in
each of the past three years. Our accident business was highly
profitable in all three years. Our yacht business was profitable
in 2007 and 2006 compared with unprofitable results in 2005. Our
excess liability business was unprofitable in each of the past
three years, but more so in 2006, due to inadequate pricing and
unfavorable prior year loss development.
32
Net premiums written from commercial insurance, which
represented 43% of our premiums written in 2007, decreased by 1%
in 2007 and increased by 2% in 2006. Net premiums written for
the classes of business within the commercial insurance segment
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
% Increase |
|
|
|
% Increase |
|
|
|
|
|
|
(Decrease) |
|
|
|
(Decrease) |
|
|
|
|
2007 |
|
2007 vs. 2006 |
|
2006 |
|
2006 vs. 2005 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
Multiple peril
|
|
$ |
1,252 |
|
|
|
(3 |
)% |
|
$ |
1,290 |
|
|
|
% |
|
|
$ |
1,286 |
|
Casualty
|
|
|
1,726 |
|
|
|
|
|
|
|
1,731 |
|
|
|
(1 |
) |
|
|
1,755 |
|
Workers compensation
|
|
|
890 |
|
|
|
(1 |
) |
|
|
901 |
|
|
|
(3 |
) |
|
|
930 |
|
Property and marine
|
|
|
1,215 |
|
|
|
1 |
|
|
|
1,203 |
|
|
|
14 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$ |
5,083 |
|
|
|
(1 |
) |
|
$ |
5,125 |
|
|
|
2 |
|
|
$ |
5,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in our commercial classes in 2007 and 2006 was
constrained due to an increasingly competitive marketplace. In
2006, renewal rates were generally stable but were under
competitive pressure in some classes of business, particularly
non-catastrophe exposed property risks and certain casualty
risks. During 2007, rates were down modestly. Certain classes of
business and geographic areas, such as non-catastrophe exposed
property risks and large company risks, experienced more
competitive pressure than others. Rate pressure increased in the
second half of the year across all classes of business,
particularly for new business. Multiple peril and property and
marine premiums in 2005 were reduced by reinsurance
reinstatement premium costs of $19 million and
$66 million, respectively, related to Hurricane Katrina. In
2006, property and marine premiums benefited from a
$20 million reduction of previously accrued reinsurance
reinstatement premium costs. Excluding the reinsurance
reinstatement premiums, multiple peril premiums declined 1% and
property and marine premiums grew 5% in 2006 compared with the
prior year.
Retention levels of our existing customers remained steady over
the last three years. New business volume was slightly higher in
2006 and again in 2007 compared with the respective prior years.
The increase in 2006 came from business outside the U.S. The
increase in 2007 was due to a few large accounts written in the
first half of the year. New business volume in the second half
of 2007 was down as it became more difficult to find new
opportunities at acceptable rates.
We have continued to maintain our underwriting discipline in the
more competitive market, renewing business and writing new
business only where we believe we are securing acceptable rates
and appropriate terms and conditions for the exposures.
Our commercial insurance business produced profitable
underwriting results in each of the past three years,
particularly in 2007 and 2006. Results in all three years
benefited from better terms and conditions and disciplined risk
selection in recent years as well as low non-catastrophe
property losses. Results in 2005 were less profitable than in
2007 and 2006, largely due to substantially higher catastrophe
losses, primarily from Hurricane Katrina. The impact of
catastrophes accounted for 8.3 percentage points of the
combined loss and expense ratio for our commercial insurance
business in 2005 whereas such impact was 2.6 percentage
points in 2007 and negligible in 2006.
33
The combined loss and expense ratios for the classes of business
within commercial insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Multiple peril
|
|
|
80.8 |
% |
|
|
75.8 |
% |
|
|
87.8 |
% |
Casualty
|
|
|
94.6 |
|
|
|
96.8 |
|
|
|
96.1 |
|
Workers compensation
|
|
|
77.6 |
|
|
|
80.4 |
|
|
|
84.8 |
|
Property and marine
|
|
|
84.3 |
|
|
|
72.5 |
|
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
85.8 |
% |
|
|
83.1 |
% |
|
|
92.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril results were highly profitable in each of the
past three years. Results in 2005 were less profitable than in
2007 and 2006, largely due to higher catastrophe losses. The
impact of catastrophes accounted for 1.7 percentage points of
the combined loss and expense ratio for this class in 2007
compared with 2.9 percentage points in 2006 and
9.1 percentage points in 2005. The property component of
this business benefited from low non-catastrophe losses in all
three years. Results in the liability component were profitable
in all three years, particularly in 2006.
Results for our casualty business were similarly profitable in
each of the past three years. The automobile component of our
casualty business deteriorated somewhat in 2007 but remained
highly profitable. Results in the primary liability component
were highly profitable in 2007 compared with marginally
profitable results in 2006 and profitable results in 2005.
Results in the excess liability component were profitable in
2007 compared with unprofitable results in 2006 and 2005. Excess
liability results in 2007 benefited from favorable prior year
loss development, whereas results in 2006 and 2005 were
adversely affected by unfavorable loss development related to
older accident years. Casualty results in 2007 were adversely
affected by incurred losses related to asbestos and toxic waste
claims. Our analysis of these exposures resulted in an increase
in our estimate of the ultimate liabilities for a small number
of our insureds. Such losses represented 5.3 percentage
points of the combined loss and expense ratio for this class in
2007. The impact of such losses was not significant in 2006 or
2005.
Workers compensation results were highly profitable in
each of the past three years. Results were more profitable in
each succeeding year due to favorable claim cost trends,
resulting in part from the positive effect of reforms in
California. Results in all three years benefited from our
disciplined risk selection during the past several years.
Property and marine results were highly profitable in 2007 and
2006 compared with marginally profitable results in 2005. The
less profitable results in 2005 were due to catastrophe losses,
primarily from Hurricane Katrina. Catastrophes accounted for
8.2 percentage points of the combined loss and expense
ratio in 2007 and 27.2 percentage points in 2005. The
impact of catastrophes was negligible in 2006. Excluding the
impact of catastrophes, the combined ratio was 76.1%, 73.4% and
71.6% in 2007, 2006 and 2005, respectively. Results in each year
benefited from relatively few large non-catastrophe losses.
34
Net premiums written from specialty insurance, which represented
25% of our premiums written in 2007, were flat in 2007 and
decreased by 3% in 2006 compared with the respective prior
years. Net premiums written for the classes of business within
the specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
|
|
% Increase |
|
|
|
% Increase |
|
|
|
|
|
|
(Decrease) |
|
|
|
(Decrease) |
|
|
|
|
2007 |
|
2007 vs. 2006 |
|
2006 |
|
2006 vs. 2005 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
Professional liability
|
|
$ |
2,605 |
|
|
|
(1 |
)% |
|
$ |
2,641 |
|
|
|
(6 |
)% |
|
$ |
2,798 |
|
Surety
|
|
|
339 |
|
|
|
13 |
|
|
|
300 |
|
|
|
23 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
$ |
2,944 |
|
|
|
|
|
|
$ |
2,941 |
|
|
|
(3 |
) |
|
$ |
3,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline of premiums in 2007 and 2006 for the professional
liability classes of business was due to the increasingly
competitive pressure on rates, particularly in the directors and
officers liability component, and our commitment to maintain
underwriting discipline in this environment. The decline in
premiums in 2006 was exacerbated by the sale of renewal rights,
effective July 1, 2005, on our hospital medical malpractice
and managed care errors and omissions business.
Renewal rates for the directors and officers liability class of
business were down in 2006 and again in 2007. Rates for
professional liability classes other than directors and officers
liability, which were generally stable in 2006, trended downward
in 2007. Retention levels remained strong over the last three
years. New business volume declined in each of the past two
years due to the increased competition in the marketplace. We
continued to get what we believe are acceptable rates and
appropriate terms and conditions on both new business and
renewals. In line with our strategy in recent years of directing
our focus to small and middle market publicly traded and
privately held companies, the percentage of our book of business
represented by large public companies has continued to decrease.
The growth in net premiums written for our surety business was
substantial in both 2007 and 2006. About half of the growth in
2006 was due to the non-renewal of a high excess reinsurance
treaty during 2005. Growth in 2007 was due primarily to a strong
public sector construction economy. However, growth slowed as
the year progressed due in part to a more competitive rate
environment. We expect the increasingly competitive market to
continue in 2008.
Our specialty insurance business produced profitable
underwriting results in each of the last three years. Results
were significantly more profitable in each succeeding year. The
combined loss and expense ratios for the classes of business
within specialty insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Professional liability
|
|
|
82.4 |
% |
|
|
91.8 |
% |
|
|
99.8 |
% |
Surety
|
|
|
35.4 |
|
|
|
44.2 |
|
|
|
62.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
77.4 |
% |
|
|
87.5 |
% |
|
|
97.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Results for our professional liability business improved
substantially in 2006 and again in 2007, producing highly
profitable results in 2007 compared with profitable results in
2006 and near breakeven results in 2005. The fidelity class was
highly profitable in each of the past three years due to
favorable loss experience. The results of the directors and
officers liability, errors and omissions liability and fiduciary
liability classes improved in 2006 and again in 2007. Results in
2007 and, to a much lesser extent, 2006 benefited from favorable
prior year loss development due to the recognition of the
increasingly favorable loss trends we have been experiencing in
recent years. These trends were largely the result of a
favorable business climate in recent years, lower policy limits
and better terms
35
and conditions. Conversely, results in 2005 were adversely
affected by unfavorable loss development related to accident
years prior to 2003. This adverse development was predominantly
from claims relating to corporate failures and allegations of
management misconduct and accounting irregularities. For more
information on prior year loss development, see Property
and Casualty Insurance Loss Reserves, Prior Year
Loss Development.
Our surety business produced highly profitable results in each
of the past three years due to favorable loss experience. This
business tends to be characterized by infrequent but potentially
high severity losses. When losses occur, they are mitigated, at
times, by recovery rights to the customers assets,
contract payments, collateral and bankruptcy recoveries.
The majority of our surety obligations are intended to be
performance-based guarantees. We manage our exposure on an
absolute basis and by specific bond type. We have substantial
commercial and construction surety exposure for current and
prior customers, including exposures related to surety bonds
issued on behalf of companies that have experienced
deterioration in creditworthiness since we issued bonds to them.
We therefore may experience an increase in filed claims and may
incur high severity losses. Such losses would be recognized if
and when claims are filed and determined to be valid, and could
have a material adverse effect on the Corporations results
of operations.
In December 2005, we completed a transaction involving a new
Bermuda-based reinsurance company, Harbor Point Limited. As part
of the transaction, we transferred our ongoing reinsurance
assumed business and certain related assets, including renewal
rights, to Harbor Point. Harbor Point generally did not assume
our reinsurance liabilities relating to reinsurance contracts
incepting prior to December 31, 2005. We retained those
liabilities and the related assets.
For a transition period of about two years, Harbor Point
underwrote specific reinsurance business on our behalf. We
retained a portion of this business and ceded the balance to
Harbor Point in return for a fronting commission. We receive
additional payments based on the amount of business renewed by
Harbor Point. These amounts are being recognized in income as
earned.
Net premiums written from our reinsurance assumed business,
which represented 1% of our premiums written in 2007, decreased
by 65% in 2007 and 57% in 2006. The significant decrease in
premiums in both years was expected in light of the sale of our
ongoing reinsurance assumed business to Harbor Point. Premiums
in 2005 included net reinsurance reinstatement premium revenue
of $43 million related to Hurricane Katrina.
Reinsurance assumed results were profitable in each of the past
three years, particularly in 2007 and 2006. While the volume of
business declined substantially in each of the past two years,
results in both years benefited from significant favorable prior
year loss development. Results in 2005 were adversely affected
by catastrophe losses related to Hurricane Katrina.
To promote and distribute our insurance products, we rely on
independent brokers and agents. Accordingly, our business is
dependent on the willingness of these brokers and agents to
recommend our products to their customers. Prior to 2007, we had
agreements in place with certain insurance agents and brokers
under which, in addition to the standard commissions that we
pay, we agreed to pay commissions that were contingent on the
volume and/or the profitability of business placed with us.
We have been involved in the investigations of certain business
practices in the property and casualty insurance industry by
various Attorneys General and other regulatory authorities of
several states, the U.S. Securities and Exchange Commission, the
U.S. Attorney for the Southern District of New York and certain
non-U.S. regulatory authorities with respect to, among other
things, (1) potential conflicts of interest and
anti-competitive behavior arising from the payment of contingent
commissions to brokers and agents and (2) loss mitigation
and finite reinsurance arrangements. In
36
connection with these investigations, we received subpoenas and
other requests for information from various regulators. We have
been cooperating fully with these investigations.
In December 2006, we settled with the Attorneys General of New
York, Connecticut and Illinois all issues arising out of their
investigations. As part of this settlement, we agreed to
implement certain business reforms, including discontinuing the
payment of contingent commissions in the United States on all
insurance lines beginning in 2007.
In August 2007, the Attorney General of Ohio filed an action
against us, as well as several other insurers and one broker, as
a result of the Ohio Attorney Generals business practices
investigation.
Although no other Attorney General or regulator has initiated an
action against us, it is possible that such an action may be
brought against us with respect to some or all of the issues
that are the focus of the ongoing investigations described above.
Chubb and certain of its subsidiaries have been named in various
legal proceedings brought by private plaintiffs arising out of
these investigations. These legal proceedings and the litigation
brought by the Ohio Attorney General referred to above are
further described in Note (15) of the Notes to Consolidated
Financial Statements.
We cannot predict at this time the ultimate outcome of the
ongoing investigations and legal proceedings referred to above,
including any potential amounts that we may be required to pay
in connection with them. Nevertheless, management believes that
it is likely that the outcome will not have a material adverse
effect on the Corporations results of operations or
financial condition.
|
|
|
Catastrophe Risk Management |
Our property and casualty subsidiaries have exposure to losses
caused by natural perils such as hurricanes and other
windstorms, earthquakes, severe winter weather and brush fires
and from man-made catastrophic events such as terrorism. The
frequency and severity of catastrophes are inherently
unpredictable.
The extent of losses from a natural catastrophe is a function of
both the total amount of insured exposure in an area affected by
the event and the severity of the event. We regularly assess our
concentration of risk exposures in catastrophe exposed areas
globally and have strategies and underwriting standards to
manage this exposure through individual risk selection, subject
to regulatory constraints, and through the purchase of
catastrophe reinsurance. We have invested in modeling
technologies and a risk concentration management tool that allow
us to monitor and control our accumulations of potential losses
in catastrophe exposed areas in the United States, such as
California and the gulf and east coasts, as well as in such
areas in other countries. Actual results may differ materially
from those suggested by the model. We also continue to actively
explore and analyze credible scientific evidence, including the
impact of global climate change, that may affect our ability to
manage exposure under the insurance policies we issue.
Despite these efforts, the occurrence of one or more severe
natural catastrophic events in heavily populated areas could
have a material adverse effect on the Corporations results
of operations, financial condition or liquidity.
|
|
|
Terrorism Risk and Legislation |
The September 11, 2001 attack changed the way the property
and casualty insurance industry views catastrophic risk. That
tragic event demonstrated that numerous classes of business we
write are subject to terrorism related catastrophic risks in
addition to the catastrophic risks related to natural
occurrences. This, together with the limited availability of
terrorism reinsurance, has required us to change how we identify
and evaluate risk accumulations. We have licensed a terrorism
model that
37
provides loss estimates under numerous event scenarios. Also,
the above noted risk concentration management tool enables us to
identify locations and geographic areas that are exposed to risk
accumulations. The information provided by the model and the
tracking tool has resulted in our non-renewing some accounts and
has restricted us from writing others. Actual results may differ
materially from those suggested by the model.
The Terrorism Risk Insurance Act of 2002 (TRIA) established
a temporary program under which the federal government will
share the risk of loss arising from certain acts of foreign
terrorism with the insurance industry. The program, which was
applicable to most lines of commercial business, was scheduled
to terminate on December 31, 2005. In December 2005, TRIA
was extended through December 31, 2007. Certain lines of
business previously subject to the provisions of TRIA, including
commercial automobile, surety and professional liability
insurance, other than directors and officers liability, were
excluded from the program. In December 2007, TRIA was extended
through December 31, 2014. The amended law eliminated the
distinction between foreign and domestic acts of terrorism, now
providing protection from all acts of terrorism. Otherwise,
there were no significant changes to the key features of the
program.
As a precondition to recovery under TRIA, insurance companies
with direct commercial insurance exposure in the United States
for TRIA lines of business are required to make insurance for
covered acts of terrorism available under their policies. Each
insurer has a separate deductible that it must meet in the event
of an act of terrorism before federal assistance becomes
available. The deductible is based on a percentage of direct
U.S. earned premiums for the covered lines of business in the
previous calendar year. For 2008, that deductible is 20% of
direct premiums earned in 2007 for these lines of business. For
losses above the deductible, the federal government will pay for
85% of covered losses, while the insurer retains 15%. There is a
combined annual aggregate limit for the federal government and
all insurers of $100 billion. If acts of terrorism result
in covered losses exceeding the $100 billion annual limit,
insurers are not liable for additional losses. While the
provisions of TRIA will serve to mitigate our exposure in the
event of a large-scale terrorist attack, our deductible is
substantial, approximating $1 billion in 2008.
For certain classes of business, such as workers
compensation, terrorism insurance is mandatory. For those
classes of business where it is not mandatory, policyholders may
choose not to accept terrorism insurance, which would, subject
to other statutory or regulatory restrictions, reduce our
exposure.
We will continue to manage this type of catastrophic risk by
monitoring terrorism risk aggregations. Nevertheless, given the
unpredictability of the targets, frequency and severity of
potential terrorist events as well as the very limited terrorism
reinsurance coverage available in the market, the occurrence of
any such events could have a material adverse effect on the
Corporations results of operations, financial condition or
liquidity.
We also have exposure outside the United States to risk of loss
from acts of terrorism. In some jurisdictions, we have access to
government mechanisms that would mitigate our exposure.
38
Unpaid losses and loss expenses, also referred to as loss
reserves, are the largest liability of our property and casualty
subsidiaries.
Our loss reserves include case estimates for claims that have
been reported and estimates for claims that have been incurred
but not reported at the balance sheet date as well as estimates
of the expenses associated with processing and settling all
reported and unreported claims, less estimates of anticipated
salvage and subrogation recoveries. Estimates are based upon
past loss experience modified for current trends as well as
prevailing economic, legal and social conditions. Our loss
reserves are not discounted to present value.
We regularly review our loss reserves using a variety of
actuarial techniques. We update the reserve estimates as
historical loss experience develops, additional claims are
reported and/or settled and new information becomes available.
Any changes in estimates are reflected in operating results in
the period in which the estimates are changed.
Incurred but not reported (IBNR) reserves represent the
difference between the estimated ultimate cost of all claims
that have occurred and the reported losses and loss expenses.
Reported losses include cumulative paid losses and loss expenses
plus case reserves. The IBNR reserve includes a provision for
claims that have occurred but have not yet been reported to us,
some of which are not yet known to the insured, as well as a
provision for future development on reported claims. A
relatively large proportion of our net loss reserves,
particularly for long tail liability classes, are reserves for
IBNR losses. In fact, more than 65% of our aggregate net loss
reserves at December 31, 2007 were for IBNR losses.
Our gross case and IBNR loss reserves and related reinsurance
recoverable by class of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loss Reserves |
|
|
|
Net |
|
|
|
|
Reinsurance |
|
Loss |
December 31, 2007 |
|
Case |
|
IBNR |
|
Total |
|
Recoverable |
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$ |
226 |
|
|
$ |
200 |
|
|
$ |
426 |
|
|
$ |
15 |
|
|
$ |
411 |
|
|
Homeowners
|
|
|
432 |
|
|
|
305 |
|
|
|
737 |
|
|
|
32 |
|
|
|
705 |
|
|
Other
|
|
|
452 |
|
|
|
526 |
|
|
|
978 |
|
|
|
230 |
|
|
|
748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
1,110 |
|
|
|
1,031 |
|
|
|
2,141 |
|
|
|
277 |
|
|
|
1,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
646 |
|
|
|
1,010 |
|
|
|
1,656 |
|
|
|
37 |
|
|
|
1,619 |
|
|
Casualty
|
|
|
1,640 |
|
|
|
4,302 |
|
|
|
5,942 |
|
|
|
402 |
|
|
|
5,540 |
|
|
Workers compensation
|
|
|
842 |
|
|
|
1,323 |
|
|
|
2,165 |
|
|
|
255 |
|
|
|
1,910 |
|
|
Property and marine
|
|
|
814 |
|
|
|
395 |
|
|
|
1,209 |
|
|
|
532 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,942 |
|
|
|
7,030 |
|
|
|
10,972 |
|
|
|
1,226 |
|
|
|
9,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
2,079 |
|
|
|
5,999 |
|
|
|
8,078 |
|
|
|
552 |
|
|
|
7,526 |
|
|
Surety
|
|
|
33 |
|
|
|
52 |
|
|
|
85 |
|
|
|
14 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
2,112 |
|
|
|
6,051 |
|
|
|
8,163 |
|
|
|
566 |
|
|
|
7,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
7,164 |
|
|
|
14,112 |
|
|
|
21,276 |
|
|
|
2,069 |
|
|
|
19,207 |
|
Reinsurance assumed
|
|
|
400 |
|
|
|
947 |
|
|
|
1,347 |
|
|
|
238 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,564 |
|
|
$ |
15,059 |
|
|
$ |
22,623 |
|
|
$ |
2,307 |
|
|
$ |
20,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loss Reserves |
|
|
|
Net |
|
|
|
|
Reinsurance |
|
Loss |
December 31, 2006 |
|
Case |
|
IBNR |
|
Total |
|
Recoverable |
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$ |
261 |
|
|
$ |
178 |
|
|
$ |
439 |
|
|
$ |
14 |
|
|
$ |
425 |
|
|
Homeowners
|
|
|
421 |
|
|
|
298 |
|
|
|
719 |
|
|
|
54 |
|
|
|
665 |
|
|
Other
|
|
|
443 |
|
|
|
459 |
|
|
|
902 |
|
|
|
245 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
1,125 |
|
|
|
935 |
|
|
|
2,060 |
|
|
|
313 |
|
|
|
1,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
702 |
|
|
|
965 |
|
|
|
1,667 |
|
|
|
74 |
|
|
|
1,593 |
|
|
Casualty
|
|
|
1,668 |
|
|
|
3,922 |
|
|
|
5,590 |
|
|
|
377 |
|
|
|
5,213 |
|
|
Workers compensation
|
|
|
827 |
|
|
|
1,223 |
|
|
|
2,050 |
|
|
|
310 |
|
|
|
1,740 |
|
|
Property and marine
|
|
|
821 |
|
|
|
393 |
|
|
|
1,214 |
|
|
|
536 |
|
|
|
678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
4,018 |
|
|
|
6,503 |
|
|
|
10,521 |
|
|
|
1,297 |
|
|
|
9,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
2,542 |
|
|
|
5,598 |
|
|
|
8,140 |
|
|
|
852 |
|
|
|
7,288 |
|
|
Surety
|
|
|
22 |
|
|
|
56 |
|
|
|
78 |
|
|
|
19 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
2,564 |
|
|
|
5,654 |
|
|
|
8,218 |
|
|
|
871 |
|
|
|
7,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
7,707 |
|
|
|
13,092 |
|
|
|
20,799 |
|
|
|
2,481 |
|
|
|
18,318 |
|
Reinsurance assumed
|
|
|
464 |
|
|
|
1,030 |
|
|
|
1,494 |
|
|
|
113 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,171 |
|
|
$ |
14,122 |
|
|
$ |
22,293 |
|
|
$ |
2,594 |
|
|
$ |
19,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves, net of reinsurance recoverable, increased by
$617 million or 3% in 2007. Loss reserves related to our
insurance business increased by $889 million, including
approximately $290 million related to currency fluctuation
due to the weakness of the U.S. dollar. Loss reserves related to
our reinsurance assumed business, which is in runoff, decreased
by $272 million.
Gross case reserves related to the professional liability
classes decreased by $463 million in 2007 due to generally
low reported loss activity as well as settlements related to
previously existing case reserves. The $300 million
decrease in reinsurance recoverable in the professional
liability classes was due primarily to the discontinuation of
the professional liability per risk treaty in 2005 and the
settlement of claims related to years prior to 2005.
In establishing the loss reserves of our property and casualty
subsidiaries, we consider facts currently known and the present
state of the law and coverage litigation. Based on all
information currently available, we believe that the aggregate
loss reserves at December 31, 2007 were adequate to cover
claims for losses that had occurred as of that date, including
both those known to us and those yet to be reported. However, as
described below, there are significant uncertainties inherent in
the loss reserving process. It is therefore possible that
managements estimate of the ultimate liability for losses
that had occurred as of December 31, 2007 may change, which
could have a material effect on the Corporations results
of operations and financial condition.
|
|
|
Estimates and Uncertainties |
The process of establishing loss reserves is complex and
imprecise as it must take into consideration many variables that
are subject to the outcome of future events. As a result,
informed subjective estimates and judgments as to our ultimate
exposure to losses are an integral component of our loss
reserving process.
40
Due to the inherent complexity of the loss reserving process and
the potential variability of the assumptions used, the actual
emergence of losses could vary, perhaps substantially, from the
estimate of losses included in our financial statements,
particularly when settlements may not occur until well into the
future. Our net loss reserves at December 31, 2007 were
$20.3 billion. Therefore, a relatively small percentage
change in the estimate of net loss reserves would have a
material effect on the Corporations results of operations.
Reserves Other than Those Relating to Asbestos and Toxic
Waste Claims. Our loss reserves include amounts related
to short tail and long tail classes of business.
Tail refers to the time period between the
occurrence of a loss and the settlement of the claim. The longer
the time span between the incidence of a loss and the settlement
of the claim, the more the ultimate settlement amount can vary.
Short tail classes consist principally of homeowners, commercial
property and marine business. For these classes, claims are
generally reported and settled shortly after the loss occurs and
the claims relate to tangible property. Consequently, the
estimation of loss reserves for these classes is less complex.
Most of our loss reserves relate to long tail liability classes
of business. Long tail classes include directors and officers
liability, errors and omissions liability and other professional
liability coverages, commercial primary and excess liability,
workers compensation and other liability coverages. For
many liability claims significant periods of time, ranging up to
several years or more, may elapse between the occurrence of the
loss, the reporting of the loss to us and the settlement of the
claim. As a result, loss experience in the more recent accident
years for the long tail liability classes has limited
statistical credibility because a relatively small proportion of
losses in these accident years are reported claims and an even
smaller proportion are paid losses. An accident year is the
calendar year in which a loss is incurred or, in the case of
claims-made policies, the calendar year in which a loss is
reported. Liability claims are also more susceptible to
litigation and can be significantly affected by changing
contract interpretations and the legal environment.
Consequently, the estimation of loss reserves for these classes
is more complex and typically subject to a higher degree of
variability than for short tail classes.
Most of our reinsurance assumed business is long tail casualty
reinsurance. Reserve estimates for this business are therefore
subject to the variability caused by extended loss emergence
periods. The estimation of loss reserves for this business is
further complicated by delays between the time the claim is
reported to the ceding insurer and when it is reported by the
ceding insurer to us and by our dependence on the quality and
consistency of the loss reporting by the ceding company.
Our actuaries perform a comprehensive annual review of loss
reserves for each of the numerous classes of business we write
prior to the determination of the year end carried reserves. The
review process takes into consideration the variety of trends
that impact the ultimate settlement of claims in each particular
class of business. A similar, but somewhat less comprehensive,
review is performed for the major classes of business prior to
the determination of the June 30 carried reserves. Prior to the
determination of the March 30 and September 30 carried reserves,
our actuaries review the emergence of paid and reported losses
relative to expectations and, as necessary, conduct reserve
reviews for particular classes of business.
The loss reserve estimation process relies on the basic
assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis
for predicting future outcomes. As part of that process, our
actuaries use a variety of actuarial methods that analyze
experience, trends and other relevant factors. The principal
standard actuarial methods used by our actuaries in the loss
reserve reviews include loss development factor methods,
expected loss ratio methods, Bornheutter-Ferguson methods and
frequency/severity methods.
Loss development factor methods generally assume that the losses
yet to emerge for an accident year are proportional to the paid
or reported loss amount observed so far. Historical patterns of
the
41
development of paid and reported losses by accident year are
applied to current paid and reported losses to generate
estimated ultimate losses by accident year.
Expected loss ratio methods use loss ratios for prior accident
years, adjusted to reflect our evaluation of recent loss trends,
the current risk environment, changes in our book of business
and changes in our pricing and underwriting, to determine the
appropriate expected loss ratio for a given accident year. The
expected loss ratio for each accident year is multiplied by the
earned premiums for that year to calculate estimated ultimate
losses.
Bornheutter-Ferguson methods are combinations of an expected
loss ratio method and a loss development factor method, where
the loss development factor method is given more weight as an
accident year matures.
Frequency/severity methods first project ultimate claim counts
(using one or more of the other methods described above) and
then multiply those counts by an estimated average claim cost to
calculate estimated ultimate losses. The average claim costs are
often estimated by fitting historical severity data to an
observed trend. Generally, these methods work best for high
frequency, low severity classes of business.
In completing their loss reserve analysis, our actuaries are
required to determine the most appropriate actuarial methods to
employ for each class of business. Within each class, the
business is further segregated by accident year and generally by
jurisdiction. Each estimation method has its own pattern,
parameter and/or judgmental dependencies, with no estimation
method being better than the others in all situations. The
relative strengths and weaknesses of the various estimation
methods when applied to a particular class of business can also
change over time, depending on the underlying circumstances. In
many cases, multiple estimation methods will be valid for the
particular facts and circumstances of the relevant class of
business. The manner of application and the degree of reliance
on a given method will vary by class of business, by accident
year and by jurisdiction based on our actuaries evaluation
of the above dependencies and the potential volatility of the
loss frequency and severity patterns. The estimation methods
selected or given weight by our actuaries at a particular
valuation date are those that are believed to produce the most
reliable indication for the loss reserves being evaluated. These
selections incorporate input from claims personnel, pricing
actuaries and underwriting management on loss cost trends and
other factors that could affect the reserve estimates.
For short tail classes, the emergence of paid and incurred
losses generally exhibits a reasonably stable pattern of loss
development from one accident year to the next. Thus, for these
classes, the loss development factor method is generally
relatively straightforward to apply and usually requires only
modest extrapolation. For long tail classes, applying the loss
development factor method often requires more judgment in
selecting development factors as well as more significant
extrapolation. For those long tail classes with high frequency
and relatively low per-loss severity (e.g. workers
compensation), volatility will often be sufficiently modest for
the loss development factor method to be given significant
weight, except in the most recent accident years.
For certain long tail classes of business, however, anticipated
loss experience is less predictable because of the small number
of claims and erratic claim severity patterns. These classes
include directors and officers liability, errors and omissions
liability and commercial excess liability, among others. For
these classes, the loss development factor methods may not
produce a reliable estimate of ultimate losses in the most
recent accident years since many claims either have not yet been
reported to us or are only in the early stages of the settlement
process. Therefore, the actuarial estimates for these accident
years are based on less extrapolatory methods, such as expected
loss ratio and Bornheutter-Ferguson methods. Over time, as a
greater number of claims are reported and the statistical
credibility of loss experience increases, loss development
factor methods are given increasingly more weight.
Using all the available data, our actuaries select an indicated
loss reserve amount for each class of business based on the
various assumptions, projections and methods. The total
indicated reserve
42
amount determined by our actuaries is an aggregate of the
indicated reserve amounts for the individual classes of
business. The ultimate outcome is likely to fall within a range
of potential outcomes around this indicated amount, but the
indicated amount is not expected to be precisely the ultimate
liability.
Senior management meets with our actuaries at the end of each
quarter to review the results of the latest loss reserve
analysis. Based on this review, management determines the
carried reserve for each class of business. In making the
determination, management considers numerous factors, such as
changes in actuarial indications in the period, the maturity of
the accident year, trends observed over the recent past and the
level of volatility within a particular class of business. Such
an assessment requires considerable judgment. It is often not
possible to determine whether a change in the data represents
credible actionable information or an anomaly. Even if a change
is determined to be permanent, it is not always possible to
determine the extent of the change until sometime later. As a
result, there can be a time lag between the emergence of a
change and a determination that the change should be reflected
in the carried loss reserves. In general, changes are made more
quickly to more mature accident years and less volatile classes
of business.
Among the numerous factors that contribute to the inherent
uncertainty in the process of establishing loss reserves are the
following:
|
|
|
|
|
changes in the inflation rate for goods and services related to
covered damages such as medical care and home repair costs, |
|
|
|
changes in the judicial interpretation of policy provisions
relating to the determination of coverage, |
|
|
|
changes in the general attitude of juries in the determination
of liability and damages, |
|
|
|
legislative actions, |
|
|
|
changes in the medical condition of claimants, |
|
|
|
changes in our estimates of the number and/or severity of claims
that have been incurred but not reported as of the date of the
financial statements, |
|
|
|
changes in our book of business, |
|
|
|
changes in our underwriting standards, and |
|
|
|
changes in our claim handling procedures. |
In addition, we must consider the uncertain effects of emerging
or potential claims and coverage issues that arise as legal,
judicial and social conditions change. These issues have had,
and may continue to have, a negative effect on our loss reserves
by either extending coverage beyond the original underwriting
intent or by increasing the number or size of claims. Recent
examples of such issues include the number of directors and
officers liability and errors and omissions liability claims
arising out of the ongoing credit crisis, the number of
directors and officers liability claims arising out of stock
option backdating practices by certain public
companies, the number and size of directors and officers
liability and errors and omissions liability claims arising out
of investment banking practices and accounting and other
corporate malfeasance, and exposure to claims asserted for
bodily injury as a result of long-term exposure to harmful
products or substances. As a result of issues such as these, the
uncertainties inherent in estimating ultimate claim costs on the
basis of past experience have grown, further complicating the
already complex loss reserving process.
As part of our loss reserving analysis, we take into
consideration the various factors that contribute to the
uncertainty in the loss reserving process. Those factors that
could materially affect our loss reserve estimates include loss
development patterns and loss cost trends, rate and exposure
level changes, the effects of changes in coverage and policy
limits, business mix shifts, the effects of regulatory and
legislative developments, the effects of changes in judicial
interpretations, the effects of emerging claims and coverage
issues and the effects of changes in claim
43
handling practices. In making estimates of reserves, however, we
do not necessarily make an explicit assumption for each of these
factors. Moreover, all estimation methods do not utilize the
same assumptions and typically no single method is determinative
in the reserve analysis for a class of business. Consequently,
changes in our loss reserve estimates generally are not the
result of changes in any one assumption. Instead, the
variability will be affected by the interplay of changes in
numerous assumptions, many of which are implicit to the
approaches used.
For each class of business, we regularly adjust the assumptions
and actuarial methods used in the estimation of loss reserves in
response to our actual loss experience as well as our judgments
regarding changes in trends and/or emerging patterns. In those
instances where we primarily utilize analyses of historical
patterns of the development of paid and reported losses, this
may be reflected, for example, in the selection of revised loss
development factors. In those long tail classes of business that
comprise a majority of our loss reserves and for which loss
experience is less predictable due to potential changes in
judicial interpretations, potential legislative actions and
potential claims issues, this may be reflected in a judgmental
change in our estimate of ultimate losses for particular
accident years.
The future impact of the various factors that contribute to the
uncertainty in the loss reserving process is extremely difficult
to predict. There is potential for significant variation in the
development of loss reserves, particularly for long tail classes
of business. We do not derive statistical loss distributions or
outcome confidence levels around our loss reserve estimate.
Actuarial ranges of reasonable estimates are not a true
reflection of the potential volatility between carried loss
reserves and the ultimate settlement amount of losses incurred
prior to the balance sheet date. This is due, among other
reasons, to the fact that actuarial ranges are developed based
on known events as of the valuation date whereas the ultimate
disposition of losses is subject to the outcome of events and
circumstances that were unknown as of the valuation date.
The following discussion includes disclosure of possible
variation from current estimates of loss reserves due to a
change in certain key assumptions for particular classes of
business. These impacts are estimated individually, without
consideration for any correlation among such assumptions or
among lines of business. Therefore, it would be inappropriate to
take the amounts and add them together in an attempt to estimate
volatility for our loss reserves in total. We believe that the
estimated variation in reserves detailed below is a reasonable
estimate of the possible variation that may occur in the future.
However, if such variation did occur, it would likely occur over
a period of several years and therefore its impact on the
Corporations results of operations would be spread over
the same period. It is important to note, however, that there is
the potential for future variation greater than the amounts
discussed below.
Two of the larger components of our loss reserves relate to the
professional liability classes other than fidelity and to
commercial excess liability. The respective reported loss
development patterns are key assumptions in estimating loss
reserves for these classes of business, both as applied directly
to more mature accident years and as applied indirectly (e.g.,
via Bornheutter-Ferguson methods) to less mature accident years.
Reserves for the professional liability classes other than
fidelity were $7.1 billion, net of reinsurance, at
December 31, 2007. Based on a review of our loss
experience, if the loss development factor for each accident
year changed such that the cumulative loss development factor
for the most recent accident year changed by 10%, we estimate
that the net reserves for professional liability classes other
than fidelity would change by approximately $700 million,
in either direction. This degree of change in the reported loss
development pattern is within the historical variation around
the averages in our data.
Reserves for commercial excess liability (excluding asbestos and
toxic waste claims) were $2.9 billion, net of reinsurance,
at December 31, 2007. These reserves are included within
commercial casualty. Based on a review of our loss experience,
if the loss development factor for each accident year changed
such that the cumulative loss development factor for the most
recent accident year
44
changed by 15%, we estimate that the net reserves for commercial
excess liability would change by approximately
$250 million, in either direction. This degree of change in
the reported loss development pattern is within the historical
variation around the averages in our data.
Reserves Relating to Asbestos and Toxic Waste Claims.
The estimation of loss reserves relating to asbestos and
toxic waste claims on insurance policies written many years ago
is subject to greater uncertainty than other types of claims due
to inconsistent court decisions as well as judicial
interpretations and legislative actions that in some cases have
tended to broaden coverage beyond the original intent of such
policies and in others have expanded theories of liability. The
insurance industry as a whole is engaged in extensive litigation
over coverage and liability issues and is thus confronted with a
continuing uncertainty in its efforts to quantify these
exposures.
Reserves for asbestos and toxic waste claims cannot be estimated
with traditional actuarial loss reserving techniques that rely
on historical accident year loss development factors. Instead,
we rely on an exposure-based analysis that involves a detailed
review of individual policy terms and exposures. Because each
policyholder presents different liability and coverage issues,
we generally evaluate our exposure on a
policyholder-by-policyholder basis, considering a variety of
factors that are unique to each policyholder. Quantitative
techniques have to be supplemented by subjective considerations
including managements judgment.
We establish case reserves and expense reserves for costs of
related litigation where sufficient information has been
developed to indicate the involvement of a specific insurance
policy. In addition, IBNR reserves are established to cover
additional exposures on both known and unasserted claims.
We believe that the loss reserves carried at December 31,
2007 for asbestos and toxic waste claims were adequate. 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, it is possible that our estimate
of loss reserves relating to these exposures may increase in
future periods as new information becomes available and as
claims develop.
Asbestos Reserves. Asbestos remains the most
significant and difficult mass tort for the insurance industry
in terms of claims volume and dollar exposure. Asbestos claims
relate primarily to bodily injuries asserted by those who came
in contact with asbestos or products containing asbestos. Tort
theory affecting asbestos litigation has evolved over the years.
Early court cases established the continuous trigger
theory with respect to insurance coverage. Under this theory,
insurance coverage is deemed to be triggered from the time a
claimant is first exposed to asbestos until the manifestation of
any disease. This interpretation of a policy trigger can involve
insurance policies over many years and increases insurance
companies exposure to liability. Until recently, judicial
interpretations and legislative actions attempted to maximize
insurance availability from both a coverage and liability
standpoint.
New asbestos claims and new exposures on existing claims have
continued despite the fact that usage of asbestos has declined
since the mid-1970s. Many claimants were exposed to
multiple asbestos products over an extended period of time. As a
result, claim filings typically name dozens of defendants. The
plaintiffs bar has solicited new claimants through
extensive advertising and through asbestos medical screenings. A
vast majority of asbestos bodily injury claims have been filed
by claimants who do not show any signs of asbestos related
disease. New asbestos cases are often filed in those
jurisdictions with a reputation for judges and juries that are
extremely sympathetic to plaintiffs.
Approximately 80 manufacturers and distributors of asbestos
products have filed for bankruptcy protection as a result of
asbestos-related liabilities. A bankruptcy sometimes involves an
agreement to a plan between the debtor and its creditors,
including current and future asbestos claimants. Although the
debtor is negotiating in part with its insurers money,
insurers are generally given only limited opportunity to be
heard. In addition to contributing to the overall number of
claims, bankruptcy proceedings have also caused increased
settlement demands against remaining solvent defendants.
45
There have been some positive legislative and judicial
developments in the asbestos environment over the past several
years:
|
|
|
|
|
Various challenges to mass screening claimants have been
mounted, including a June 2005 U.S. District Court decision in
Texas. Many believe that this decision is leading to higher
medical evidentiary standards. For example, several asbestos
injury settlement trusts suspended their acceptance of claims
that were based on the diagnosis of physicians or screening
companies named in the case, citing concerns about their
reliability. Further investigations of the medical screening
process for asbestos claims are underway. |
|
|
|
A number of states have implemented legislative and judicial
reforms that focus the courts resources on the claims of
the most seriously injured. Those who allege serious injury and
can present credible evidence of their injuries are receiving
priority trial settings in the courts, while those who have not
shown any credible disease manifestation are having their
hearing dates delayed or are placed on an inactive docket, which
preserves the right to pursue litigation in the future. |
|
|
|
A number of key jurisdictions have adopted venue reform that
requires plaintiffs to have a connection to the jurisdiction in
order to file a complaint. |
|
|
|
In recognition that many aspects of bankruptcy plans are unfair
to certain classes of claimants and to the insurance industry,
these plans are beginning to be closely scrutinized by the
courts and rejected when appropriate. |
Our most significant individual asbestos exposures involve
products liability on the part of traditional
defendants who were engaged in the manufacture, distribution or
installation of asbestos products. We wrote excess liability
and/or general liability coverages for these insureds. While
these insureds are relatively few in number, their exposure has
become substantial due to the increased volume of claims, the
erosion of the underlying limits and the bankruptcies of target
defendants.
Our other asbestos exposures involve products and non-products
liability on the part of peripheral defendants,
including a mix of manufacturers, distributors and installers of
certain products that contain asbestos in small quantities and
owners or operators of properties where asbestos was present.
Generally, these insureds are named defendants on a regional
rather than a nationwide basis. As the financial resources of
traditional asbestos defendants have been depleted, plaintiffs
are targeting these viable peripheral parties with greater
frequency and, in many cases, for large awards.
Asbestos claims against the major manufacturers, distributors or
installers of asbestos products were typically presented under
the products liability section of primary general liability
policies as well as under excess liability policies, both of
which typically had aggregate limits that capped an
insurers exposure. In recent years, a number of asbestos
claims by insureds are being presented as
non-products claims, such as those by installers of
asbestos products and by property owners or operators who
allegedly had asbestos on their property, under the premises or
operations section of primary general liability policies. Unlike
products exposures, these non-products exposures typically had
no aggregate limits on coverage, creating potentially greater
exposure. Further, in an effort to seek additional insurance
coverage, some insureds with installation activities who have
substantially eroded their products coverage are presenting new
asbestos claims as non-products operations claims or attempting
to reclassify previously settled products claims as non-products
claims to restore a portion of previously exhausted products
aggregate limits. It is difficult to predict whether insureds
will be successful in asserting claims under non-products
coverage or whether insurers will be successful in asserting
additional defenses. Accordingly, the ultimate cost to insurers
of the claims for coverage not subject to aggregate limits is
uncertain.
In establishing our asbestos reserves, we evaluate the exposure
presented by each insured. As part of this evaluation, we
consider a variety of factors including: the available insurance
coverage; limits and deductibles; the jurisdictions involved;
past settlement values of similar claims; the potential role of
other insurance, particularly underlying coverage below our
excess liability policies; potential
46
bankruptcy impact; relevant judicial interpretations; and
applicable coverage defenses, including asbestos exclusions.
We have assumed a continuing unfavorable legal environment with
no benefit from any federal asbestos reform legislation. Various
federal proposals to solve the ongoing asbestos litigation
crisis have been considered by the U.S. Congress over the past
few years, but none have yet been enacted. Thus, the prospect of
federal asbestos reform legislation remains uncertain.
Our actuaries and claim personnel perform periodic analyses of
our asbestos related exposures. The analyses during 2005 noted
an increase in our estimate of the ultimate liabilities for two
of our asbestos defendants. The analyses during 2006 noted
positive developments, including several settlements, related to
certain of our traditional asbestos defendants. At the same
time, the analyses indicated that our exposure to loss from
claims against our peripheral defendants was somewhat higher
than previously expected. The analyses during 2007 noted an
increase in our estimate of the ultimate liabilities related to
certain of our traditional asbestos defendants. Based on these
analyses, we increased our net asbestos loss reserves by
$35 million in 2005, $18 million in 2006 and
$75 million in 2007.
The following table presents a reconciliation of the beginning
and ending loss reserves related to asbestos claims.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
Gross loss reserves, beginning of year
|
|
$ |
841 |
|
|
$ |
930 |
|
|
$ |
961 |
|
Reinsurance recoverable, beginning of year
|
|
|
52 |
|
|
|
50 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, beginning of year
|
|
|
789 |
|
|
|
880 |
|
|
|
906 |
|
Net incurred losses
|
|
|
75 |
|
|
|
18 |
|
|
|
35 |
|
Net losses paid
|
|
|
71 |
|
|
|
109 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
|
793 |
|
|
|
789 |
|
|
|
880 |
|
Reinsurance recoverable, end of year
|
|
|
45 |
|
|
|
52 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss reserves, end of year
|
|
$ |
838 |
|
|
$ |
841 |
|
|
$ |
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the number of policyholders for
whom we have open asbestos case reserves and the related net
loss reserves at December 31, 2007 as well as the net
losses paid during 2007 by component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Net Loss |
|
Net Losses |
|
|
Policyholders |
|
Reserves |
|
Paid |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Traditional defendants
|
|
|
26 |
|
|
$ |
220 |
|
|
$ |
26 |
|
Peripheral defendants
|
|
|
385 |
|
|
|
411 |
|
|
|
45 |
|
Future claims from unknown policyholders
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
793 |
|
|
$ |
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant uncertainty remains as to our ultimate liability
related to asbestos related claims. This uncertainty is due to
several factors including:
|
|
|
|
|
the long latency period between asbestos exposure and disease
manifestation and the resulting potential for involvement of
multiple policy periods for individual claims; |
|
|
|
plaintiffs increased focus on peripheral defendants; |
|
|
|
the volume of claims by unimpaired plaintiffs and the extent to
which they can be precluded from making claims; |
47
|
|
|
|
|
the efforts by insureds to claim the right to non-products
coverage not subject to aggregate limits; |
|
|
|
the number of insureds seeking bankruptcy protection as a result
of asbestos-related liabilities; |
|
|
|
the ability of claimants to bring a claim in a state in which
they have no residency or exposure; |
|
|
|
the impact of the exhaustion of primary limits and the resulting
increase in claims on excess liability policies we have issued; |
|
|
|
inconsistent court decisions and diverging legal
interpretations; and |
|
|
|
the possibility, however remote, of federal legislation that
would address the asbestos problem. |
These significant uncertainties are not likely to be resolved in
the near future.
Toxic Waste Reserves. Toxic waste claims relate
primarily to pollution and related cleanup costs. Our insureds
have two potential areas of exposure hazardous waste
dump sites and pollution at the insured site primarily from
underground storage tanks and manufacturing processes.
The federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (Superfund) has been interpreted to
impose strict, retroactive and joint and several liability on
potentially responsible parties (PRPs) for the cost of
remediating hazardous waste sites. Most sites have multiple PRPs.
Most PRPs named to date are parties who have been generators,
transporters, past or present landowners or past or present site
operators. These PRPs had proper government authorization in
many instances. However, relative fault has not been a factor in
establishing liability. Insurance policies issued to PRPs were
not intended to cover the clean-up costs of pollution and, in
many cases, did not intend to cover the pollution itself. In
more recent years, however, policies specifically excluded such
exposures.
As the costs of environmental clean-up became substantial, PRPs
and others increasingly filed claims with their insurance
carriers. Litigation against insurers extends to issues of
liability, coverage and other policy provisions.
There is substantial uncertainty involved in estimating our
liabilities related to these claims. First, the liabilities of
the claimants are extremely difficult to estimate. At any given
waste site, the allocation of remediation costs among
governmental authorities and the PRPs varies greatly depending
on a variety of factors. Second, different courts have addressed
liability and coverage issues regarding pollution claims and
have reached inconsistent conclusions in their interpretation of
several issues. These significant uncertainties are not likely
to be resolved definitively in the near future.
Uncertainties also remain as to the Superfund law itself.
Superfunds taxing authority expired on December 31,
1995 and has not been re-enacted. Federal legislation appears to
be at a standstill. At this time, it is not possible to predict
the direction that any reforms may take, when they may occur or
the effect that any changes may have on the insurance industry.
Without federal movement on Superfund reform, the enforcement of
Superfund liability has occasionally shifted to the states.
States are being forced to reconsider state-level cleanup
statutes and regulations. As individual states move forward, the
potential for conflicting state regulation becomes greater. In a
few states, we have seen cases brought against insureds or
directly against insurance companies for environmental pollution
and natural resources damages. To date, only a few natural
resource claims have been filed and they are being vigorously
defended. Significant uncertainty remains as to the cost of
remediating the state sites. Because of the large number of
state sites, such sites could prove even more costly in the
aggregate than Superfund sites.
48
In establishing our toxic waste reserves, we evaluate the
exposure presented by each insured. As part of this evaluation,
we consider a variety of factors including: the probable
liability, available insurance coverage, past settlement values
of similar claims, relevant judicial interpretations, applicable
coverage defenses as well as facts that are unique to each
insured.
Uncertainty remains as to our ultimate liability relating to
toxic waste claims. However, toxic waste losses appear to be
developing as expected due to relatively stable claim trends. In
many cases, claims are being settled for less than initially
anticipated due to more efficient site remediation efforts. In
other cases, we have been successful at buying back our
policies, thus removing the threat of additional losses in the
future.
The following table presents a reconciliation of our beginning
and ending loss reserves, net of reinsurance recoverable,
related to toxic waste claims. The reinsurance recoverable
related to these claims is minimal.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
Reserves, beginning of year
|
|
$ |
169 |
|
|
$ |
191 |
|
|
$ |
208 |
|
Incurred losses
|
|
|
13 |
|
|
|
6 |
|
|
|
|
|
Losses paid
|
|
|
28 |
|
|
|
28 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, end of year
|
|
$ |
154 |
|
|
$ |
169 |
|
|
$ |
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the net toxic waste loss reserves at December 31, 2007,
$58 million was IBNR reserves.
Reinsurance Recoverable. Reinsurance recoverable
is the estimated amount recoverable from reinsurers related to
the losses we have incurred. At December 31, 2007,
reinsurance recoverable included $363 million recoverable
with respect to paid losses and loss expenses, which is included
in other assets, and $2.3 billion recoverable on unpaid
losses and loss expenses.
Reinsurance recoverable on unpaid losses and loss expenses
represents an estimate of the portion of our gross loss reserves
that will be recovered from reinsurers. Such reinsurance
recoverable is estimated as part of our loss reserving process
using assumptions that are consistent with the assumptions used
in estimating the gross loss reserves. Consequently, the
estimation of reinsurance recoverable is subject to similar
judgments and uncertainties as the estimation of gross loss
reserves.
Ceded reinsurance contracts do not relieve our primary
obligation to our policyholders. Consequently, an exposure
exists with respect to reinsurance recoverable to the extent
that any reinsurer is unable to meet its obligations or disputes
the liabilities assumed under the reinsurance contracts. We are
selective in regard to our reinsurers, placing reinsurance with
only those reinsurers who we believe have strong balance sheets
and superior underwriting ability, and we monitor the financial
strength of our reinsurers on an ongoing basis. Nevertheless, in
recent years, certain of our reinsurers have experienced
financial difficulties or exited the reinsurance business. In
addition, we may become involved in coverage disputes with our
reinsurers. A provision for estimated uncollectible reinsurance
is recorded based on periodic evaluations of balances due from
reinsurers, the financial condition of the reinsurers, coverage
disputes and other relevant factors.
Prior Year Loss Development
Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that
loss trends vary and time is required for changes in trends to
be recognized and confirmed. Reserve changes that increase
previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease previous estimates of ultimate
cost are referred to as favorable development or reserve
releases.
49
A reconciliation of our beginning and ending loss reserves, net
of reinsurance, for the three years ended December 31, 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
Net loss reserves, beginning of year
|
|
$ |
19,699 |
|
|
$ |
18,713 |
|
|
$ |
16,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred losses and loss expenses related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
6,996 |
|
|
|
6,870 |
|
|
|
7,650 |
|
|
Prior years
|
|
|
(697 |
) |
|
|
(296 |
) |
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,299 |
|
|
|
6,574 |
|
|
|
7,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments for losses and loss expenses related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,809 |
|
|
|
1,640 |
|
|
|
1,878 |
|
|
Prior years
|
|
|
3,873 |
|
|
|
3,948 |
|
|
|
4,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,682 |
|
|
|
5,588 |
|
|
|
5,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
$ |
20,316 |
|
|
$ |
19,699 |
|
|
$ |
18,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, we experienced overall favorable prior year
development of $697 million, which represented 3.5% of the
net loss reserves as of December 31, 2006. This compares
with favorable prior year development of $296 million
during 2006, which represented 1.6% of the net loss reserves at
December 31, 2005, and unfavorable prior year development
of $163 million during 2005, which represented 1.0% of the
net loss reserves at December 31, 2004. Such development
was reflected in operating results in these respective years.
The following table presents the overall prior year loss
development for the three years ended December 31, 2007 by
accident year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year |
|
|
(Favorable) Unfavorable |
|
|
Development? |
|
|
|
Accident Year |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
(in millions) |
2006
|
|
$ |
(141 |
) |
|
|
|
|
|
|
|
|
2005
|
|
|
(233 |
) |
|
$ |
(372 |
) |
|
|
|
|
2004
|
|
|
(240 |
) |
|
|
(276 |
) |
|
$ |
(304 |
) |
2003
|
|
|
(148 |
) |
|
|
(83 |
) |
|
|
(306 |
) |
2002
|
|
|
(71 |
) |
|
|
5 |
|
|
|
169 |
|
2001
|
|
|
53 |
|
|
|
99 |
|
|
|
149 |
|
2000
|
|
|
(17 |
) |
|
|
102 |
|
|
|
81 |
|
1999
|
|
|
(10 |
) |
|
|
24 |
|
|
|
99 |
|
1998
|
|
|
(26 |
) |
|
|
19 |
|
|
|
36 |
|
1997 and prior
|
|
|
136 |
|
|
|
186 |
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(697 |
) |
|
$ |
(296 |
) |
|
$ |
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net favorable development of $697 million in 2007 was
due to various factors. The most significant factors were:
|
|
|
We experienced favorable development of about $300 million
in the professional liability classes other than fidelity,
including about $100 million outside the U.S. A majority of
this favorable development was in the 2003 through 2005 accident
years. Reported loss activity related to these accident years
was less than expected due to a favorable business climate,
lower policy limits and better terms and conditions. While these
accident years are somewhat immature, we concluded that |
50
|
|
|
there was sufficient evidence to modestly decrease the expected
loss ratios for these accident years. The fact that our initial
estimates for accident years 2003 and subsequent are developing
favorably was recognized as one factor among several factors in
the determination of loss reserves for the 2007 accident year
for these classes. Other factors included the specific aspects
of the current claim environment and the recent downward trend
in prices. |
|
|
We experienced favorable development of about $180 million
in the short tail homeowners and commercial property classes,
primarily related to the 2006 and 2005 accident years. This
favorable development arose from the lower than expected
emergence of actual losses during 2007 relative to expectations
used to establish our loss reserves at the end of 2006. The
severity of late reported property claims that emerged during
2007 was lower than expected and case development, including
salvage recoveries, on previously reported claims was better
than expected. Because the incidence of property losses is
subject to a considerable element of fortuity, reserve estimates
for these classes are based on an analysis of past loss
experience on average over a period of years. As a result, the
favorable development in 2007 was recognized but had a
relatively modest effect on our determination of carried
property loss reserves at December 31, 2007. |
|
|
We experienced favorable development of about $135 million
in the run-off of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants. |
|
|
We experienced favorable development of about $40 million
in the fidelity class and $30 million in the surety class
due to lower than expected reported loss emergence, mainly
related to more recent accident years. Loss reserve estimates at
the end of 2006 in these classes included an expectation of more
large late reported losses than actually occurred in 2007.
However, since we would still expect such losses to occur in a
typical year, factors that resulted in the favorable development
in 2007 were given only modest weight in our determination of
carried fidelity and surety loss reserves at December 31,
2007. |
|
|
We experienced favorable development of about $30 million
in the personal automobile class. Case development during 2007
on previously reported claims was better than expected,
reflecting improved case management. Also, the number of late
reported claims was less than expected, reflecting a
continuation of recent generally favorable frequency trends.
Both of these factors were reflected in the determination of the
carried loss reserves for this class at December 31, 2007. |
|
|
We experienced adverse development of about $20 million in
the commercial liability classes. Adverse development in
accident years prior to 1997, mostly the $88 million
related to asbestos and toxic waste claims, was largely offset
by favorable development in these classes in the more recent
accident years. The asbestos and toxic waste loss activity
primarily related to specific individual excess liability claims
and did not change our overall assessment of recent trends.
Therefore, this adverse development had little overall effect on
our determination of carried loss reserves for these classes at
December 31, 2007. |
The net favorable development of $296 million in 2006 was
also due to various factors. The most significant factors were:
|
|
|
We experienced favorable development of about $190 million
in the short tail homeowners and commercial property classes,
primarily related to the 2005 accident year. This favorable
development arose from the lower than expected emergence of
actual losses during 2006 relative to expectations used to
establish our loss reserves at the end of 2005. The severity of
late reported property claims that emerged during 2006 was lower
than expected and case development, including salvage
recoveries, on previously reported claims was better than
expected. |
|
|
We experienced favorable loss development of about
$70 million in the fidelity class due to lower than
expected reported loss emergence, mainly related to more recent
accident years. |
|
|
We experienced favorable development of about $65 million
in the run-off of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants. |
51
|
|
|
We experienced favorable development of about $45 million
in the professional liability classes other than fidelity.
Favorable development in the 2004 and 2005 accident years more
than offset continued unfavorable development in accident years
2000 through 2002. Reported loss activity related to accident
years 2004 and 2005 was less than expected due to a favorable
business climate, lower policy limits and better terms and
conditions. While these accident years are somewhat immature, we
concluded that there was sufficient evidence to modestly
decrease the expected loss ratios for these accident years. On
the other hand, we continued to experience significant reported
loss activity related to the 2000 through 2002 accident years,
largely from claims related to corporate failures and
allegations of management misconduct and accounting
irregularities. As a result, we increased the expected loss
ratios for these accident years. |
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We experienced favorable development of about $25 million
in the personal automobile class. Case development during 2006
on previously reported claims was better than expected,
reflecting improved case management. Also, the number of late
reported claims was less than expected, reflecting a
continuation of recent generally favorable frequency trends. |
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We experienced adverse development of about $100 million in
the commercial liability classes, including $24 million
related to asbestos and toxic waste claims. The adverse
development was primarily due to reported loss activity in
accident years prior to 1997 that was worse than expected,
primarily related to specific individual excess liability and
other liability claims. |
The net unfavorable development of $163 million in 2005 was
due to various factors. The most significant were:
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We experienced adverse development of about $200 million in
the professional liability classes other than fidelity. The
adverse development resulted from continued significant reported
loss activity related to accident years 1998 through 2002,
largely from claims related to corporate failures and
allegations of management misconduct and accounting
irregularities. As a result, we increased the expected loss
ratios for these accident years. Offsetting this somewhat,
reported loss activity related to accident years 2003 and 2004
was less than expected due to a favorable business climate,
lower policy limits and better terms and conditions. While these
accident years were somewhat immature, we concluded that there
was sufficient evidence to modestly decrease the expected loss
ratios for these accident years. |
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We experienced adverse development of about $175 million in
the commercial liability classes related to accident years prior
to 1996, including $35 million related to asbestos claims.
There was significant reported loss activity during 2005 related
to these older accident years, primarily in the commercial
excess liability class, which caused us to extend the expected
loss emergence period. |
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We experienced favorable development of about $160 million
in the short tail homeowners and commercial property classes,
primarily related to the 2004 accident year. The favorable
development arose from the lower than expected emergence of late
reported losses during 2005 relative to expectations used to
establish our loss reserves at the end of 2004. |
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We experienced favorable loss development of about
$60 million in the fidelity class due to lower than
expected reported loss emergence, mainly related to more recent
accident years. |
In Item 1 of this report, we present an analysis of our
consolidated loss reserve development on a calendar year basis
for each of the ten years prior to 2007. The variability in
reserve development over the ten year period illustrates the
uncertainty of the loss reserving process.
Our U.S. property and casualty subsidiaries are required to file
annual statements with insurance regulatory authorities prepared
on an accounting basis prescribed or permitted by such
authorities. These annual statements include an analysis of loss
reserves, referred to as Schedule P, that presents accident
year loss development information by line of business for the
nine years prior to 2007. It is our intention to post the
Schedule P for our combined U.S. property and casualty
subsidiaries on our website as soon as it becomes available.
52
Investment Results
Property and casualty investment income before taxes increased
by 9% in 2007 compared with 2006 and by 11% in 2006 compared
with 2005. Growth in both years was due to an increase in
invested assets, which reflected substantial cash flow from
operations over the period.
The effective tax rate on our investment income was 19.9% in
2007 compared with 19.8% in 2006 and 19.7% in 2005. While
similar in these years, the effective tax rate does fluctuate as
a result of our holding a different proportion of our investment
portfolio in tax exempt securities during different periods.
On an after-tax basis, property and casualty investment income
increased by 9% in 2007 and 10% in 2006. The after-tax
annualized yield on the investment portfolio that supports our
property and casualty insurance business was 3.50% in 2007
compared with 3.48% in 2006 and 3.45% in 2005. Management uses
property and casualty investment income after-tax, a non-GAAP
financial measure, to evaluate its investment performance
because it reflects the impact of any change in the proportion
of the investment portfolio invested in tax exempt securities
and is therefore more meaningful for analysis purposes than
investment income before income tax.
Other Income and Charges
Other income and charges, which include miscellaneous income and
expenses of the property and casualty subsidiaries, were not
significant in the last three years.
CORPORATE AND OTHER
Corporate and other comprises investment income earned on
corporate invested assets, interest expense and other expenses
not allocated to our operating subsidiaries, and the results of
our real estate and other non-insurance subsidiaries, including
Chubb Financial Solutions (CFS), which provided customized
financial products to corporate clients and has been in run-off
since April 2003.
Corporate and other produced a loss before taxes of
$149 million in 2007 compared with losses of
$89 million and $172 million in 2006 and 2005,
respectively. The higher loss in 2007 compared with 2006 was due
primarily to higher interest expense as a result of the issuance
of $1.8 billion of new debt during the first half of 2007.
The higher interest expense was only modestly offset by an
increase in investment income as a substantial portion of the
proceeds from the issuance of the debt was used to repurchase
Chubbs common stock. The lower loss in 2006 compared with
2005 was primarily due to a significantly smaller loss in our
real estate operation and higher investment income. The growth
in investment income in 2006 was due to an increase in corporate
invested assets, resulting from the issuance of Chubbs
common stock upon the settlement of equity unit warrants and
purchase contracts and under stock-based employee compensation
plans.
Real Estate
Real estate operations resulted in a loss before taxes of
$6 million in 2007 compared with losses of $3 million
in 2006 and $41 million in 2005. The large loss in 2005 was
due to the recognition of a significant impairment loss. During
2005, we committed to a plan to sell a parcel of land in New
Jersey that we had previously intended to hold and develop. The
decision to sell the property was based on our assessment of the
current real estate market and our concern about zoning issues.
As a result of our decision to sell this property, we reassessed
the recoverability of its carrying value. Based on our
reassessment, we recognized an impairment loss of
$48 million during the year to reduce the carrying value of
the property to its estimated fair value.
Real estate revenues were $41 million in 2007,
$202 million in 2006 and $115 million in 2005. The
higher revenues in 2006 were due to the sale of one commercial
property for approximately $110 million.
53
At December 31, 2007, we owned approximately
$120 million of land and $25 million of commercial
properties and land parcels under lease. Management believes
that it has made adequate provisions for impairment of real
estate assets.
Chubb Financial Solutions
CFSs business was primarily structured credit derivatives,
principally as a counterparty in portfolio credit default swap
contracts. In April 2003, the Corporation announced its
intention to exit CFSs business. Since that date, CFS has
terminated early or run-off nearly all of its contractual
obligations within its financial products portfolio.
The credit derivatives are carried in the financial statements
at estimated fair value, which represents managements best
estimate of the cost to exit the positions. Changes in fair
value are recognized in income in the period of the change.
CFSs results were near breakeven in 2007 and 2006 compared
with a loss before taxes of $9 million in 2005. The loss in
2005 related to the termination of a principal and interest
guarantee contract.
CFSs aggregate exposure, or retained risk, from each of
its remaining in-force financial products contracts is referred
to as notional amount. Notional 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.
CFSs remaining financial products contracts at
December 31, 2007 included one credit default swap, a
derivative contract linked to an equity market index that
terminates in 2012 and a few other insignificant transactions.
We estimate that the notional amount under the remaining
contracts was about $400 million and the fair value of our
future obligations was $7 million at December 31, 2007.
REALIZED INVESTMENT GAINS AND LOSSES
Net investment gains realized were as follows:
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Years Ended December 31 |
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2007 |
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2006 |
|
2005 |
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|
(in millions) |
Net realized gains (losses)
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|
Equity securities
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|
$ |
135 |
|
|
$ |
51 |
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|
$ |
75 |
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Fixed maturities
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|
4 |
|
|
|
(2 |
) |
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|
(35 |
) |
|
Other invested assets
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|
344 |
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|
209 |
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|
162 |
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|
Transfer of reinsurance assumed business
|
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|
|
|
|
|
|
|
|
|
171 |
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|
Personal Lines Insurance Brokerage
|
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|
16 |
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|
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483 |
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|
258 |
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|
389 |
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|
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Other-than-temporary impairment losses
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|
|
|
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|
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|
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|
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|
Equity securities
|
|
|
79 |
|
|
|
10 |
|
|
|
1 |
|
|
Fixed maturities
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|
|
30 |
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|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
13 |
|
|
|
5 |
|
|
|
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|
|
|
|
|
|
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|
|
|
Realized investment gains before tax
|
|
$ |
374 |
|
|
$ |
245 |
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|
$ |
384 |
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|
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|
Realized investment gains after tax
|
|
$ |
243 |
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|
$ |
161 |
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|
$ |
248 |
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The net realized gains on other invested assets represent the
aggregate of distributions to us from the limited partnerships
in which we have an interest and changes in our equity in the
net assets of the partnerships based on valuations provided to
us by the manager of each partnership. As a result of the timing
of our receipt of valuation data from the investment managers,
these investments are reported on a three month lag.
54
In 2005, we transferred our ongoing reinsurance business and
certain related assets to Harbor Point Limited. In exchange, we
received from Harbor Point $200 million of 6% convertible
notes and warrants to purchase common stock of Harbor Point. The
notes and warrants represented in the aggregate on a fully
diluted basis approximately 16% of the new company. The
transaction resulted in a pre-tax gain of $204 million, of
which $171 million was recognized as a realized investment
gain in 2005. The remaining gain of $33 million was
deferred and will be recognized based on the timing of the
ultimate disposition of our economic interest in Harbor Point.
In 2005, we completed the sale of Personal Lines Insurance
Brokerage, Inc. Based on the terms of the sale, we recognized a
gain of $16 million.
Decisions to sell equity securities and fixed maturities are
governed principally by considerations of investment
opportunities and tax consequences. As a result, realized gains
and losses on the sale of these investments may vary
significantly from period to period. However, such gains and
losses generally have little, if any, impact on
shareholders equity as all of these investments are
carried at fair value, with the unrealized appreciation or
depreciation reflected in comprehensive income.
A primary reason for the sale of fixed maturities in each of the
last three years has been to improve our after-tax portfolio
return without sacrificing quality where market opportunities
have existed to do so. In addition, in the fourth quarter of
2005, to reduce our income tax liability, we engaged in a
program to sell taxable and tax exempt fixed maturities to
generate realized losses to offset a portion of the gain related
to the Harbor Point transaction.
We regularly review those invested assets whose fair value is
less than cost to determine if an other-than-temporary decline
in value has occurred. In evaluating whether a decline in value
of any investment is temporary or other than temporary, we
consider various quantitative criteria and qualitative factors
including the length of time and the extent to which the fair
value has been less than the cost, the financial condition and
near term prospects of the issuer, whether the issuer is current
on contractually obligated interest and principal payments, our
intent and ability to hold the investment for a period of time
sufficient to allow us to recover our cost, general market
conditions and industry or sector specific factors. If a decline
in the fair value of an individual security is deemed to be
other than temporary, the difference between cost and estimated
fair value is charged to income as a realized investment loss.
The fair value of the investment becomes its new cost basis. The
decision to recognize a decline in the value of a security
carried at fair value as other-than-temporary rather than
temporary has no impact on shareholders equity.
During 2007, our investments in several equity securities and
one fixed maturity holding were deemed to be
other-than-temporarily impaired. We determined that the equity
securities were not likely to recover to our cost basis over a
near-term period and we were not likely to collect all
contractually obligated amounts due us under the terms of the
fixed maturity investment.
Information related to investment securities in an unrealized
loss position at December 31, 2007 and 2006 is included in
Note (4)(b) of the Notes to Consolidated Financial Statements.
INCOME TAXES
As a result of progress toward the settlement of certain tax
matters, we recognized a $10 million tax benefit in the
third quarter of 2006.
In connection with the sale of a subsidiary a number of years
ago, we agreed to indemnify the buyer for certain pre-closing
tax liabilities. During the first quarter of 2005, we settled
this obligation with the purchaser. Accordingly, we reduced our
income tax liability, which resulted in the recognition of a
benefit of $22 million.
55
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent a companys
overall financial strength and its ability to generate cash
flows, borrow funds at competitive rates and raise new capital
to meet operating and growth needs.
Capital Resources
Capital resources provide protection for policyholders, furnish
the financial strength to support the business of underwriting
insurance risks and facilitate continued business growth. At
December 31, 2007, the Corporation had shareholders
equity of $14.4 billion and total debt of $3.5 billion.
In February 2007, Executive Risk Capital Trust (Trust),
wholly owned by Chubb Executive Risk Inc., a wholly owned
subsidiary of Chubb, redeemed $125 million of its 8.675%
capital securities using the funds it received from the
repayment of debentures issued by Chubb Executive Risk to the
Trust, which constituted the Trusts sole assets. The
redemption price of the capital securities included a make-whole
premium of $5 million in the aggregate.
In March 2007, Chubb issued $1.0 billion of unsecured
junior subordinated capital securities. The capital securities
will become due on April 15, 2037, the scheduled maturity
date, but only to the extent that Chubb has received sufficient
net proceeds from the sale of certain qualifying capital
securities. Chubb must use its commercially reasonable efforts,
subject to certain market disruption events, to sell enough
qualifying capital securities to permit repayment of the capital
securities on the scheduled maturity date or as soon thereafter
as possible. Any remaining outstanding principal amount will be
due on March 29, 2067, the final maturity date. The capital
securities bear interest at a fixed rate of 6.375% through
April 14, 2017. Thereafter, the capital securities will
bear interest at a rate equal to the three-month LIBOR rate plus
2.25%. Subject to certain conditions, Chubb has the right to
defer the payment of interest on the capital securities for a
period not exceeding ten consecutive years. During any such
period, interest will continue to accrue and Chubb generally may
not declare or pay any dividends on or purchase any shares of
its capital stock.
In connection with the issuance of the capital securities, Chubb
entered into a replacement capital covenant in which it agreed
that it will not repay, redeem or purchase the capital
securities before March 29, 2047, unless, subject to
certain limitations, it has received proceeds from the sale of
replacement capital securities, as defined. Subject to the
replacement capital covenant, the capital securities may be
redeemed, in whole or in part, at any time on or after
April 15, 2017 at a redemption price equal to the principal
amount plus any accrued interest or prior to April 15, 2017
at a redemption price equal to the greater of (i) the
principal amount or (ii) a make-whole amount, in each case
plus any accrued interest.
In May 2007, Chubb issued $800 million of unsecured 6%
senior notes due in 2037.
In 2002, Chubb issued $600 million of unsecured 4% senior
notes due in 2007 and 24 million mandatorily exercisable
warrants to purchase its common stock. The notes and warrants
were issued together in the form of 7% equity units, each of
which initially represented $25 principal amount of notes and
one warrant. In August 2005, the notes were successfully
remarketed as required by their terms. The interest rate on the
notes was reset to 4.934%, effective August 16, 2005. Each
warrant obligated the holder to purchase, on or before
November 16, 2005, for a settlement price of $25, a
variable number of shares of Chubbs common stock. The
number of shares purchased was determined based on a formula
that considered the market price of Chubbs common stock
immediately prior to the time of settlement in relation to the
$28.32 per share sale price of the common stock at the time the
equity units were offered. Upon settlement of the warrants in
November 2005, Chubb issued 17,366,234 shares of common stock
and received proceeds of $600 million. In November 2007,
the $600 million of notes were paid when due.
In December 2007, $75 million of
71/8%
notes issued by Chubb Executive Risk were paid when due.
56
In 2003, Chubb issued $460 million of unsecured 2.25%
senior notes due in 2008 and 18.4 million purchase
contracts to purchase its common stock. The notes and purchase
contracts were issued together in the form of 7% equity units,
each of which initially represented $25 principal amount of
notes and one purchase contract. In May 2006, the notes were
successfully remarketed as required by their terms. The interest
rate on the notes was reset to 5.472% from 2.25%, effective
May 16, 2006. The remarketed notes mature on
August 16, 2008. Each purchase contract obligated the
holder to purchase, on or before August 16, 2006, for a
settlement price of $25, a variable number of shares of
Chubbs common stock. The number of shares purchased was
determined based on a formula that considered the market price
of Chubbs common stock immediately prior to the time of
settlement in relation to the $29.75 per share sale price of the
common stock at the time the equity units were offered. Upon
settlement of the purchase contracts in August 2006, Chubb
issued 12,883,527 shares of common stock and received proceeds
of $460 million.
Chubb also has outstanding $225 million of 3.95% notes due
in April 2008 as well as $400 million of 6% notes due in
2011, $275 million of 5.2% notes due in 2013,
$100 million of 6.6% debentures due in 2018 and
$200 million of 6.8% debentures due in 2031, all of which
are unsecured.
Management regularly monitors the Corporations capital
resources. In connection with our long-term capital strategy,
Chubb from time to time contributes capital to its property and
casualty subsidiaries. In addition, in order to satisfy capital
needs as a result of any rating agency capital adequacy or other
future rating issues, or in the event we were to need additional
capital to make strategic investments in light of market
opportunities, we may take a variety of actions, which could
include the issuance of additional debt and/or equity
securities. We believe that our strong financial position and
conservative debt level provide us with the flexibility and
capacity to obtain funds externally through debt or equity
financings on both a short term and long term basis.
In December 2005, the Board of Directors authorized the
repurchase of up to 28,000,000 shares of Chubbs common
stock. In December 2006, the Board of Directors authorized the
repurchase of up to an additional 20,000,000 shares of common
stock. In March 2007, the Board of Directors authorized an
increase of 20,000,000 shares to the December 2006
authorization. In December 2007, the Board of Directors
authorized the repurchase of up to an additional 28,000,000
shares of common stock.
In 2005, we repurchased 2,787,800 shares of Chubbs common
stock in open market transactions at a cost of
$135 million. In January 2006, we repurchased 5,100,000
shares under an accelerated stock buyback program at an initial
price of $48.91 per share, for a total cost of
$249 million. The program was completed in March 2006, at
which time, under the terms of the agreement, we received a
price adjustment based on the volume weighted average price of
Chubbs common stock during the program period. The price
adjustment could be settled, at our election, in Chubbs
common stock or cash. We elected to have the counterparty
deliver 125,562 additional shares in settlement of the price
adjustment. During the remainder of 2006, we repurchased
20,140,700 shares in the open market. In the aggregate, in 2006,
we repurchased 25,366,262 shares of Chubbs common stock at
a cost of $1,257 million. In 2007, we repurchased
41,733,268 shares of Chubbs common stock in open market
transactions at a cost of $2,184 million. As of
December 31, 2007, 26,112,670 shares remained under the
December 2007 share repurchase authorization, which has no
expiration date. Based on our outlook for 2008, we expect to
repurchase all of the shares remaining under the December 2007
authorization by the end of 2008, subject to market conditions.
Ratings
Chubb and its insurance subsidiaries are rated by major rating
agencies. These ratings reflect the rating agencys opinion
of our financial strength, operating performance, strategic
position and ability to meet our obligations to policyholders.
57
Credit ratings assess a companys ability to make timely
payments of interest and principal on its debt. The following
table summarizes the Corporations credit ratings from the
major independent rating organizations as of February 26,
2008.
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A.M. Best |
|
Standard & Poors |
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Moodys |
|
Fitch |
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Senior unsecured debt
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aa- |
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A |
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A2 |
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A+ |
|
Junior subordinated capital securities
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a |
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BBB+ |
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A3 |
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A |
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Commercial paper
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AMB-1+ |
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A-1 |
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P-1 |
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F-1 |
|
Financial strength ratings assess an insurers ability to
meet its financial obligations to policyholders. The following
table summarizes our property and casualty subsidiaries
financial strength ratings from the major independent rating
organizations as of February 26, 2008.
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A.M. Best |
|
Standard & Poors |
|
Moodys |
|
Fitch |
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Financial strength
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A++ |
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AA |
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Aa2 |
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AA |
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Ratings are an important factor in establishing our competitive
position in the insurance markets. There can be no assurance
that our ratings will continue for any given period of time or
that they will not be changed.
It is possible that one or more of the rating agencies may raise
or lower our existing ratings in the future. If our credit
ratings were downgraded, we might incur higher borrowing costs
and might have more limited means to access capital. A downgrade
in our financial strength ratings could adversely affect the
competitive position of our insurance operations, including a
possible reduction in demand for our products in certain markets.
Liquidity
Liquidity is a measure of a companys ability to generate
sufficient cash flows to meet the short and long term cash
requirements of its business operations.
The Corporations liquidity requirements in the past have
been met by funds from operations as well as the issuance of
commercial paper and debt and equity securities. We expect that
our liquidity requirements in the future will be met by these
sources of funds or borrowings from our credit facility.
Our property and casualty operations provide liquidity in that
premiums are generally received months or even years before
losses are paid under the policies purchased by such premiums.
Historically, cash receipts from operations, consisting of
insurance premiums and investment income, have provided more
than sufficient funds to pay losses, operating expenses and
dividends to Chubb. After satisfying our cash requirements,
excess cash flows are used to build the investment portfolio and
thereby increase future investment income.
Our strong underwriting results continued to generate
substantial new cash in 2007. New cash from operations available
for investment by the property and casualty subsidiaries was
approximately $1.6 billion in 2007 compared with
$2.7 billion in 2006 and $3.4 billion in 2005. New
cash available was lower in 2007 than in 2006 due to a
$900 million increase in dividends paid by the property and
casualty subsidiaries to Chubb and, to a lesser extent, higher
income tax payments. New cash available was lower in 2006 than
in 2005 due primarily to substantially higher income tax
payments and lower premium receipts.
58
Our property and casualty subsidiaries maintain substantial
investments in highly liquid, short-term marketable securities.
Accordingly, we do not anticipate selling long-term fixed
maturity investments to meet any liquidity needs.
Chubbs liquidity requirements primarily include the
payment of dividends to shareholders and interest and principal
on debt obligations. The declaration and payment of future
dividends to Chubbs shareholders will be at the discretion
of Chubbs Board of Directors and will depend upon many
factors, including our operating results, financial condition,
capital requirements and any regulatory constraints.
As a holding company, Chubbs ability to continue to pay
dividends to shareholders and to satisfy its debt obligations
relies on the availability of liquid assets, which is dependent
in large part on the dividend paying ability of its property and
casualty subsidiaries. Our property and casualty subsidiaries
are subject to laws and regulations in the jurisdictions in
which they operate that restrict the amount of dividends they
may pay without the prior approval of regulatory authorities.
The restrictions are generally based on net income and on
certain levels of policyholders surplus as determined in
accordance with statutory accounting practices. Dividends in
excess of such thresholds are considered
extraordinary and require prior regulatory approval.
During 2007, 2006 and 2005, these subsidiaries paid to Chubb
cash dividends of $1,550 million, $650 million and
$520 million, respectively. In 2005, these subsidiaries
also paid a dividend of $97 million in other assets. The
maximum dividend distribution that may be made by the property
and casualty subsidiaries to Chubb during 2008 without prior
approval is approximately $2.4 billion.
Chubb has a revolving credit agreement with a group of banks
that provides for up to $500 million of unsecured
borrowings. There have been no borrowings under this agreement.
Various interest rate options are available to Chubb, all of
which are based on market interest rates. The agreement contains
customary restrictive covenants including a covenant to maintain
a minimum consolidated shareholders equity, as adjusted.
At December 31, 2007, Chubb was in compliance with all such
covenants. The revolving credit facility is available for
general corporate purposes and to support our commercial paper
borrowing arrangement. The facility had a termination date of
June 22, 2010. In October 2007, the agreement was amended
to extend the termination date to October 19, 2012. The
terms of the amended agreement allow Chubb to elect in 2008 and
again in 2009 to extend the termination date of the agreement by
an additional year. On the termination date of the agreement,
any borrowings then outstanding become payable.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table provides our future payments due by period
under contractual obligations as of December 31, 2007,
aggregated by type of obligation.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2011 |
|
|
|
|
|
|
|
|
and |
|
and |
|
There- |
|
|
|
|
2008 |
|
2010 |
|
2012 |
|
after |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Principal due under long term debt
|
|
$ |
685 |
|
|
$ |
|
|
|
$ |
400 |
|
|
$ |
2,375 |
|
|
$ |
3,460 |
|
Interest payments on long term debt(a)
|
|
|
190 |
|
|
|
341 |
|
|
|
317 |
|
|
|
3,144 |
|
|
|
3,992 |
|
Future minimum rental payments under operating leases
|
|
|
89 |
|
|
|
146 |
|
|
|
114 |
|
|
|
181 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
964 |
|
|
|
487 |
|
|
|
831 |
|
|
|
5,700 |
|
|
|
7,982 |
|
Loss and loss expense reserves(b)
|
|
|
4,977 |
|
|
|
7,013 |
|
|
|
4,072 |
|
|
|
6,561 |
|
|
|
22,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,941 |
|
|
$ |
7,500 |
|
|
$ |
4,903 |
|
|
$ |
12,261 |
|
|
$ |
30,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Junior subordinated capital securities of $1 billion bear
interest at a fixed rate of 6.375% through April 14, 2017
and at a rate equal to the three-month LIBOR rate plus 2.25%
thereafter. For purposes of the above table, interest after
April 14, 2017 was calculated using the three-month |
59
|
|
|
LIBOR rate as of December 31, 2007. The table includes
future interest payments through the scheduled maturity date,
April 15, 2037. Interest payments for the period from the
scheduled maturity date through the final maturity date,
March 29, 2067, would increase the contractual obligation
by $2.1 billion. It is our expectation that the capital
securities will be redeemed at the end of the fixed interest
rate period. |
|
|
(b) |
There is typically no stated contractual commitment associated
with property and casualty insurance loss reserves. The
obligation to pay a claim arises only when a covered loss event
occurs and a settlement is reached. The vast majority of our
loss reserves relate to claims for which settlements have not
yet been reached. Our loss reserves therefore represent
estimates of future payments. These estimates are dependent on
the outcome of claim settlements that will occur over many
years. Accordingly, the payment of the loss reserves is not
fixed as to either amount or timing. The estimate of the timing
of future payments is based on our historical loss payment
patterns. The ultimate amount and timing of loss payments will
likely differ from our estimate and the differences could be
material. We expect that these loss payments will be funded, in
large part, by future cash receipts from operations. |
The above table excludes certain commitments totaling
$1.3 billion at December 31, 2007 to fund limited
partnership investments. These capital commitments can be called
by the partnerships from time to time during the commitment
period (generally five years or less), if and when needed by the
partnerships to fund working capital needs or the purchase of
new investments. It is uncertain whether and, if so, when we
will be required to fund these commitments. There is no
predetermined payment schedule.
The Corporation does not have any off-balance sheet arrangements
that are reasonably likely to have a material effect on the
Corporations financial condition, results of operations,
liquidity or capital resources, other than as disclosed in
Note (15) of the Notes to Consolidated Financial Statements.
INVESTED ASSETS
The main objectives in managing our investment portfolios are to
maximize after-tax investment income and total investment
returns while minimizing credit risks in order to provide
maximum support to the insurance underwriting operations.
Investment strategies are developed based on many factors
including underwriting results and our resulting tax position,
regulatory requirements, fluctuations in interest rates and
consideration of other market risks. Investment decisions are
centrally managed by investment professionals based on
guidelines established by management and approved by the boards
of directors of Chubb and its respective operating companies.
Our investment portfolio is primarily comprised of high quality
bonds, principally tax exempt, U.S. Treasury and government
agency, mortgage-backed securities and corporate issues as well
as foreign government and corporate bonds that support our
international operations. The portfolio also includes equity
securities, primarily publicly traded common stocks, and other
invested assets, primarily private equity limited partnerships,
all of which are held with the primary objective of capital
appreciation.
Limited partnership investments by their nature are less liquid
and involve more risk than other investments. We actively manage
our risk through type of asset class and domestic and
international diversification. At December 31, 2007, we had
investments in about 80 separate partnerships. We review the
performance of these investments on a quarterly basis and we
obtain audited financial statements annually.
In our U.S. operations, during 2007, we invested new cash
in tax exempt bonds and, to a lesser extent, taxable bonds,
equity securities and limited partnerships. The taxable bonds we
invested in were corporate bonds and mortgage-backed securities
while we reduced our holdings of U.S. Treasury securities.
In 2006, we invested new cash in tax-exempt bonds and, to a
lesser extent, equity securities
60
and limited partnerships, whereas we decreased our holdings of
taxable bonds, principally U.S. Treasury securities. In
2005, we invested new cash primarily in tax-exempt bonds and
taxable bonds. The taxable bonds we invested in were
mortgage-backed securities and, to a lesser extent, corporate
bonds. Our objective is to achieve the appropriate mix of
taxable and tax exempt securities in our portfolio to balance
both investment and tax strategies. At December 31, 2007,
66% of our U.S. fixed maturity portfolio was invested in tax
exempt bonds compared with 65% at December 31, 2006 and 60%
at December 31, 2005.
We classify those fixed maturity securities that may be sold
prior to maturity to support our investment strategies, such as
in response to changes in interest rates and the yield curve or
to maximize after-tax returns, as available-for-sale. We
classify those fixed maturities that we have the ability and
intent to hold to maturity as held-to-maturity. Fixed maturities
classified as available-for-sale are carried at market value
while fixed maturities classified as held-to-maturity are
carried at amortized cost. Only about 1% of the fixed maturity
portfolio was classified as held-to-maturity at
December 31, 2006 and 2005. During the fourth quarter of
2007, we transferred our remaining held-to-maturity securities
to available-for-sale.
Changes in the general interest rate environment affect the
returns available on new fixed maturity investments. While a
rising interest rate environment enhances the returns available
on new investments, it reduces the market value of existing
fixed maturity investments and thus the availability of gains on
disposition. A decline in interest rates reduces the returns
available on new investments but increases the market value of
existing investments, creating the opportunity for realized
investment gains on disposition.
The unrealized appreciation before tax of investments carried at
market value, which consists of fixed maturities classified as
available-for-sale and equity securities, was $810 million,
$603 million and $478 million at December 31,
2007, 2006 and 2005, respectively. Such unrealized appreciation
is reflected in comprehensive income, net of applicable deferred
income tax.
Changes in unrealized market appreciation or depreciation of
fixed maturities were due primarily to fluctuations in interest
rates.
CHANGE IN ACCOUNTING PRINCIPLES
Effective December 31, 2006, we adopted Statement of
Financial Accounting Standards (SFAS) No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R). SFAS No. 158 requires
an employer to recognize the overfunded or underfunded status of
a defined benefit postretirement plan as an asset or liability
in its balance sheet and to recognize changes in the funded
status as a component of comprehensive income in the year in
which the changes occur. Retrospective application is not
permitted.
SFAS No. 158 required that any gains or losses and
prior service cost that had not yet been included in net benefit
costs at the end of the year in which the Statement was adopted
be recognized as an adjustment of the ending balance of
accumulated other comprehensive income, net of tax. The adoption
of SFAS No. 158 reduced shareholders equity at
December 31, 2006 by $281 million. Adoption of the
Statement did not have any effect on the Corporations net
income in 2006 and 2007 and will not in future years. The
adoption of SFAS No. 158 is discussed further in
Note (2)(a) of the Notes to Consolidated Financial
Statements.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments. Our primary
exposure to market risks relates to our investment portfolio,
which is sensitive to changes in interest rates and, to a lesser
extent, credit quality, prepayment, foreign currency exchange
rates and equity prices. We also have exposure to market risks
through our debt
61
obligations. Analytical tools and monitoring systems are in
place to assess each of these elements of market risk.
Investment Portfolio
Interest rate risk is the price sensitivity of a security that
promises a fixed return to changes in interest rates. When
market interest rates rise, the market value of our fixed income
securities decreases. We view the potential changes in price of
our fixed income investments within the overall context of asset
and liability management. Our actuaries estimate the payout
pattern of our liabilities, primarily our property and casualty
loss reserves, to determine their duration, which is the present
value of the weighted average payments expressed in years. We
set duration targets for our fixed income investment portfolios
after consideration of the estimated duration of these
liabilities and other factors, which we believe mitigates the
overall effect of interest rate risk for the Corporation.
The following table provides information about our fixed
maturity investments, which are sensitive to changes in interest
rates. The table presents cash flows of principal amounts and
related weighted average interest rates by expected maturity
dates at December 31, 2007 and 2006. The cash flows are
based on the earlier of the call date or the maturity date or,
for mortgage-backed securities, expected payment patterns.
Actual cash flows could differ from the expected amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
There- |
|
Amortized |
|
Market |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
after |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Tax exempt
|
|
$ |
1,179 |
|
|
$ |
891 |
|
|
$ |
1,047 |
|
|
$ |
1,421 |
|
|
$ |
1,766 |
|
|
$ |
11,904 |
|
|
$ |
18,208 |
|
|
$ |
18,559 |
|
|
Average interest rate
|
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
4.7 |
% |
|
|
4.3 |
% |
|
|
4.1 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
Taxable other than mortgage- backed securities
|
|
|
808 |
|
|
|
1,125 |
|
|
|
1,388 |
|
|
|
1,196 |
|
|
|
1,494 |
|
|
|
4,494 |
|
|
|
10,505 |
|
|
|
10,562 |
|
|
Average interest rate
|
|
|
5.6 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
5.0 |
% |
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
623 |
|
|
|
580 |
|
|
|
556 |
|
|
|
529 |
|
|
|
694 |
|
|
|
1,779 |
|
|
|
4,761 |
|
|
|
4,750 |
|
|
Average interest rate
|
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
5.0 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,610 |
|
|
$ |
2,596 |
|
|
$ |
2,991 |
|
|
$ |
3,146 |
|
|
$ |
3,954 |
|
|
$ |
18,177 |
|
|
$ |
33,474 |
|
|
$ |
33,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
There- |
|
Amortized |
|
Market |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
after |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Tax exempt
|
|
$ |
915 |
|
|
$ |
868 |
|
|
$ |
1,007 |
|
|
$ |
1,094 |
|
|
$ |
1,492 |
|
|
$ |
12,073 |
|
|
$ |
17,449 |
|
|
$ |
17,755 |
|
|
Average interest rate
|
|
|
5.3 |
% |
|
|
5.2 |
% |
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
4.3 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
Taxable other than mortgage- backed securities
|
|
|
757 |
|
|
|
1,151 |
|
|
|
1,834 |
|
|
|
1,278 |
|
|
|
1,053 |
|
|
|
3,831 |
|
|
|
9,904 |
|
|
|
9,879 |
|
|
Average interest rate
|
|
|
5.6 |
% |
|
|
4.8 |
% |
|
|
4.5 |
% |
|
|
4.8 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
473 |
|
|
|
675 |
|
|
|
583 |
|
|
|
550 |
|
|
|
523 |
|
|
|
1,602 |
|
|
|
4,406 |
|
|
|
4,339 |
|
|
Average interest rate
|
|
|
4.5 |
% |
|
|
5.2 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,145 |
|
|
$ |
2,694 |
|
|
$ |
3,424 |
|
|
$ |
2,922 |
|
|
$ |
3,068 |
|
|
$ |
17,506 |
|
|
$ |
31,759 |
|
|
$ |
31,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk is the potential loss resulting from adverse changes
in the issuers ability to repay the debt obligation. We
have consistently invested in high quality marketable
securities. Only about 1% of our bond portfolio is below
investment grade. Our investment portfolio does not have any
direct exposure to either sub-prime mortgages or collateralized
debt obligations. Our tax exempt bonds mature on average in nine
years, while our taxable bonds have an average maturity of five
years.
62
About 95% of our tax exempt bonds are rated AA or better by
Moodys or Standard and Poors with about 70% rated
AAA. About 57% of the tax exempt bonds are uninsured and have an
average credit rating of AA+. The remaining 43% are insured and
are therefore rated AAA. Ongoing credit market related events
have weakened the monoline bond insurers and raised concerns
about the value of the credit insurance. The insured tax exempt
bonds in our portfolio have been selected based on the quality
of the underlying credit and not the value of the credit
insurance enhancement. It is managements belief that even
if the insurance provided by the monoline insurers ceased to
exist, the aggregate mark-to-market impact on our tax exempt
portfolio would not be material.
About 75% of the taxable bonds, other than mortgage-backed
securities, in our portfolio are issued by the
U.S. Treasury or U.S. government agencies or by
foreign governments or are rated AA or better.
Mortgage-backed securities comprised 31% of our taxable bond
portfolio at year-end 2007. About 98% of the mortgage-backed
securities are rated AAA and the remaining 2% are all investment
grade. Of the AAA rated securities, about 60% related to
residential mortgages consisting of government agency
pass-through securities, government agency collateralized
mortgage obligations (CMOs) and AAA rated non-agency CMOs backed
by government agency collateral or single family home mortgages.
The majority of the CMOs are actively traded in liquid markets
and market value information is readily available from
broker/dealers. The other 40% of the AAA rated securities are
call protected, commercial mortgage-backed securities.
Prepayment risk refers to the changes in prepayment patterns
related to decreases and increases in interest rates that can
either shorten or lengthen the expected timing of the principal
repayments and thus the average life of a security, potentially
reducing or increasing its effective yield. Such risk exists
primarily within our portfolio of residential mortgage-backed
securities. We monitor such risk regularly.
Foreign currency risk is the sensitivity to foreign exchange
rate fluctuations of the market value and investment income
related to foreign currency denominated financial instruments.
The functional currency of our foreign operations is generally
the currency of the local operating environment since business
is primarily transacted in such local currency. We seek to
mitigate the risks relating to currency fluctuations by
generally maintaining investments in those foreign currencies in
which our property and casualty subsidiaries have loss reserves
and other liabilities, thereby limiting exchange rate risk to
the net assets denominated in foreign currencies.
At December 31, 2007, the property and casualty
subsidiaries held foreign currency denominated investments of
$6.8 billion supporting their international operations. The
principal currencies creating foreign exchange rate risk for the
property and casualty subsidiaries are the Canadian dollar, the
euro and the British pound sterling. The following table
provides information about those fixed maturity investments that
are denominated in these currencies. The table presents cash
flows of principal amounts in U.S. dollar equivalents by
expected maturity dates at December 31, 2007. Actual cash
flows could differ from the expected amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
There- |
|
Amortized |
|
Market |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
after |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Canadian dollar
|
|
$ |
163 |
|
|
$ |
227 |
|
|
$ |
246 |
|
|
$ |
261 |
|
|
$ |
231 |
|
|
$ |
718 |
|
|
$ |
1,846 |
|
|
$ |
1,873 |
|
Euro
|
|
|
98 |
|
|
|
161 |
|
|
|
174 |
|
|
|
215 |
|
|
|
144 |
|
|
|
842 |
|
|
|
1,634 |
|
|
|
1,611 |
|
British pound sterling
|
|
|
129 |
|
|
|
114 |
|
|
|
274 |
|
|
|
117 |
|
|
|
191 |
|
|
|
673 |
|
|
|
1,498 |
|
|
|
1,502 |
|
63
Equity price risk is the potential loss in market value of our
equity securities resulting from adverse changes in stock
prices. In general, equities have more year-to-year price
variability than intermediate term high grade bonds. However,
returns over longer time frames have been consistently higher.
Our publicly traded equity securities are high quality,
diversified across industries and readily marketable. A
hypothetical decrease of 10% in the market price of each of the
equity securities held at December 31, 2007 and 2006 would
have resulted in a decrease of $232 million and
$196 million, respectively, in the fair value of the equity
securities portfolio.
All of the above risks are monitored on an ongoing basis. A
combination of in-house systems and proprietary models and
externally licensed software are used to analyze individual
securities as well as each portfolio. These tools provide the
portfolio managers with information to assist them in the
evaluation of the market risks of the portfolio.
Debt
We also have interest rate risk on our debt obligations. The
following table presents expected cash flow of principal amounts
and related weighted average interest rates by maturity date of
our long term debt obligations at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
There- |
|
|
|
Market |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
after |
|
Total |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Expected cash flows of principal amounts
|
|
$ |
685 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
400 |
|
|
$ |
|
|
|
$ |
2,375 |
|
|
$ |
3,460 |
|
|
$ |
3,427 |
|
Average interest rate
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
Item 8. Consolidated Financial Statements
and Supplementary Data
Consolidated financial statements of the Corporation at December
31, 2007 and 2006 and for each of the three years in the period
ended December 31, 2007 and the report thereon of our
independent registered public accounting firm, and the
Corporations unaudited quarterly financial data for the
two-year period ended December 31, 2007 are listed in Item
15(a) of this report.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of December 31, 2007, an evaluation of the effectiveness
of the design and operation of the Corporations disclosure
controls and procedures (as such term is defined in
Rule 13a-15(e) of
the Securities Exchange Act of 1934) was performed under
the supervision and with the participation of the
Corporations management, including Chubbs chief
executive officer and chief financial officer. Based on that
evaluation, the chief executive officer and chief financial
officer concluded that the Corporations disclosure
controls and procedures were effective as of December 31,
2007.
During the three month period ended December 31, 2007,
there were no changes in internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, the Corporations internal
control over financial reporting.
64
Managements Report on Internal Control over Financial
Reporting
Management of the Corporation is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934. The Corporations internal
control over financial reporting was designed under the
supervision of and with the participation of the
Corporations management, including Chubbs chief
executive officer and chief financial officer, to provide
reasonable assurance regarding the reliability of the
Corporations financial reporting and the preparation and
fair presentation of published financial statements in
accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management conducted an assessment of the effectiveness of the
Corporations internal control over financial reporting as
of December 31, 2007. In making this assessment, management
used the framework set forth in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, management has determined that, as of
December 31, 2007, the Corporations internal control
over financial reporting is effective.
The Corporations internal control over financial reporting
as of December 31, 2007 has been audited by
Ernst & Young LLP, the independent registered public
accounting firm who also audited the Corporations
consolidated financial statements. Their attestation report on
the Corporations internal control over financial reporting
is shown on page 66.
Item 9B. Other Information
None.
65
Report of Independent Registered Public Accounting Firm
Ernst & Young LLP
5 Times Square
New York, New York 10036
The Board of Directors and Shareholders
The Chubb Corporation
We have audited The Chubb Corporations internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The Chubb
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Corporations internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, The Chubb Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The Chubb Corporation as of
December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders equity, cash flows and
comprehensive income for each of the three years in the period
ended December 31, 2007, and our report dated
February 26, 2008 expressed an unqualified opinion thereon.
February 26, 2008
66
PART III.
Item 10. Directors and Executive Officers
of the Registrant
Information regarding Chubbs directors is incorporated by
reference from Chubbs definitive Proxy Statement for the
2008 Annual Meeting of Shareholders under the caption Our
Board of Directors. Information regarding Chubbs
executive officers is included in Part I of this report under
the caption Executive Officers of the Registrant.
Information regarding Section 16 reporting compliance of
Chubbs directors, executive officers and 10% beneficial
owners is incorporated by reference from Chubbs definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders
under the caption Section 16(a) Beneficial Ownership
Reporting Compliance. Information regarding Chubbs
Code of Ethics for CEO and Senior Financial Officers is included
in Item 1 of this report under the caption
Business General. Information regarding
the Audit Committee of Chubbs Board of Directors and its
Audit Committee financial experts is incorporated by reference
from Chubbs definitive Proxy Statement for the 2008 Annual
Meeting of Shareholders under the captions Corporate
Governance Audit Committee and Committee
Assignments.
Item 11. Executive Compensation
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, under the
captions Corporate Governance Directors
Compensation, Compensation Discussion and
Analysis and Executive Compensation.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, under the
captions Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information.
Item 13. Certain Relationships and Related
Transactions
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, under the
caption Certain Transactions and Other Matters.
Item 14. Principal Accountant Fees and
Services
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, under the
caption Proposal 2: Ratification of Appointment of
Independent Auditor.
PART IV.
Item 15. Exhibits,
Financial Statements and Schedules
The financial statements and schedules listed in the
accompanying index to financial statements and financial
statement schedules are filed as part of this report.
The exhibits listed in the accompanying index to exhibits are
filed as part of this report.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
February 21, 2008
|
|
|
|
|
(John D. Finnegan Chairman, President and |
|
Chief Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ John D. Finnegan
(John D. Finnegan) |
|
Chairman, President, Chief
Executive Officer and
Director
|
|
February 21, 2008 |
|
/s/ Zoë Baird
(Zoë Baird) |
|
Director
|
|
February 21, 2008 |
|
/s/ Sheila P. Burke
(Sheila P. Burke) |
|
Director
|
|
February 21, 2008 |
|
/s/ James I. Cash, Jr.
(James I. Cash, Jr.) |
|
Director
|
|
February 21, 2008 |
|
/s/ Joel J. Cohen
(Joel J. Cohen) |
|
Director
|
|
February 21, 2008 |
|
/s/ Klaus J. Mangold
(Klaus J. Mangold) |
|
Director
|
|
February 21, 2008 |
|
/s/ Martin G. McGuinn
(Martin G. McGuinn) |
|
Director
|
|
February 21, 2008 |
68
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ David G. Scholey
(David G. Scholey) |
|
Director
|
|
February 21, 2008 |
|
/s/ Lawrence M. Small
(Lawrence M. Small) |
|
Director
|
|
February 21, 2008 |
|
/s/ Jess Søderberg
(Jess Søderberg) |
|
Director
|
|
February 21, 2008 |
|
/s/ Daniel E. Somers
(Daniel E. Somers) |
|
Director
|
|
February 21, 2008 |
|
/s/ Karen Hastie Williams
(Karen Hastie Williams) |
|
Director
|
|
February 21, 2008 |
|
/s/ Alfred W. Zollar
(Alfred W. Zollar) |
|
Director
|
|
February 21, 2008 |
|
/s/ Michael OReilly
(Michael OReilly) |
|
Vice Chairman and
Chief Financial Officer
|
|
February 21, 2008 |
|
/s/ Henry B. Schram
(Henry B. Schram) |
|
Senior Vice President and
Chief Accounting Officer
|
|
February 21, 2008 |
69
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
(Item 15(a))
|
|
|
|
|
|
|
|
|
|
|
Form 10-K |
|
|
|
|
Page |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
Consolidated Statements of Income for the Years Ended
December 31, 2007, 2006 and 2005 |
|
|
F-3 |
|
Consolidated Balance Sheets at December 31, 2007 and 2006 |
|
|
F-4 |
|
Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2007, 2006 and 2005 |
|
|
F-5 |
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005 |
|
|
F-6 |
|
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2007, 2006 and 2005 |
|
|
F-7 |
|
Notes to Consolidated Financial Statements |
|
|
F-8 |
|
Supplementary Information (unaudited) |
|
|
|
|
Quarterly Financial Data |
|
|
F-32 |
|
Schedules: |
|
|
|
|
I
|
|
Consolidated Summary of Investments Other than
Investments in Related Parties at December 31, 2007
|
|
|
S-1 |
|
II
|
|
Condensed Financial Information of Registrant at
December 31, 2007 and 2006 and for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
S-2 |
|
III
|
|
Consolidated Supplementary Insurance Information at and for the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
S-5 |
|
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information
required is included in the financial statements and notes
thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
5 Times Square
New York, New York 10036
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of
The Chubb Corporation as of December 31, 2007 and 2006, and
the related consolidated statements of income,
shareholders equity, cash flows and comprehensive income
for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility
of the Corporations management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of The Chubb Corporation at December 31,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), The
Chubb Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2008
expressed an unqualified opinion thereon.
February 26, 2008
F-2
THE CHUBB CORPORATION
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions, |
|
|
Except For Per Share Amounts |
|
|
Years Ended December 31 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$ |
11,946 |
|
|
|
$ |
11,958 |
|
|
|
$ |
12,176 |
|
|
Investment Income
|
|
|
1,738 |
|
|
|
|
1,580 |
|
|
|
|
1,408 |
|
|
Other Revenues
|
|
|
49 |
|
|
|
|
220 |
|
|
|
|
115 |
|
|
Realized Investment Gains
|
|
|
374 |
|
|
|
|
245 |
|
|
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
14,107 |
|
|
|
|
14,003 |
|
|
|
|
14,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss Expenses
|
|
|
6,299 |
|
|
|
|
6,574 |
|
|
|
|
7,813 |
|
|
Amortization of Deferred Policy Acquisition Costs
|
|
|
3,092 |
|
|
|
|
2,919 |
|
|
|
|
2,931 |
|
|
Other Insurance Operating Costs and Expenses
|
|
|
444 |
|
|
|
|
550 |
|
|
|
|
512 |
|
|
Investment Expenses
|
|
|
35 |
|
|
|
|
34 |
|
|
|
|
29 |
|
|
Other Expenses
|
|
|
48 |
|
|
|
|
207 |
|
|
|
|
161 |
|
|
Corporate Expenses
|
|
|
252 |
|
|
|
|
194 |
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LOSSES AND EXPENSES
|
|
|
10,170 |
|
|
|
|
10,478 |
|
|
|
|
11,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX
|
|
|
3,937 |
|
|
|
|
3,525 |
|
|
|
|
2,447 |
|
|
|
|
Federal and Foreign Income Tax
|
|
|
1,130 |
|
|
|
|
997 |
|
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
2,807 |
|
|
|
$ |
2,528 |
|
|
|
$ |
1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
7.13 |
|
|
|
$ |
6.13 |
|
|
|
$ |
4.61 |
|
|
|
Diluted
|
|
|
7.01 |
|
|
|
|
5.98 |
|
|
|
|
4.47 |
|
See accompanying notes.
F-3
THE CHUBB CORPORATION
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
|
December 31 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Invested Assets
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
$ |
1,839 |
|
|
|
$ |
2,254 |
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity Tax Exempt (market $142 in 2006)
|
|
|
|
|
|
|
|
135 |
|
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Exempt (cost $18,208 and $17,314)
|
|
|
18,559 |
|
|
|
|
17,613 |
|
|
|
|
|
Taxable (cost $15,266 and $14,310)
|
|
|
15,312 |
|
|
|
|
14,218 |
|
|
|
Equity Securities (cost $1,907 and $1,561)
|
|
|
2,320 |
|
|
|
|
1,957 |
|
|
|
Other Invested Assets
|
|
|
2,051 |
|
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTED ASSETS
|
|
|
40,081 |
|
|
|
|
37,693 |
|
|
|
|
Cash
|
|
|
49 |
|
|
|
|
38 |
|
|
Securities Lending Collateral
|
|
|
1,247 |
|
|
|
|
2,620 |
|
|
Accrued Investment Income
|
|
|
440 |
|
|
|
|
411 |
|
|
Premiums Receivable
|
|
|
2,227 |
|
|
|
|
2,314 |
|
|
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
|
|
|
2,307 |
|
|
|
|
2,594 |
|
|
Prepaid Reinsurance Premiums
|
|
|
392 |
|
|
|
|
354 |
|
|
Deferred Policy Acquisition Costs
|
|
|
1,556 |
|
|
|
|
1,480 |
|
|
Deferred Income Tax
|
|
|
442 |
|
|
|
|
591 |
|
|
Goodwill
|
|
|
467 |
|
|
|
|
467 |
|
|
Other Assets
|
|
|
1,366 |
|
|
|
|
1,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
50,574 |
|
|
|
$ |
50,277 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Unpaid Losses and Loss Expenses
|
|
$ |
22,623 |
|
|
|
$ |
22,293 |
|
|
Unearned Premiums
|
|
|
6,599 |
|
|
|
|
6,546 |
|
|
Securities Lending Payable
|
|
|
1,247 |
|
|
|
|
2,620 |
|
|
Long Term Debt
|
|
|
3,460 |
|
|
|
|
2,466 |
|
|
Dividend Payable to Shareholders
|
|
|
110 |
|
|
|
|
104 |
|
|
Accrued Expenses and Other Liabilities
|
|
|
2,090 |
|
|
|
|
2,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
36,129 |
|
|
|
|
36,414 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities (Note 9 and
15)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Authorized 8,000,000 Shares;
$1 Par Value; Issued None
|
|
|
|
|
|
|
|
|
|
|
Common Stock Authorized 1,200,000,000 Shares;
$1 Par Value; Issued 374,649,923 and 411,276,940 Shares
|
|
|
375 |
|
|
|
|
411 |
|
|
Paid-In Surplus
|
|
|
346 |
|
|
|
|
1,539 |
|
|
Retained Earnings
|
|
|
13,280 |
|
|
|
|
11,711 |
|
|
Accumulated Other Comprehensive Income
|
|
|
444 |
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
14,445 |
|
|
|
|
13,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$ |
50,574 |
|
|
|
$ |
50,277 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
THE CHUBB CORPORATION
Consolidated Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
|
Years Ended December 31 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning and End of Year
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
411 |
|
|
|
|
210 |
|
|
|
|
196 |
|
|
|
Two-for-One Stock Split
|
|
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
|
Treasury Shares Cancelled
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
Repurchase of Shares
|
|
|
(42 |
) |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
Shares Issued Upon Settlement of Equity Unit Purchase Contracts
and Warrants
|
|
|
|
|
|
|
|
13 |
|
|
|
|
9 |
|
|
|
Shares Issued Under Stock-Based Employee Compensation Plans
|
|
|
6 |
|
|
|
|
6 |
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
375 |
|
|
|
|
411 |
|
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In Surplus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
1,539 |
|
|
|
|
2,364 |
|
|
|
|
1,319 |
|
|
|
Two-for-One Stock Split
|
|
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
|
Treasury Shares Cancelled
|
|
|
|
|
|
|
|
(377 |
) |
|
|
|
|
|
|
|
Repurchase of Shares
|
|
|
(1,361 |
) |
|
|
|
(987 |
) |
|
|
|
|
|
|
|
Shares Issued Upon Settlement of Equity Unit Purchase Contracts
and Warrants
|
|
|
|
|
|
|
|
447 |
|
|
|
|
591 |
|
|
|
Changes Related to Stock-Based Employee Compensation (includes
tax benefit of $16, $46, and $84)
|
|
|
168 |
|
|
|
|
302 |
|
|
|
|
454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
346 |
|
|
|
|
1,539 |
|
|
|
|
2,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
11,711 |
|
|
|
|
9,600 |
|
|
|
|
8,119 |
|
|
|
Net Income
|
|
|
2,807 |
|
|
|
|
2,528 |
|
|
|
|
1,826 |
|
|
|
Dividends Declared (per share $1.16, $1.00 and $.86)
|
|
|
(457 |
) |
|
|
|
(417 |
) |
|
|
|
(345 |
) |
|
|
Repurchase of Shares
|
|
|
(781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
13,280 |
|
|
|
|
11,711 |
|
|
|
|
9,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Appreciation of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
392 |
|
|
|
|
311 |
|
|
|
|
624 |
|
|
|
Change During Year, Net of Tax
|
|
|
134 |
|
|
|
|
81 |
|
|
|
|
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
526 |
|
|
|
|
392 |
|
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
91 |
|
|
|
|
57 |
|
|
|
|
79 |
|
|
|
Change During Year, Net of Tax
|
|
|
125 |
|
|
|
|
34 |
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
216 |
|
|
|
|
91 |
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Costs Not Yet Recognized
in Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change During Year, Net of Tax
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to Recognize Funded Status at December 31, 2006,
Net of Tax
|
|
|
|
|
|
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
(298 |
) |
|
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income,
End of Year
|
|
|
444 |
|
|
|
|
202 |
|
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year
|
|
|
|
|
|
|
|
(135 |
) |
|
|
|
(211 |
) |
|
|
Repurchase of Shares
|
|
|
|
|
|
|
|
(249 |
) |
|
|
|
(135 |
) |
|
|
Cancellation of Shares
|
|
|
|
|
|
|
|
384 |
|
|
|
|
|
|
|
|
Shares Issued Under Stock-Based Employee Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
$ |
14,445 |
|
|
|
$ |
13,863 |
|
|
|
$ |
12,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
THE
CHUBB CORPORATION
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
|
Years Ended December 31 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
2,807 |
|
|
|
$ |
2,528 |
|
|
|
$ |
1,826 |
|
|
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Unpaid Losses and Loss Expenses, Net
|
|
|
617 |
|
|
|
|
986 |
|
|
|
|
1,904 |
|
|
|
Increase (Decrease) in Unearned Premiums, Net
|
|
|
(74 |
) |
|
|
|
16 |
|
|
|
|
107 |
|
|
|
Decrease (Increase) in Reinsurance Recoverable on
Paid Losses
|
|
|
258 |
|
|
|
|
(225 |
) |
|
|
|
(51 |
) |
|
|
Amortization of Premiums and Discounts on
Fixed Maturities
|
|
|
233 |
|
|
|
|
233 |
|
|
|
|
217 |
|
|
|
Depreciation
|
|
|
69 |
|
|
|
|
81 |
|
|
|
|
91 |
|
|
|
Realized Investment Gains
|
|
|
(374 |
) |
|
|
|
(245 |
) |
|
|
|
(384 |
) |
|
|
Other, Net
|
|
|
(345 |
) |
|
|
|
(32 |
) |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY
OPERATING ACTIVITIES
|
|
|
3,191 |
|
|
|
|
3,342 |
|
|
|
|
3,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
4,616 |
|
|
|
|
3,623 |
|
|
|
|
7,481 |
|
|
|
Maturities, Calls and Redemptions
|
|
|
1,790 |
|
|
|
|
1,579 |
|
|
|
|
1,683 |
|
|
Proceeds from Sales of Equity Securities
|
|
|
360 |
|
|
|
|
186 |
|
|
|
|
330 |
|
|
Purchases of Fixed Maturities
|
|
|
(7,909 |
) |
|
|
|
(6,758 |
) |
|
|
|
(12,206 |
) |
|
Purchases of Equity Securities
|
|
|
(650 |
) |
|
|
|
(377 |
) |
|
|
|
(428 |
) |
|
Investments in Other Invested Assets, Net
|
|
|
(164 |
) |
|
|
|
(264 |
) |
|
|
|
(66 |
) |
|
Decrease (Increase) in Short Term Investments, Net
|
|
|
455 |
|
|
|
|
(355 |
) |
|
|
|
(591 |
) |
|
Increase (Decrease) in Net Payable from Security Transactions
not Settled
|
|
|
(106 |
) |
|
|
|
50 |
|
|
|
|
(111 |
) |
|
Purchases of Property and Equipment, Net
|
|
|
(53 |
) |
|
|
|
(53 |
) |
|
|
|
(40 |
) |
|
Other, Net
|
|
|
12 |
|
|
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,649 |
) |
|
|
|
(2,369 |
) |
|
|
|
(3,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Issuance of Long Term Debt
|
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Long Term Debt
|
|
|
(800 |
) |
|
|
|
|
|
|
|
|
(301 |
) |
|
Decrease in Funds Held Under Deposit Contracts
|
|
|
(8 |
) |
|
|
|
(29 |
) |
|
|
|
(276 |
) |
|
Proceeds from Common Stock Issued Upon Settlement of Equity Unit
Purchase Contracts and Warrants
|
|
|
|
|
|
|
|
460 |
|
|
|
|
600 |
|
|
Proceeds from Issuance of Common Stock Under
Stock-Based Employee Compensation Plans
|
|
|
130 |
|
|
|
|
229 |
|
|
|
|
531 |
|
|
Repurchase of Shares
|
|
|
(2,185 |
) |
|
|
|
(1,228 |
) |
|
|
|
(135 |
) |
|
Dividends Paid to Shareholders
|
|
|
(451 |
) |
|
|
|
(403 |
) |
|
|
|
(330 |
) |
|
Other, Net
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(1,531 |
) |
|
|
|
(971 |
) |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
11 |
|
|
|
|
2 |
|
|
|
|
(6 |
) |
Cash at Beginning of Year
|
|
|
38 |
|
|
|
|
36 |
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$ |
49 |
|
|
|
$ |
38 |
|
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
F-6
THE
CHUBB CORPORATION
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
|
Years Ended December 31 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
2,807 |
|
|
|
$ |
2,528 |
|
|
|
$ |
1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Unrealized Appreciation of Investments
|
|
|
134 |
|
|
|
|
81 |
|
|
|
|
(313 |
) |
|
Foreign Currency Translation Gains (Losses)
|
|
|
125 |
|
|
|
|
34 |
|
|
|
|
(22 |
) |
|
Change in Postretirement Benefit Costs Not Yet Recognized in Net
Income
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
115 |
|
|
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$ |
3,049 |
|
|
|
$ |
2,643 |
|
|
|
$ |
1,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) |
Summary of Significant Accounting Policies |
(a) Basis of Presentation
The Chubb Corporation (Chubb) is a holding company with
subsidiaries principally engaged in the property and casualty
insurance business. The property and casualty insurance
subsidiaries (the P&C Group) underwrite most lines of
property and casualty insurance in the United States, Canada,
Europe, Australia and parts of Latin America and Asia. The
geographic distribution of property and casualty business in the
United States is broad with a particularly strong market
presence in the Northeast.
The accompanying consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles and include the accounts of Chubb and its
subsidiaries (collectively, the Corporation). Significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements include amounts based on
informed estimates and judgments of management for transactions
that are not yet complete. Such estimates and judgments affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Certain amounts in the consolidated financial statements for
prior years have been reclassified to conform with the 2007
presentation.
(b) Invested Assets
Short term investments, which have an original maturity of one
year or less, are carried at amortized cost, which approximates
market value.
Fixed maturities, which include bonds and redeemable preferred
stocks, are purchased to support the investment strategies of
the Corporation. These strategies are developed based on many
factors including rate of return, maturity, credit risk, tax
considerations and regulatory requirements. Fixed maturities
that may be sold prior to maturity to support the investment
strategies of the Corporation are classified as
available-for-sale and carried at market value as of the balance
sheet date. Those fixed maturities that the Corporation has the
ability and positive intent to hold to maturity are classified
as held-to-maturity and carried at amortized cost.
Premiums and discounts arising from the purchase of fixed
maturities are amortized using the interest method over the
estimated remaining term of the securities. For mortgage-backed
securities, prepayment assumptions are reviewed periodically and
revised as necessary.
Equity securities, which include common stocks and
non-redeemable preferred stocks, are carried at market value as
of the balance sheet date.
Unrealized appreciation or depreciation of equity securities and
fixed maturities carried at market value is excluded from net
income and credited or charged, net of applicable deferred
income tax, directly to comprehensive income.
Other invested assets, which include private equity limited
partnerships, are carried at the Corporations equity in
the net assets of the partnerships based on valuations provided
by the manager of each partnership. As a result of the timing of
the receipt of valuation data from the investment managers,
these investments are reported on a three month lag. Changes in
the Corporations equity in the net assets of the
partnerships are included in income as realized investment gains
or losses.
Realized gains and losses on the sale of investments are
determined on the basis of the cost of the specific investments
sold and are credited or charged to income. When the market
value of any investment is lower than its cost, an assessment is
made to determine whether the decline is temporary or
other-than-temporary. If the decline is deemed to be
other-than-temporary, the investment is written down to market
value and the amount of the writedown is charged to income as a
realized investment loss. The market value of the investment
becomes its new cost basis.
The Corporation engages in a securities lending program from
which it generates investment income from the lending of certain
of its invested assets to other institutions for short periods
of time. The Corporation maintains effective control over
securities loaned and therefore continues to report such
securities as invested assets. The market value of the loaned
securities was $1,510 million and $2,857 million at
December 31, 2007 and 2006, respectively. Of these amounts,
$1,274 million and $2,499 million, respectively,
comprised available-for-sale fixed maturities and the balance
comprised equity securities.
The Corporations policy is to require initial collateral
equal to at least 102% of the market value of the loaned
securities. In those instances where cash collateral is obtained
from the borrower, the collateral is invested by a lending agent
in accordance with the Corporations guidelines. The cash
collateral is recognized as an asset with a corresponding
liability for the obligation to return the collateral. In
instances where non-cash collateral is obtained from the
borrower, the Corporation does not recognize the receipt of the
collateral held by the lending agent or the obligation to return
the collateral as there exists no right to sell or repledge the
collateral. The market value of the non-cash collateral held was
$325 million and $346 million at December 31,
2007 and 2006, respectively. The Corporation retains a portion
of the income earned from the cash collateral or receives a fee
from the borrower. Under the terms of the securities lending
program, the lending agent indemnifies the Corporation against
borrower defaults.
F-8
(c) Premium Revenues and Related Expenses
Insurance premiums are earned on a monthly pro rata basis over
the terms of the policies and include estimates of audit
premiums and premiums on retrospectively rated policies. Assumed
reinsurance premiums are earned over the terms of the
reinsurance contracts. Unearned premiums represent the portion
of direct and assumed premiums written applicable to the
unexpired terms of the insurance policies and reinsurance
contracts in force.
Ceded reinsurance premiums are charged to income over the terms
of the reinsurance contracts. Prepaid reinsurance premiums
represent the portion of premiums ceded to reinsurers applicable
to the unexpired terms of the reinsurance contracts in force.
Reinsurance reinstatement premiums are recognized in the same
period as the loss event that gave rise to the reinstatement
premiums.
Acquisition costs that vary with and are primarily related to
the production of business are deferred and amortized over the
period in which the related premiums are earned. Such costs
include commissions, premium taxes and certain other
underwriting and policy issuance costs. Commissions received
related to reinsurance premiums ceded are considered in
determining net acquisition costs eligible for deferral.
Deferred policy acquisition costs are reviewed to determine
whether they are recoverable from future income. If such costs
are deemed to be unrecoverable, they are expensed. Anticipated
investment income is considered in the determination of the
recoverability of deferred policy acquisition costs.
(d) Unpaid Losses and Loss Expenses
Unpaid losses and loss expenses (also referred to as loss
reserves) include the accumulation of individual case estimates
for claims that have been reported and estimates of claims that
have been incurred but not reported as well as estimates of the
expenses associated with processing and settling all reported
and unreported claims, less estimates of anticipated salvage and
subrogation recoveries. Estimates are based upon past loss
experience modified for current trends as well as prevailing
economic, legal and social conditions. Loss reserves are not
discounted to present value.
Loss reserves are regularly reviewed using a variety of
actuarial techniques. Reserve estimates are updated as
historical loss experience develops, additional claims are
reported and/or settled and new information becomes available.
Any changes in estimates are reflected in operating results in
the period in which the estimates are changed.
Reinsurance recoverable on unpaid losses and loss expenses
represents an estimate of the portion of gross loss reserves
that will be recovered from reinsurers. Amounts recoverable from
reinsurers are estimated using assumptions that are consistent
with those used in estimating the gross losses associated with
the reinsured policies. A provision for estimated uncollectible
reinsurance is recorded based on periodic evaluations of
balances due from reinsurers, the financial condition of the
reinsurers, coverage disputes and other relevant factors.
(e) Financial Products
Credit derivatives are carried at estimated fair value as of the
balance sheet date. Changes in fair value are recognized in
income in the period of the change and are included in other
revenues.
Assets and liabilities related to the credit derivatives are
included in other assets and other liabilities.
(f) Goodwill
Goodwill represents the excess of the cost of an acquired entity
over the fair value of net assets acquired. Goodwill is tested
for impairment at least annually.
(g) Property and Equipment
Property and equipment used in operations, including certain
costs incurred to develop or obtain computer software for
internal use, are capitalized and carried at cost less
accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets.
(h) Real Estate
Real estate properties are carried at cost less accumulated
depreciation and any writedowns for impairment. Real estate
properties are reviewed for impairment whenever events or
circumstances indicate that the carrying value of such
properties may not be recoverable. Measurement of such
impairment is based on the fair value of the property.
(i) Income Taxes
Deferred income tax assets and liabilities are recognized for
the expected future tax effects attributable to temporary
differences between the financial reporting and tax bases of
assets and liabilities, based on enacted tax rates and other
provisions of tax law. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in
income in the period in which such change is enacted. Deferred
tax assets are reduced by a valuation allowance if it is more
likely than not that all or some portion of the deferred tax
assets will not be realized.
The Corporation does not consider the earnings of its foreign
subsidiaries to be permanently reinvested. Accordingly,
provision has been made for the expected U.S. federal income tax
liabilities applicable to undistributed earnings of foreign
subsidiaries.
(j) Stock-Based Employee Compensation
The fair value method of accounting is used for stock-based
employee compensation plans. Under the fair value method,
compensation cost is measured based on the fair value of the
award at the grant date and recognized over the requisite
service period.
F-9
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are
translated into U.S. dollars using current exchange rates as of
the balance sheet date. Revenues and expenses are translated
into U.S. dollars using the average exchange rates during the
year.
The functional currency of foreign operations is generally the
currency of the local operating environment since business is
primarily transacted in such local currency. Translation gains
and losses, net of applicable income tax, are excluded from net
income and are credited or charged directly to comprehensive
income.
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(l) |
Cash Flow Information |
In the statement of cash flows, short term investments are not
considered to be cash equivalents. The effect of changes in
foreign exchange rates on cash balances was immaterial.
In 2005, the Corporation transferred its ongoing reinsurance
assumed business and certain related assets to Harbor Point
Limited (see Note (3)). In exchange, the Corporation
received from Harbor Point $200 million of 6% convertible
notes and warrants to purchase common stock of Harbor Point.
In 2005, a mortgage payable of $42 million was assumed by
an unaffiliated joint venture in connection with the disposition
of the Corporations interest in a variable interest entity
in which it was the primary beneficiary.
These noncash transactions have been excluded from the
consolidated statement of cash flows.
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(m) |
Accounting Pronouncements Not Yet Adopted |
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 applies whenever
other accounting pronouncements require or permit assets or
liabilities to be measured at fair value. The Statement does not
expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for the Corporation for the
year beginning January 1, 2008. The adoption of SFAS
No. 157 is not expected to have a significant effect on the
Corporations financial position or results of operations.
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(2) |
Adoption of New Accounting Pronouncements |
(a) Effective December 31, 2006, the Corporation
adopted SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its balance
sheet and to recognize changes in the funded status as a
component of other comprehensive income in the years in which
the changes occur. Retrospective application was not permitted.
SFAS No. 158 requires that any gains or losses and prior
service cost that had not yet been included in net benefit costs
as of the end of the year in which the Statement was adopted be
recognized as an adjustment of the ending balance of accumulated
other comprehensive income, net of tax. The effect on the
Corporations balance sheet at December 31, 2006 was an
increase in other liabilities of $432 million, an increase
in deferred income tax assets of $151 million and a
decrease in accumulated other comprehensive income, a component
of shareholders equity, of $281 million. Adoption of
the Statement did not have any effect on the Corporations
results of operations in 2006 and 2007 and will not in future
years.
(b) Effective January 1, 2007, the Corporation adopted
FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of SFAS
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements. The Interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
adoption of FIN 48 did not have a significant effect on the
Corporations financial position or results of operations.
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(3) |
Transfer of Ongoing Reinsurance Assumed Business |
In December 2005, the Corporation completed a transaction
involving a new Bermuda-based reinsurance company, Harbor Point
Limited.
As part of the transaction, the Corporation transferred its
ongoing reinsurance assumed business and certain related assets,
including renewal rights, to Harbor Point. In exchange, the
Corporation received from Harbor Point $200 million of 6%
convertible notes and warrants to purchase common stock of
Harbor Point. The notes and warrants represented in the
aggregate on a fully diluted basis approximately 16% of the new
company.
Harbor Point generally did not assume the reinsurance
liabilities relating to reinsurance contracts incepting prior to
December 31, 2005. The P&C Group retained those
liabilities and the related assets.
The transaction resulted in a pre-tax gain of $204 million,
of which $171 million was recognized in 2005 and
$33 million was deferred. The portion of the gain that was
deferred was based on the Corporations economic interest
in Harbor Point.
For a transition period of about two years, Harbor Point
underwrote specific reinsurance business on the P&C
Groups behalf. The P&C Group retained a portion of
this business and ceded the balance to Harbor Point in return
for a fronting commission.
The P&C Group receives additional payments based on the
amount of business renewed by Harbor Point. These amounts are
being recognized in income as earned.
F-10
(4) Invested Assets and Related Income
(a) The amortized cost and estimated market value of fixed
maturities were as follows:
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December 31 |
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2007 |
|
2006 |
|
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|
|
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|
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Gross |
|
Gross |
|
Estimated |
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|
Gross |
|
Gross |
|
Estimated |
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Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
|
|
Cost |
|
Appreciation |
|
Depreciation |
|
Value |
|
Cost |
|
Appreciation |
|
Depreciation |
|
Value |
|
|
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|
|
|
|
|
|
|
|
|
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(in millions) |
Held-to-maturity Tax exempt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
135 |
|
|
$ |
7 |
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|
$ |
|
|
|
$ |
142 |
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|
|
|
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|
|
|
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|
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Available-for-sale
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Tax exempt
|
|
|
18,208 |
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|
|
385 |
|
|
|
34 |
|
|
|
18,559 |
|
|
|
17,314 |
|
|
|
341 |
|
|
|
42 |
|
|
|
17,613 |
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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Taxable
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agency and authority obligations
|
|
|
671 |
|
|
|
36 |
|
|
|
2 |
|
|
|
705 |
|
|
|
1,936 |
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|
|
1 |
|
|
|
26 |
|
|
|
1,911 |
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|
|
Corporate bonds
|
|
|
2,888 |
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|
|
42 |
|
|
|
22 |
|
|
|
2,908 |
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|
|
2,379 |
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|
|
42 |
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|
|
24 |
|
|
|
2,397 |
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|
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Foreign bonds
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|
|
6,946 |
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|
|
66 |
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|
|
63 |
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6,949 |
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|
|
5,589 |
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|
|
39 |
|
|
|
57 |
|
|
|
5,571 |
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Mortgage-backed securities
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|
|
4,761 |
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|
|
31 |
|
|
|
42 |
|
|
|
4,750 |
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|
|
4,406 |
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|
|
21 |
|
|
|
88 |
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|
|
4,339 |
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
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|
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|
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|
|
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15,266 |
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|
|
175 |
|
|
|
129 |
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|
|
15,312 |
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|
|
14,310 |
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|
|
103 |
|
|
|
195 |
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|
|
14,218 |
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
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Total available-for-sale
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33,474 |
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|
|
560 |
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|
|
163 |
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|
|
33,871 |
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|
|
31,624 |
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|
|
444 |
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|
|
237 |
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|
|
31,831 |
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Total fixed maturities
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$ |
33,474 |
|
|
$ |
560 |
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|
$ |
163 |
|
|
$ |
33,871 |
|
|
$ |
31,759 |
|
|
$ |
451 |
|
|
$ |
237 |
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|
$ |
31,973 |
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During the fourth quarter of 2007, the Corporation transferred
its remaining $86 million of held-to-maturity securities to
available-for-sale. The unrealized appreciation was
$6 million at the date of transfer.
The amortized cost and estimated market value of fixed
maturities at December 31, 2007 by contractual maturity
were as follows:
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Estimated |
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Amortized |
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Market |
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|
Cost |
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Value |
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(in millions) |
Available-for-sale
|
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|
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Due in one year or less
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$ |
1,062 |
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|
$ |
1,065 |
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Due after one year through five years
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|
|
8,206 |
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|
|
8,301 |
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Due after five years through ten years
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|
|
11,862 |
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|
|
12,071 |
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Due after ten years
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|
|
7,583 |
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|
|
7,684 |
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|
|
|
|
|
|
|
|
|
|
|
|
28,713 |
|
|
|
29,121 |
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|
|
Mortgage-backed securities
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|
|
4,761 |
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|
|
4,750 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,474 |
|
|
$ |
33,871 |
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|
|
|
|
|
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|
Actual maturities could differ from contractual maturities
because borrowers may have the right to call or prepay
obligations.
(b) The components of unrealized appreciation or
depreciation of investments carried at market value were as
follows:
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|
December 31 |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
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(in millions) |
Equity securities
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$ |
490 |
|
|
$ |
417 |
|
|
Gross unrealized depreciation
|
|
|
77 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
413 |
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
560 |
|
|
|
444 |
|
|
Gross unrealized depreciation
|
|
|
163 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
810 |
|
|
|
603 |
|
Deferred income tax liability
|
|
|
284 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
526 |
|
|
$ |
392 |
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|
|
|
|
|
|
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F-11
When the market value of any investment is lower than its cost,
an assessment is made to determine whether the decline is
temporary or other-than-temporary. The assessment is based on
both quantitative criteria and qualitative information and
considers a number of factors including, but not limited to, the
length of time and the extent to which the market value has been
less than the cost, the financial condition and near term
prospects of the issuer, whether the issuer is current on
contractually obligated interest and principal payments, the
intent and ability of the Corporation to hold the investment for
a period of time sufficient to allow for the recovery of cost,
general market conditions and industry or sector specific
factors. Based on a review of the securities in an unrealized
loss position at December 31, 2007 and 2006, management
believes that none of the declines in market value at those
dates were other-than-temporary.
The following table summarizes, for all investment securities in
an unrealized loss position at December 31, 2007, the
aggregate market value and gross unrealized depreciation by
investment category and length of time that individual
securities have continuously been in an unrealized loss position.
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Less Than 12 Months |
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12 Months or More |
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Total |
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Estimated |
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Gross |
|
Estimated |
|
Gross |
|
Estimated |
|
Gross |
|
|
Market |
|
Unrealized |
|
Market |
|
Unrealized |
|
Market |
|
Unrealized |
|
|
Value |
|
Depreciation |
|
Value |
|
Depreciation |
|
Value |
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Depreciation |
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