e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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x
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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, 2011
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OR
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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
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Commission File No. 1-8661
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The Chubb Corporation
(Exact name of registrant as
specified in its charter)
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New Jersey
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13-2595722
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(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
Warren, New Jersey
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07059
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(Address of principal executive
offices)
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(Zip Code)
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(908) 903-2000
(Registrants
telephone number, including area code)
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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:
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None
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(Title of class)
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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 whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and
post such files). Yes
[ü]
No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) 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.
[ü]
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 [ ]
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Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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Smaller reporting company [ ]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ]
No [ü]
The aggregate market value of common stock held by
non-affiliates of the registrant was $17,852,043,816 as of
June 30, 2011, computed on the basis of the closing sale
price of the common stock on that date.
271,126,567
Number of shares of common stock
outstanding as of February 10, 2012
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the 2012 Annual
Meeting of Shareholders are incorporated by reference in
Part III of this Form 10-K.
PART
I.
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
12th largest U.S. property and casualty insurance group based on
2010 net written premiums.
At December 31, 2011, the Corporation had total assets of
$50.9 billion and shareholders equity of
$15.6 billion. Revenues, income before income tax and
assets for each operating segment for the three years ended
December 31, 2011 are included in Note (14) of the
Notes to Consolidated Financial Statements. The Corporation
employed approximately 10,100 persons worldwide on
December 31, 2011.
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 Personal Insurance offers coverage of fine homes,
automobiles and other personal possessions along with options
for high limits of personal liability coverage. Chubb Personal
Insurance also provides supplemental accident and health
insurance in niche markets. 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.
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, 2011 are
included in Note (14) 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), Executive Risk Indemnity Inc. (Executive Risk
Indemnity), Great Northern Insurance Company (Great Northern),
Vigilant Insurance Company (Vigilant), Chubb National Insurance
Company (Chubb National), Chubb Indemnity Insurance Company
(Chubb Indemnity), Chubb Custom Insurance Company, Executive
Risk Specialty Insurance Company (Executive Risk Specialty),
Northwestern Pacific Indemnity Company, Texas Pacific Indemnity
Company (Texas Pacific Indemnity) and Chubb Insurance Company of
New Jersey (Chubb New Jersey) in the United States, as well as
Chubb Atlantic Indemnity Ltd. (a Bermuda company), Chubb
Insurance Company of Canada, Chubb Insurance Company of Europe
SE, Chubb Capital Ltd. (a United Kingdom company),
3
Chubb Insurance Company of Australia Ltd., Chubb Argentina de
Seguros, S.A., Chubb Insurance (China) Company Limited and Chubb
do Brasil Companhia de Seguros.
Chubb & Son, a division of Federal, is the manager of
Pacific Indemnity, Executive Risk Indemnity, Great Northern,
Vigilant, Chubb National, Chubb Indemnity, Executive Risk
Specialty, Texas Pacific Indemnity and Chubb New Jersey.
Chubb & Son 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, Chubb & Son 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
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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)
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2011
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$
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12,302
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$
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548
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$
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1,092
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$
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11,758
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2010
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11,952
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391
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1,107
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11,236
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2009
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11,813
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370
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1,106
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11,077
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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 2011, approximately 75% of the
P&C Groups direct premiums written were 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%, Florida with 4% and
New Jersey with 4%. Of the approximately 25% of the P&C
Groups direct premiums written that were produced outside
of the United States, approximately 5% were produced in the
United Kingdom, 5% in Canada, 4% in Brazil and 3% in Australia.
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.
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,
2011 and 2010, the ratio for the P&C Group was 0.84 and
0.77, respectively.
4
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 independent
insurance agencies and accepts business on a regular basis from
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 territory, branch and service
offices throughout the United States.
The P&C Group primarily offers products through 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 reinsurance
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, a credit
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 2011 was approximately 11% higher than the
number at year-end 2010 primarily due to an increase in
outstanding catastrophe claims. The number of new arising claims
during 2011 was approximately 8% higher 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 2011.
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, 2011. 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 2011 relating to losses incurred prior
to December 31, 2001 would be included in the cumulative
deficiency amount for each year in the period 2001 through 2010.
Yet, the deficiency would be reflected in operating results only
in 2011. 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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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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2008
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2009
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2010
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2011
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(in millions)
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Net Liability for Unpaid Losses and Loss Adjustment Expenses
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$
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11,010
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$
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12,642
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$
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14,521
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$
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16,809
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$
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18,713
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$
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19,699
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$
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20,316
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$
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20,155
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$
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20,786
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$
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20,901
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$
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21,329
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Net Liability Reestimated as of:
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One year later
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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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19,443
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19,393
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20,040
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20,134
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Two years later
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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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18,215
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18,619
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18,685
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19,229
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Three years later
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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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17,298
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17,571
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18,049
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17,965
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Four years later
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13,246
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14,842
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15,584
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16,526
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16,884
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17,184
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17,510
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Five years later
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13,676
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14,907
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15,657
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16,411
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16,636
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16,829
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Six years later
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13,812
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15,064
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15,798
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16,310
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16,459
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Seven years later
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13,994
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15,255
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15,802
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16,231
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Eight years later
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14,218
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15,305
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15,801
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Nine years later
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14,301
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15,323
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Ten years later
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14,344
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Total Cumulative Net Deficiency
(Redundancy)
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3,334
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2,681
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1,280
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|
|
|
(578
|
)
|
|
|
(2,254
|
)
|
|
|
(2,870
|
)
|
|
|
(2,806
|
)
|
|
|
(2,190
|
)
|
|
|
(1,557
|
)
|
|
|
(767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Net Deficiency Related to Asbestos and Toxic Waste
Claims (Included in Above Total)
|
|
|
1,521
|
|
|
|
780
|
|
|
|
530
|
|
|
|
455
|
|
|
|
420
|
|
|
|
396
|
|
|
|
308
|
|
|
|
223
|
|
|
|
133
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amount of
Net Liability Paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
3,135
|
|
|
|
3,550
|
|
|
|
3,478
|
|
|
|
3,932
|
|
|
|
4,118
|
|
|
|
4,066
|
|
|
|
4,108
|
|
|
|
4,063
|
|
|
|
4,074
|
|
|
|
4,300
|
|
|
|
|
|
Two years later
|
|
|
5,499
|
|
|
|
5,911
|
|
|
|
6,161
|
|
|
|
6,616
|
|
|
|
6,896
|
|
|
|
6,789
|
|
|
|
6,565
|
|
|
|
6,711
|
|
|
|
6,831
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
7,133
|
|
|
|
7,945
|
|
|
|
8,192
|
|
|
|
8,612
|
|
|
|
8,850
|
|
|
|
8,554
|
|
|
|
8,436
|
|
|
|
8,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
8,564
|
|
|
|
9,396
|
|
|
|
9,689
|
|
|
|
10,048
|
|
|
|
10,089
|
|
|
|
9,884
|
|
|
|
9,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
9,588
|
|
|
|
10,543
|
|
|
|
10,794
|
|
|
|
10,977
|
|
|
|
10,994
|
|
|
|
10,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
10,366
|
|
|
|
11,353
|
|
|
|
11,530
|
|
|
|
11,606
|
|
|
|
11,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
10,950
|
|
|
|
11,915
|
|
|
|
12,037
|
|
|
|
12,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
11,390
|
|
|
|
12,292
|
|
|
|
12,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
11,681
|
|
|
|
12,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
11,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Liability, End of Year
|
|
$
|
15,515
|
|
|
$
|
16,713
|
|
|
$
|
17,948
|
|
|
$
|
20,292
|
|
|
$
|
22,482
|
|
|
$
|
22,293
|
|
|
$
|
22,623
|
|
|
$
|
22,367
|
|
|
$
|
22,839
|
|
|
$
|
22,718
|
|
|
$
|
23,068
|
|
Reinsurance Recoverable, End of Year
|
|
|
4,505
|
|
|
|
4,071
|
|
|
|
3,427
|
|
|
|
3,483
|
|
|
|
3,769
|
|
|
|
2,594
|
|
|
|
2,307
|
|
|
|
2,212
|
|
|
|
2,053
|
|
|
|
1,817
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability, End of Year
|
|
$
|
11,010
|
|
|
$
|
12,642
|
|
|
$
|
14,521
|
|
|
$
|
16,809
|
|
|
$
|
18,713
|
|
|
$
|
19,699
|
|
|
$
|
20,316
|
|
|
$
|
20,155
|
|
|
$
|
20,786
|
|
|
$
|
20,901
|
|
|
$
|
21,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Gross Liability
|
|
$
|
19,894
|
|
|
$
|
20,209
|
|
|
$
|
19,667
|
|
|
$
|
19,680
|
|
|
$
|
19,975
|
|
|
$
|
19,296
|
|
|
$
|
19,678
|
|
|
$
|
20,083
|
|
|
$
|
21,235
|
|
|
$
|
21,890
|
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
5,550
|
|
|
|
4,886
|
|
|
|
3,866
|
|
|
|
3,449
|
|
|
|
3,516
|
|
|
|
2,467
|
|
|
|
2,168
|
|
|
|
2,118
|
|
|
|
2,006
|
|
|
|
1,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Net Liability
|
|
$
|
14,344
|
|
|
$
|
15,323
|
|
|
$
|
15,801
|
|
|
$
|
16,231
|
|
|
$
|
16,459
|
|
|
$
|
16,829
|
|
|
$
|
17,510
|
|
|
$
|
17,965
|
|
|
$
|
19,229
|
|
|
$
|
20,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gross Deficiency
(Redundancy)
|
|
$
|
4,379
|
|
|
$
|
3,496
|
|
|
$
|
1,719
|
|
|
$
|
(612
|
)
|
|
$
|
(2,507
|
)
|
|
$
|
(2,997
|
)
|
|
$
|
(2,945
|
)
|
|
$
|
(2,284
|
)
|
|
$
|
(1,604
|
)
|
|
$
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
The subsequent development of the net liability for unpaid
losses and loss adjustment expenses as of year-ends 2001 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 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, to a
lesser extent, workers compensation and commercial
casualty classes. For the years 2004 through 2010, unfavorable
development related to asbestos and toxic waste claims was more
than offset by significant favorable development, primarily in
the professional liability classes and more recently in the
commercial casualty classes due to favorable loss trends in
recent years and in the commercial property and homeowners
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 2001 column, as of December 31, 2011 the P&C Group
had paid $11,991 million of the currently estimated
$14,344 million of net losses and loss adjustment
expenses that were unpaid at the end of 2001; thus, an estimated
$2,353 million of net losses incurred on or before
December 31, 2001 remain unpaid as of December 31,
2011, approximately 37% 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, 2011.
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
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in millions)
|
|
|
U.S. subsidiaries
|
|
$
|
17,500
|
|
|
$
|
17,193
|
|
Foreign subsidiaries
|
|
|
3,829
|
|
|
|
3,708
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,329
|
|
|
$
|
20,901
|
|
|
|
|
|
|
|
|
|
|
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, net of reinsurance recoverable,
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 (3) 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
|
|
|
|
|
|
|
|
|
Invested
|
|
Investment
|
|
Percent Earned
|
Year
|
|
Assets(a)
|
|
Income(b)
|
|
Before Tax
|
|
After Tax
|
|
|
(in millions)
|
|
|
|
|
|
2011
|
|
$
|
38,901
|
|
|
$
|
1,562
|
|
|
|
4.02
|
%
|
|
|
3.25
|
%
|
2010
|
|
|
38,288
|
|
|
|
1,558
|
|
|
|
4.07
|
|
|
|
3.29
|
|
2009
|
|
|
36,969
|
|
|
|
1,549
|
|
|
|
4.19
|
|
|
|
3.39
|
|
|
|
|
|
(a)
|
Average of amounts with fixed maturity securities at amortized
cost, equity securities at fair value and other invested assets,
which include private equity limited partnerships carried 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
There are numerous property and casualty insurance companies
operating in the United States as well as in the international
jurisdictions in which we write business. Accordingly, 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
distribution network of agents and brokers as well as customers
and to reinforce with them the stability, expertise and added
value the P&C Groups products provide.
There are approximately 2,500 property and casualty insurance
companies in the United States operating independently or in
groups and no single company or group is dominant across all
lines of business or jurisdictions. 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. In the United
States, Chubb and the companies within the P&C Group are
subject to regulation by certain states as members of an
insurance holding company system. 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
9
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 holding
company system and, in addition, certain of such transactions
cannot be consummated without the commissioners prior
approval. Recent amendments to the model holding company law and
regulation adopted by the National Association of Insurance
Commissioners (NAIC), if passed by the state legislatures, will
require insurance holding company systems to provide regulators
with more information about the risks posed by any non-insurance
company subsidiaries in the holding company system.
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.
State insurance departments impose regulations that, among other
things, establish the standards of solvency that must be met and
maintained. The NAIC has a risk-based capital requirement for
property and casualty insurance companies. The risk-based
capital formula is used by all 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, 2011, 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. The NAIC recently has undertaken a Solvency
Modernization Initiative focused on updating the
U.S. insurance solvency regulation framework, including
capital requirements, governance and risk management, group
supervision, accounting and financial reporting and reinsurance.
Among the changes under consideration by the NAIC is
implementation of an Own Risk and Solvency Assessment (ORSA)
rule that would require insurers to measure and share with
solvency regulators their internal assessment of capital needs
for the entire holding company group, including non-insurance
subsidiaries.
State insurance departments also administer other aspects of
insurance regulation and supervision that affect the P&C
Groups operations including: 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.
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 in ratemaking and, at
times, some states have adopted premium rate freezes or rate
rollbacks. State limitations on the ability to cancel or
nonrenew certain policies also 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
10
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 or policyholder surcharges. In 2011,
assessments of the members of the P&C Group were
insignificant. The amount of future assessments cannot be
reasonably estimated and can vary significantly from year to
year.
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. Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, signed into law in July 2010, two
federal government bodies, the Federal Insurance Office (FIO)
and the Financial Stability Oversight Council (FSOC), were
created which may impact the regulation of insurance. Although
the FIO is prohibited from directly regulating the business of
insurance, it has authority to represent the
United States in international insurance matters and
has limited powers to preempt certain types of state insurance
laws. The FIO also can recommend to the FSOC that it designate
an insurer as an entity posing risks to U.S. financial
stability in the event of the insurers material financial
distress or failure. An insurer so designated by FSOC could be
subject to Federal Reserve supervision and heightened prudential
standards. Other current and proposed federal measures that may
significantly affect the P&C Groups business and the
market as a whole include those concerning federal terrorism
insurance, tort law, natural catastrophes, corporate governance,
ergonomics, health care reform including the containment of
medical costs, 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.
11
Outside the United States, the extent of insurance regulation
varies significantly among the countries in which the P&C
Group operates, and regulatory and political developments in
international markets could impact the P&C Groups
business. 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. Regulators in many countries are working
with the International Association of Insurance Supervisors
(IAIS) to consider changes to insurance company solvency
standards and group supervision of companies in a holding
company system, including noninsurance companies. These IAIS
initiatives include a set of Insurance Core Principles (ICPs)
for a globally-accepted framework for insurance sector
regulation and supervision and the Common Framework for the
Supervision of Internationally Active Insurance Groups
(ComFrame). The European Union Solvency II directive, being
implemented to harmonize insurance regulation across the
European Union member states, will require regulated companies
such as the P&C Groups European operations to meet
new requirements in relation to risk and capital management.
Solvency II is scheduled to be effective January 1, 2013,
but will not be fully enforced until January 1, 2014.
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 residential development activities primarily
in central Florida. The real estate operations are in runoff.
Chubb
Financial Solutions
Chubb Financial Solutions (CFS) provided customized financial
products, primarily derivative financial instruments, to
corporate clients. CFS has been in runoff since 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 because 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 or
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
12
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 or 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,
tsunamis, tidal waves, 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.
We are exposed to natural and man-made catastrophe risks in both
our U.S. and international operations. Catastrophe risks
include hurricanes and cyclones along the coastlines of North
America, the Caribbean Region, Latin America, Asia and
Australia. Catastrophe risks also include winter storms,
northeasters, thunderstorms, hail storms, tornadoes, flooding
and other water damage, earthquakes, other seismic or volcanic
eruption, wildfires, and terrorism that may occur in locations
in and outside the United States where we insure properties.
We utilize proprietary and third party catastrophe modeling
tools to assist us in managing our catastrophe exposures. These
models rely on various methodologies and assumptions which are
subjective and subject to uncertainty. The methodologies and
assumptions also may be changed from time to time by the third
party modeling company. The use of different methodologies or
assumptions would result in the model generating substantially
different estimations of our catastrophe exposures. Moreover,
modeled loss estimates may be materially different from actual
results.
Natural or man-made catastrophic events could cause claims under
our insurance policies to be higher than we 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. 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
limiting insurers ability to increase rates and 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.
We cannot
predict the impact that changing climate conditions, including
legal, regulatory and social responses thereto, may have on our
business.
Various scientists, environmentalists, international
organizations, regulators and other commentators believe that
global climate change has added, and will continue to add, to
the unpredictability, frequency and severity of natural
disasters (including, but not limited to, hurricanes, tornadoes,
freezes, other storms and fires) in certain parts of the world.
In response to this belief, a number of legal and
13
regulatory measures as well as social initiatives have been
introduced in an effort to reduce greenhouse gas and other
carbon emissions which may be chief contributors to global
climate change.
We cannot predict the impact that changing climate conditions,
if any, will have on our results of operations or our financial
condition. Moreover, we cannot predict how legal, regulatory and
social responses to concerns about global climate change will
impact our business.
We rely
on pricing and capital models, but actual results could differ
materially from the model outputs.
We employ various predictive modeling, stochastic modeling
and/or forecasting techniques to analyze and estimate loss
trends and the risks associated with our assets and liabilities.
We utilize the modeled outputs and related analyses to assist us
in making underwriting, pricing, reinsurance and capital
decisions. The modeled outputs and related analyses are subject
to numerous assumptions, uncertainties and the inherent
limitations of any statistical analysis. Consequently, modeled
results may differ materially from our actual experience. If,
based upon these models or otherwise, we under price our
products or underestimate the frequency
and/or
severity of loss events, our results of operations or financial
condition may be adversely affected. If, based upon these models
or otherwise, we over price our products or overestimate the
risks we are exposed to, new business growth and retention of
our existing business may be adversely affected which could have
a material adverse effect on our results of operations.
We may
experience reduced returns or losses on our investments
especially during periods of heightened volatility, which could
have a material adverse effect on our results of operations or
financial condition.
The returns on our investment portfolio may be reduced or we may
incur losses as a result of changes in general economic
conditions, interest rates, real estate markets, fixed income
markets, equity markets, alternative investment markets, credit
markets, exchange rates, global capital market conditions and
numerous other factors that are beyond our control.
During prolonged periods of low interest rates and investment
returns, we may not be able to invest new money generated by our
operations or reinvest funds at rates that generate the same
level of investment income generated by our existing invested
assets, which could have a material adverse effect on our
results of operations and financial condition.
The worldwide financial markets experience high levels of
volatility during certain periods, which could have an
increasingly adverse impact on the U.S. and foreign
economies. The financial market volatility and the resulting
negative economic impact could continue and it is possible that
it may be prolonged, which could adversely affect our current
investment portfolio, make it difficult to determine the value
of certain assets in our portfolio
and/or make
it difficult for us to purchase suitable investments that meet
our risk and return criteria. These factors could 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.
A significant portion of our investment portfolio is invested in
obligations of states, municipalities and political subdivisions
(often referred to as municipal bonds). The recent financial
market volatility and the resulting negative economic impact
have resulted in actual or projected budget deficits for many
municipal bond issuers. These deficits, combined with declining
municipal tax bases and revenues, have raised concerns over the
potential for an increased risk of default or impairment of
municipal bonds. Such concerns, as well actual defaults or
impairments, could adversely impact these investments in terms
of volatility, liquidity and value.
Our investment portfolio includes commercial mortgage-backed
securities, residential mortgage-backed securities,
collateralized mortgage obligations and pass-through securities.
Continuation of the
14
prolonged stress in the U.S. housing market
and/or
financial market disruption could adversely impact these
investments.
Our
investment portfolio includes securities that may be more
volatile than fixed maturity instruments and certain of these
instruments may be illiquid.
Our investment portfolio includes equity securities and private
equity limited partnership interests which may experience
significant volatility in their investment returns and
valuation. Moreover, our private equity limited partnership
interests are subject to transfer restrictions and may be
illiquid. If the investment returns or value of these
investments decline, or if we are unable to dispose of these
investments at their carrying value, it could have a material
adverse effect on our results of operations or financial
condition.
Changes
to federal and/or state laws could adversely affect the value of
our investment portfolio.
A significant portion of our investment portfolio consists of
tax exempt securities and we receive certain tax benefits
relating to such securities based on current laws and
regulations. Our portfolio has also benefited from certain other
laws and regulations, including without limitation, tax credits
(such as foreign tax credits). Federal
and/or state
tax legislation could be enacted that would lessen or eliminate
some or all of the tax advantages currently benefiting us and
could negatively impact the value of our investment portfolio.
We are
exposed to credit risk and foreign currency risk in our business
operations and in our investment portfolio.
We are exposed to credit risk in several areas of our business
operations, including, without limitation, credit risk relating
to reinsurance, co-sureties on surety bonds, policyholders of
certain of our insurance products, independent agents and
brokers, issuers of securities, insurers of certain securities
and certain other counterparties relating to our investment
portfolio.
With respect to reinsurance coverages that we have purchased,
our ability to recover amounts due from reinsurers may be
affected by the creditworthiness and willingness to pay of the
reinsurers. Although certain reinsurance we have purchased is
collateralized, the collateral is exposed to credit risk of the
counterparty that has guaranteed an investment return on such
collateral.
It is customary practice in the surety business for multiple
insurers to participate as co-sureties on large surety bonds,
meaning that each insurer (each referred to as a co-surety)
assumes its proportionate share of the risk and receives a
corresponding percentage of the bond premium. Under these
arrangements, the co-sureties obligations are joint and
several. Consequently, if a co-surety defaults on its
obligations, the remaining co-surety or co-sureties are
obligated to make up the shortfall to the beneficiary of the
surety bond even though the non-defaulting co-sureties did not
receive the premium for that portion of the risk. Therefore, we
are subject to credit risk with respect to the insurers with
whom we are co-sureties on surety bonds.
In accordance with industry practice, when insureds purchase our
insurance products through independent agents and brokers, they
generally pay the premiums to the agent or broker, which in turn
is required to remit the collected premium to us. In many
jurisdictions, we are deemed to have received payment upon the
receipt of the payment by the agent or broker, regardless of
whether the agent or broker actually remits payment to us. As a
result, we assume credit risk associated with amounts due from
independent agents and brokers.
The value of our investment portfolio is subject to credit risk
from the issuers
and/or
guarantors of the securities in the portfolio, other
counterparties in certain transactions and, for certain
securities, insurers that guarantee specific issuers
obligations. Defaults by the issuer and, where applicable, an
issuers guarantor, insurer or other counterparties with
regard to any of such investments could reduce our net
investment income and net realized investment gains or result in
investment losses.
15
We report our financial results in U.S. dollars, but a
significant amount of the business we write and expenses we
incur outside the United States are denominated in currencies
other than the U.S. dollar. In addition, a substantial portion
of our investment portfolio is denominated in non-U.S. dollar
currencies. As a result, changes in the strength of the U.S.
dollar relative to these foreign currencies could adversely
affect our results of operations and financial condition.
Our exposure to any of the above credit risks and foreign
currency risk could have a material adverse effect on our
results of operations or 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 rigorous 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.
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However, there are inherent limitations in all of these tactics
and no assurance can be given that an event or series of 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. It is also
possible that losses could manifest themselves in ways that we
do not anticipate and that our risk mitigation strategies are
not designed to address. Such a manifestation of losses could
have a material adverse effect on our financial condition or
results of operations.
These risks may be heightened during difficult economic
conditions such as those currently being experienced in the
United States and elsewhere.
Reinsurance
coverage may not be available to us in the future at
commercially reasonable rates or at all.
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
rates 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.
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.
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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.
We may be
unsuccessful in our efforts to sell new products
and/or to
expand our existing product offerings to new markets.
Our strategy for enhancing profitable growth includes new
product initiatives as well as expanding existing product
offerings to new markets. We may not be successful in these
efforts, which could have a material adverse effect on our
results of operations. If we are successful, results
attributable to these product offerings could be different than
we anticipate and could have an adverse effect on our results of
operations or financial condition.
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.
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.
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
17
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.
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. Failure to comply with or to obtain
appropriate authorizations
and/or
exemptions under any applicable laws and regulations could
result in restrictions on our ability to do business or
undertake activities that are regulated in one or more of the
jurisdictions in which we conduct business and could subject us
to fines and other sanctions.
Virtually all states in which we operate require the P&C
Group, 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. The NAIC recently has undertaken a Solvency
Modernization Initiative focused on updating the
U.S. insurance solvency regulation framework, including
capital requirements, governance and risk management, group
supervision, accounting and financial reporting and reinsurance.
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 or increased capital requirements.
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 measures concerning federal terrorism
insurance, systemic risk regulation, tort law, natural
catastrophes, corporate governance, ergonomics, health care
reform including containment of medical costs, privacy,
e-commerce,
international trade, federal regulation of insurance companies
and the taxation of insurance companies. Under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, signed into law
in July 2010, two federal government bodies, the Federal
Insurance Office (FIO) and the Financial Stability Oversight
Council (FSOC), were created which may impact the regulation of
insurance. Although the FIO is prohibited from directly
regulating the business of insurance, it has authority to
represent the United States in international insurance
matters and has limited powers to preempt certain types of state
insurance laws. The FIO also can recommend to the FSOC that it
designate an insurer as an entity posing risks to
U.S. financial stability in the event of the insurers
material financial distress or failure. An insurer so designated
by FSOC could be subject to Federal Reserve supervision and
heightened prudential standards. While we do not believe the
P&C Group or any of its companies are systemically
significant, it is possible the FSOC could conclude
18
otherwise. If the FSOC were to designate the P&C Group or
any of its insurance subsidiaries for supervision by the Federal
Reserve, it could place more restrictions on our ability to
conduct business and may result in higher costs, increased
capital requirements and lower profitability. Even if an
insurance company is not designated as a systemically important
institution, it still could be adversely impacted by new rules
governing such institutions, as non-bank financial institutions
may, under certain circumstances, be subject to possible
assessment to fund the orderly resolution of a financially
distressed systemically important financial institution.
Our insurance subsidiaries also are subject to extensive
regulation and supervision in jurisdictions outside the United
States. Regulators in many countries are working with the
International Association of Insurance Supervisors (IAIS) to
consider changes to insurance company solvency standards and
group supervision of companies in a holding company system,
including noninsurance companies. Some IAIS initiatives are
particularly focused on the supervision of internationally
active insurance groups, such as the P&C Group. The
European Union Solvency II directive will require regulated
companies such as the P&C Groups European operations
to meet new requirements in relation to risk and capital
management. A U.S. parent of an European Union subsidiary could
be subject to certain Solvency II requirements if the U.S.
state-based regulatory system is not deemed
equivalent to Solvency II. Solvency II is
scheduled to be effective January 1, 2013 and will be fully
enforced beginning January 1, 2014. Such proposed or future
legislation and regulatory initiatives in countries where we
operate, if adopted, may be more restrictive on our ability to
conduct business than current regulatory requirements or may
result in higher costs, increased capital requirements and lower
profitability.
The IAIS also is working with the Financial Stability Board
(FSB) to decide if any insurers should be designated globally
significant financial institutions. While we do not believe the
P&C Group or any of its companies are globally systemically
significant institutions, it is possible the FSB could conclude
otherwise. The ramifications of an FSB globally systemically
significant designation for the P&C Group or any of its
insurance subsidiaries is unknown at this time; however, it is
likely to result in greater regulatory scrutiny and could place
more restrictions on our ability to conduct business, result in
higher costs, increased capital requirements or lower
profitability.
Changes
in accounting principles and financial reporting requirements
may impact the manner in which we present our results of
operations and financial condition.
The Financial Accounting Standards Board (FASB) and the
Securities and Exchange Commission may issue from time to time
new accounting and reporting standards or changes in the
interpretation of existing standards. These new standards or
changes in interpretation could have an effect on how we report
our results of operations and financial condition in the future.
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
subject to a number of risks associated with our business
outside the United States.
A significant portion of our business is conducted outside the
United States, including in Asia, Australia, Canada, Europe and
Latin America. By doing business outside the United States, we
are subject to a number of risks, including without limitation,
dealing with jurisdictions, especially in
19
emerging markets, that may lack political, financial or social
stability
and/or a
strong legal and regulatory framework, which may make it
difficult to do business and comply with local laws and
regulations in such jurisdictions. Failure to comply with local
laws in a particular jurisdiction or doing business in a country
that becomes increasingly unstable could have a significant
adverse effect on our business and operations in that market as
well as on our reputation generally.
As part of our international operations, we engage in
transactions denominated in currencies other than the U.S.
dollar. To reduce our exposure to currency fluctuation, we
attempt to match the currency of the liabilities we incur under
insurance policies with assets denominated in the same local
currency. However, in the event that we underestimate our
exposure, negative movements in the U.S. dollar versus the
local currency will exacerbate the impact of the exposure on our
results of operations and financial condition.
We report the results of our international operations on a
consolidated basis with our domestic business. These results are
reported in U.S. dollars. A significant portion of the business
we write outside the United States, however, is transacted in
local currencies. Consequently, fluctuations in the relative
value of local currencies in which the policies are written
versus the U.S. dollar can mask the underlying trends in our
international business.
The United States and other jurisdictions in which we operate
have adopted various laws and regulations that may apply to the
business we conduct outside of the United States, including
those relating to antibribery and economic sanctions compliance.
Although we have policies and controls in place that are
designed to ensure compliance with these laws and regulations,
it is possible that an employee or intermediary could fail to
comply with applicable laws and regulations. In such event, we
could be exposed to civil penalties, criminal penalties and
other sanctions. In addition, such violations could damage our
business
and/or our
reputation. Such civil penalties, criminal penalties, other
sanctions and damage to our business
and/or
reputation could have a material adverse effect on our results
of operations or financial condition.
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 or
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 and may do so increasingly in the future. 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 or financial condition. By outsourcing
certain business and administrative functions to third parties,
we may be exposed to enhanced risk of data security breaches.
Any breach of data security could damage our reputation
and/or
result in monetary damages, which, in turn, could have a
material adverse effect on our results of operations or
financial condition.
The
occurrence of certain 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
20
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 might be unable to perform their duties for
an extended period of time if our computer, information
technology or telecommunication systems were disabled or
destroyed.
Our systems could also be subject to physical break-ins,
electronic hacking, 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 or financial condition. In
addition, such events could result in data security breaches.
Any breach of data security could damage our reputation
and/or
result in monetary damages, which, in turn, 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 territory, 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
The information required with respect to Item 3 is included
in Note (13)(a) of the Notes to Consolidated Financial
Statements, which information is incorporated by reference into
this Item 3.
21
Executive
Officers of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
|
|
|
Age(a)
|
|
Election(b)
|
John D. Finnegan, Chairman, President and Chief Executive Officer
|
|
|
63
|
|
|
|
2002
|
|
W. Brian Barnes, Senior Vice President and Chief Actuary of
Chubb & Son, a division of Federal
|
|
|
49
|
|
|
|
2008
|
|
Maureen A. Brundage, Executive Vice President and General Counsel
|
|
|
55
|
|
|
|
2005
|
|
Robert C. Cox, Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
53
|
|
|
|
2003
|
|
John J. Kennedy, Senior Vice President and Chief Accounting
Officer
|
|
|
56
|
|
|
|
2008
|
|
Mark P. Korsgaard, Executive Vice President of Chubb & Son,
a division of Federal
|
|
|
56
|
|
|
|
2010
|
|
Paul J. Krump, President of Commercial and Specialty Lines of
Chubb & Son, a division of Federal
|
|
|
52
|
|
|
|
2001
|
|
Harold L. Morrison, Jr., Executive Vice President, Chief
Global Field Officer and Chief Administrative Officer of Chubb
& Son, a division of Federal
|
|
|
54
|
|
|
|
2008
|
|
Steven R. Pozzi, Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
55
|
|
|
|
2009
|
|
Dino E. Robusto, President of Personal Lines and Claims of Chubb
& Son, a division of Federal
|
|
|
53
|
|
|
|
2006
|
|
Richard G. Spiro, Executive Vice President and Chief Financial
Officer
|
|
|
47
|
|
|
|
2008
|
|
Kathleen M. Tierney, Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
43
|
|
|
|
2010
|
|
|
|
|
|
(a)
|
Ages listed above are as of April 24, 2012.
|
(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 Mr. Spiro.
Before joining the Corporation in 2008, Mr. Spiro was an
investment banker at Citigroup Global Markets Inc., where he
served as a Managing Director in Citigroups financial
institutions investment banking group.
22
PART
II.
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
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 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Common stock prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
61.31
|
|
|
$
|
65.87
|
|
|
$
|
64.45
|
|
|
$
|
70.31
|
|
Low
|
|
|
57.32
|
|
|
|
60.50
|
|
|
|
55.43
|
|
|
|
58.12
|
|
Dividends declared
|
|
|
.39
|
|
|
|
.39
|
|
|
|
.39
|
|
|
|
.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Common stock prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
52.47
|
|
|
$
|
53.75
|
|
|
$
|
58.14
|
|
|
$
|
60.23
|
|
Low
|
|
|
47.66
|
|
|
|
49.10
|
|
|
|
49.20
|
|
|
|
56.05
|
|
Dividends declared
|
|
|
.37
|
|
|
|
.37
|
|
|
|
.37
|
|
|
|
.37
|
|
At February 10, 2012, there were approximately
8,000 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 (17)(e) of the Notes to Consolidated
Financial Statements.
The following table summarizes Chubbs repurchases of its
common stock during each month in the quarter ended
December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
Total
|
|
|
|
|
|
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 2011
|
|
|
443,900
|
|
|
$
|
58.70
|
|
|
|
443,900
|
|
|
|
6,461,380
|
|
November 2011
|
|
|
2,795,903
|
|
|
|
65.37
|
|
|
|
2,795,903
|
|
|
|
3,665,477
|
|
December 2011
|
|
|
2,756,070
|
|
|
|
68.04
|
|
|
|
2,756,070
|
|
|
|
909,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,995,873
|
|
|
|
66.10
|
|
|
|
5,995,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The stated amounts exclude 2,050 shares and 227 shares
delivered to Chubb during the months of October 2011 and
December 2011, respectively, by employees of the Corporation to
cover option exercise prices in connection with the
Corporations stock-based compensation plans.
|
|
|
(b) |
On December 9, 2010, the Board of Directors authorized the
repurchase of up to 30,000,000 shares of Chubbs
common stock. On January 26, 2012, the Board of
Directors authorized the repurchase of up to $1.2 billion
of Chubbs common stock. These authorizations have no
expiration date.
|
23
Stock
Performance Graph
The following performance graph compares the performance of
Chubbs common stock during the five-year period from
December 31, 2006 through December 31, 2011 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, 2006
with dividends reinvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Chubb
|
|
$
|
100
|
|
|
$
|
105
|
|
|
$
|
101
|
|
|
$
|
101
|
|
|
$
|
125
|
|
|
$
|
149
|
|
S&P 500
|
|
|
100
|
|
|
|
105
|
|
|
|
66
|
|
|
|
84
|
|
|
|
97
|
|
|
|
99
|
|
S&P 500 Property & Casualty Insurance
|
|
|
100
|
|
|
|
86
|
|
|
|
61
|
|
|
|
68
|
|
|
|
74
|
|
|
|
74
|
|
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.
24
Item 6. Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions except for per share amounts)
|
|
|
FOR THE YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$
|
11,644
|
|
|
$
|
11,215
|
|
|
$
|
11,331
|
|
|
$
|
11,828
|
|
|
$
|
11,946
|
|
Investment Income
|
|
|
1,598
|
|
|
|
1,590
|
|
|
|
1,585
|
|
|
|
1,652
|
|
|
|
1,622
|
|
Other Revenues
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
11
|
|
Corporate and Other
|
|
|
55
|
|
|
|
88
|
|
|
|
75
|
|
|
|
108
|
|
|
|
154
|
|
Realized Investment Gains
(Losses), Net
|
|
|
288
|
|
|
|
426
|
|
|
|
23
|
|
|
|
(371
|
)
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
13,585
|
|
|
$
|
13,319
|
|
|
$
|
13,016
|
|
|
$
|
13,221
|
|
|
$
|
14,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Income
|
|
$
|
574
|
|
|
$
|
1,222
|
|
|
$
|
1,631
|
|
|
$
|
1,361
|
|
|
$
|
2,116
|
|
Investment Income
|
|
|
1,562
|
|
|
|
1,558
|
|
|
|
1,549
|
|
|
|
1,622
|
|
|
|
1,590
|
|
Other Income (Charges)
|
|
|
21
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
9
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
Insurance Income
|
|
|
2,157
|
|
|
|
2,782
|
|
|
|
3,177
|
|
|
|
2,992
|
|
|
|
3,712
|
|
Corporate and Other
|
|
|
(246
|
)
|
|
|
(220
|
)
|
|
|
(238
|
)
|
|
|
(214
|
)
|
|
|
(149
|
)
|
Realized Investment Gains
(Losses), Net
|
|
|
288
|
|
|
|
426
|
|
|
|
23
|
|
|
|
(371
|
)
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
|
|
2,199
|
|
|
|
2,988
|
|
|
|
2,962
|
|
|
|
2,407
|
|
|
|
3,937
|
|
Federal and Foreign Income Tax
|
|
|
521
|
|
|
|
814
|
|
|
|
779
|
|
|
|
603
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,678
|
|
|
$
|
2,174
|
|
|
$
|
2,183
|
|
|
$
|
1,804
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5.76
|
|
|
$
|
6.76
|
|
|
$
|
6.18
|
|
|
$
|
4.92
|
|
|
$
|
7.01
|
|
Dividends Declared on
Common Stock
|
|
|
1.56
|
|
|
|
1.48
|
|
|
|
1.40
|
|
|
|
1.32
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
50,865
|
|
|
$
|
50,249
|
|
|
$
|
50,449
|
|
|
$
|
48,429
|
|
|
$
|
50,574
|
|
Long Term Debt
|
|
|
3,575
|
|
|
|
3,975
|
|
|
|
3,975
|
|
|
|
3,975
|
|
|
|
3,460
|
|
Total Shareholders Equity
|
|
|
15,574
|
|
|
|
15,530
|
|
|
|
15,634
|
|
|
|
13,432
|
|
|
|
14,445
|
|
Book Value Per Share
|
|
|
57.15
|
|
|
|
52.24
|
|
|
|
47.09
|
|
|
|
38.13
|
|
|
|
38.56
|
|
25
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, 2011 compared with
December 31, 2010 and the results of operations for each of
the three years in the period ended December 31, 2011. 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
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
31
|
|
|
|
|
31
|
|
|
|
|
32
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
35
|
|
|
|
|
37
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
44
|
|
|
|
|
44
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
53
|
|
|
|
|
57
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
58
|
|
|
|
|
58
|
|
|
|
|
60
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
66
|
|
26
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; asbestos and
toxic waste liabilities and related developments; the number and
severity of surety-related claims; the impact of an improving
economy on our business; the impact of changes to our
reinsurance program in 2011 and the cost of reinsurance in 2012;
the adequacy of the rates at which we renewed and wrote new
business; premium volume, pricing and competition in 2012;
actions we may take in connection with our estimates of our
exposure to catastrophes; property and casualty investment
income during 2012; cash flows generated by our fixed income
investments; currency rate fluctuations; estimates with respect
to our credit derivatives exposure; the repurchase of common
stock under our share repurchase program; our capital adequacy
and funding of liquidity needs; the expected impact of new
guidance related to accounting for costs associated with
acquiring or renewing insurance contracts; the funding and
timing of loss payments; and the redemption of our capital
securities. 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 and attract new business;
|
|
|
|
our expectations with respect to cash flow 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; and
|
|
|
|
the impact from the bankruptcy protection sought by various
asbestos producers and other related businesses;
|
|
|
|
|
|
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;
|
|
|
|
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;
|
27
|
|
|
|
|
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:
|
|
|
|
|
|
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;
|
|
|
|
claims and litigation relating to uncertainty in the credit and
broader financial markets; and
|
|
|
|
legislative or regulatory proposals or changes;
|
|
|
|
|
|
the effects of changes in market practices in the
U.S. property and casualty insurance industry 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, regulatory and similar developments
on our business, including those relating to terrorism,
catastrophes, the financial markets, solvency standards, capital
requirements and accounting guidance;
|
|
|
|
any downgrade in our claims-paying, financial strength or other
credit ratings;
|
|
|
|
the ability of our subsidiaries to pay us dividends;
|
|
|
|
general political, economic and market conditions, whether
globally or in the markets in which we operate, including:
|
|
|
|
|
|
changes in interest rates, market credit spreads and the
performance of the financial markets;
|
|
|
|
currency fluctuations;
|
|
|
|
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;
|
|
|
|
|
|
our ability to implement managements strategic plans and
initiatives.
|
Chubb assumes no obligation to update any forward-looking
information set forth in this document, which speak as of the
date hereof.
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 and the evaluation of whether a decline
in value of any investment is temporary or other than temporary.
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.
28
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 $1.7 billion in 2011 and $2.2 billion
in both 2010 and 2009. The decrease in net income in 2011
compared with 2010 was due primarily to lower operating income
and, to a lesser extent, lower net realized investment gains.
Net income was similar in 2010 and 2009 as lower operating
income in 2010 was offset by higher net realized investment
gains. We define operating income as net income excluding
realized investment gains and losses after tax.
|
|
|
|
Operating income was $1.5 billion in 2011,
$1.9 billion in 2010 and $2.2 billion in 2009. The
lower operating income in 2011 compared with that in 2010 and in
2010 compared with that in 2009 was due to lower underwriting
income in our property and casualty insurance business,
attributable in large part to an increasingly higher impact of
catastrophes. Property and casualty investment income was flat
in 2011 and increased slightly in 2010 compared with the
respective prior year. Management uses operating income, a
non-GAAP financial measure, among other measures, to evaluate
its performance because the realization of investment gains and
losses in any period could be discretionary as to timing and can
fluctuate significantly, which could distort the analysis of
operating trends.
|
|
|
|
Underwriting results were profitable in 2011 and highly
profitable in both 2010 and 2009. Our combined loss and expense
ratio was 95.3% in 2011 compared with 89.3% in 2010 and 86.0% in
2009. The less profitable results in 2011 and 2010 compared to
the respective prior year were primarily due to a substantially
higher impact of catastrophes. The impact of catastrophes
accounted for 8.9 percentage points of the combined ratio
in 2011 compared with 5.7 percentage points in 2010 and 0.8
of a percentage point in 2009.
|
|
|
|
During 2011, 2010 and 2009, we experienced overall favorable
development of $767 million, $746 million and
$762 million, respectively, on loss reserves established as
of the previous year end. The favorable development in 2011 and
2010 was due primarily to favorable loss experience in certain
professional liability, commercial liability and personal
insurance classes. The favorable development in 2009 was due
primarily to favorable loss experience in certain professional
liability and commercial liability classes as well as lower than
expected emergence of losses in the homeowners and commercial
property classes.
|
|
|
|
Total net premiums written increased by 5% in 2011 and 1% in
2010. Premium growth in 2010 was limited by the general economic
downturn, especially in the United States. Growth in 2011 in the
United States benefited from positive pricing trends in the
standard commercial market as well as improving general economic
conditions. Premium growth in both years benefited slightly from
the impact of currency fluctuation on business written outside
the United States. Net premiums written in the United States
increased by 2% in 2011 and decreased by 1% in 2010. Net
premiums written outside the United States increased by 11% in
2011 and 9% in 2010. Measured in local currencies, premiums
outside the United States grew significantly in 2011 and
modestly in 2010. In both years, overall premium growth
reflected our emphasis on underwriting discipline in a highly
competitive market.
|
|
|
|
Property and casualty investment income after tax was flat in
2011 and increased by 1% in 2010 in what continued to be a low
yield investment environment. The increase in 2010 reflected the
positive effect of currency fluctuation on income from our
investments denominated in currencies other than the
U.S. dollar. Management uses property and casualty
investment income after tax, a non-GAAP financial measure, to
evaluate its investment results because it reflects the impact
of any change in the proportion of the investment portfolio
invested in tax exempt
|
29
|
|
|
|
|
securities and is therefore more meaningful for analysis
purposes than investment income before income tax.
|
|
|
|
|
|
Net realized investment gains before tax were $288 million
($187 million after tax) in 2011 compared with
$426 million ($277 million after tax) in 2010 and
$23 million ($15 million after tax) in 2009. The net
realized gains in 2011 and 2010 were primarily related to
investments in limited partnerships, which generally are
reported on a quarter lag.
|
A summary of our consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Property and casualty insurance
|
|
$
|
2,157
|
|
|
$
|
2,782
|
|
|
$
|
3,177
|
|
Corporate and other
|
|
|
(246
|
)
|
|
|
(220
|
)
|
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income before income tax
|
|
|
1,911
|
|
|
|
2,562
|
|
|
|
2,939
|
|
Federal and foreign income tax
|
|
|
420
|
|
|
|
665
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
|
1,491
|
|
|
|
1,897
|
|
|
|
2,168
|
|
Realized investment gains after income tax
|
|
|
187
|
|
|
|
277
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
1,678
|
|
|
$
|
2,174
|
|
|
$
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Underwriting
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
11,758
|
|
|
$
|
11,236
|
|
|
$
|
11,077
|
|
Decrease (increase) in unearned premiums
|
|
|
(114
|
)
|
|
|
(21
|
)
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
11,644
|
|
|
|
11,215
|
|
|
|
11,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
7,407
|
|
|
|
6,499
|
|
|
|
6,268
|
|
Operating costs and expenses
|
|
|
3,695
|
|
|
|
3,496
|
|
|
|
3,377
|
|
Decrease (increase) in deferred policy acquisition costs
|
|
|
(63
|
)
|
|
|
(30
|
)
|
|
|
27
|
|
Dividends to policyholders
|
|
|
31
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
574
|
|
|
|
1,222
|
|
|
|
1,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses
|
|
|
1,598
|
|
|
|
1,590
|
|
|
|
1,585
|
|
Investment expenses
|
|
|
36
|
|
|
|
32
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,562
|
|
|
|
1,558
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (charges)
|
|
|
21
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax
|
|
$
|
2,157
|
|
|
$
|
2,782
|
|
|
$
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty investment income after tax
|
|
$
|
1,265
|
|
|
$
|
1,261
|
|
|
$
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Property and casualty income before tax was lower in 2011 than
in 2010, which in turn was lower than in 2009. The successively
lower level of income was due to a decrease in underwriting
income. The decrease in underwriting income in 2011 compared
with 2010 was primarily the result of a higher impact of
catastrophes during 2011 and a decrease in current accident year
underwriting profitability excluding the impact of catastrophes.
The decrease in underwriting income in 2010 compared with 2009
was primarily attributable to a higher impact of catastrophes
during 2010, offset in part by a modest improvement in current
accident year underwriting profitability excluding the impact of
catastrophes. Investment income in 2011 was flat and was
slightly higher in 2010 compared with the respective prior year.
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 $11.8 billion in 2011,
$11.2 billion in 2010 and $11.1 billion in 2009.
Net premiums written by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
2011
|
|
|
2011 vs. 2010
|
|
|
2010
|
|
|
2010 vs. 2009
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
|
Personal insurance
|
|
$
|
3,977
|
|
|
|
4
|
%
|
|
$
|
3,825
|
|
|
|
5
|
%
|
|
$
|
3,657
|
|
Commercial insurance
|
|
|
5,051
|
|
|
|
8
|
|
|
|
4,676
|
|
|
|
|
|
|
|
4,660
|
|
Specialty insurance
|
|
|
2,720
|
|
|
|
|
|
|
|
2,727
|
|
|
|
|
|
|
|
2,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
11,748
|
|
|
|
5
|
|
|
|
11,228
|
|
|
|
2
|
|
|
|
11,056
|
|
Reinsurance assumed
|
|
|
10
|
|
|
|
*
|
|
|
|
8
|
|
|
|
*
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,758
|
|
|
|
5
|
|
|
$
|
11,236
|
|
|
|
1
|
|
|
$
|
11,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The change in net premiums written
is not presented since this business is in runoff.
|
Net premiums written increased by 5% in 2011 compared with 2010
and increased 1% in 2010 compared with 2009. Premiums written in
the United States, which we define as premiums for
U.S.-based
exposures and which in 2011 represented about 72% of our total
net premiums, increased by 2% in 2011 and decreased by 1% in
2010. Premiums written outside the United States, expressed in
U.S. dollars, increased by 11% in 2011 and 9% in 2010. In
both 2011 and 2010, the increase in net premiums written outside
the United States included the positive impact of foreign
currency fluctuation due to the impact of the weaker
U.S. dollar relative to several currencies in which we
wrote business in 2011 and 2010 compared to the respective prior
year. As a result, overall premium growth in both 2011 and 2010
benefited slightly from the impact of currency fluctuation on
business written outside the United States. Measured in local
currencies, net premiums written outside the United States grew
in both years, but more significantly in 2011. We experienced
particularly strong growth in our personal insurance business
outside the United States in both years. The countries outside
the United States which were significant contributors to net
premiums written in recent years were the United Kingdom,
Canada, Brazil, Australia and Germany.
31
Premium growth continued to be constrained in both 2011 and 2010
by the general economic conditions in recent years. The amounts
of coverage purchased or the insured exposures, both of which
are bases upon which we calculate the premiums we charge, were
down slightly or were flat for many classes of business in both
2011 and 2010 compared to the respective prior year. Also, in
both 2011 and 2010, our ability to grow premiums was constrained
by our emphasis on underwriting discipline in the highly
competitive market environment. In 2010, the competitive
environment placed pressure on renewal rates, resulting in
overall average U.S. renewal rates in the personal,
commercial and professional liability businesses being down
slightly compared to 2009. While the market remained competitive
in 2011, the pricing environment improved steadily during the
year, primarily in the commercial classes. Overall average
U.S. renewal rates in the commercial business in 2011 were
up slightly while rates in the professional liability business
were down slightly. Average renewal rates for our personal auto
and homeowners business were close to flat.
In 2011 and 2010, we retained a high percentage of our existing
customers and renewed those accounts at what we believe are
acceptable rates relative to the risks. Overall, the percentage
of business we retained on renewal was similar in 2011 compared
with 2010. In both years, the slow improvement in the economic
environment and the highly competitive market continued to make
it challenging to obtain new business at acceptable rates. The
overall level of new business improved slightly in 2011 compared
with 2010, as an increase in new personal and commercial
business, driven by business written outside the United States,
was mostly offset by a modest decline in new professional
liability business. The overall level of new business also
improved slightly in 2010 over 2009 levels, as a modest increase
in new commercial business was offset to a small extent by a
decline in new professional liability business.
The highly competitive market is likely to continue in 2012.
Nevertheless, we expect that the positive pricing environment
experienced in 2011, particularly in the commercial classes,
will continue into 2012. In addition, there were some signs
during 2011 that the economy was improving, which if it
continues and is sustained, should have a positive impact on
premiums, although there is typically a lag between a recovery
and any resulting growth in premiums. We expect our net written
premiums will be modestly higher in 2012 compared with 2011,
assuming average foreign currency to U.S. dollar exchange
rates in 2012 remain similar to 2011 year-end levels.
The reinsurance assumed business has been in runoff since the
sale of our ongoing reinsurance assumed business in December
2005.
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 reinsurance. 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 reinsurance companies and receive
few, if any, loss recoveries. However, in a year in which there
is a significant catastrophic event or a series of large
individual losses, we may receive substantial loss recoveries.
The impact of ceded reinsurance on net premiums written and net
premiums earned and on net losses and loss expenses incurred for
the three years ended December 31, 2011 is presented in
Note (9) of the Notes to Consolidated Financial Statements.
The most significant component of our ceded reinsurance program
is property reinsurance. We purchase two main types of property
reinsurance: catastrophe and property per risk.
32
For property risks in the United States and Canada, we purchase
traditional catastrophe reinsurance, including our primary
treaty which we refer to as our North American catastrophe
treaty, as well as supplemental catastrophe reinsurance that
provides additional coverage for our exposures in the
northeastern United States. For certain exposures in the United
States, we also have arranged for the purchase of multi-year,
collateralized reinsurance funded through the issuance of
collateralized risk linked securities, known as catastrophe
bonds. For events outside the United States, we also purchase
traditional catastrophe reinsurance.
The North American catastrophe treaty has an initial retention
of $500 million and provides coverage for United States and
Canadian exposures of approximately 64% of losses (net of
recoveries from other available reinsurance) between
$500 million and $1.65 billion. For catastrophic
events in the northeastern part of the United States and in
Florida, the North American catastrophe treaty, supplemental
catastrophe reinsurance
and/or the
catastrophe bond arrangements provide additional coverages as
discussed below.
The catastrophe bond arrangements generally provide reinsurance
coverage for specific types of losses in specific geographic
locations. They are generally designed to supplement coverage
provided under the North American catastrophe treaty. We
currently have two catastrophe bond arrangements in effect: a
$150 million reinsurance arrangement that expires in March
2012 that provides coverage for homeowners-related hurricane
losses in Florida and a $475 million reinsurance
arrangement, a portion of which expires in March 2014 and the
remainder in March 2015, that provides coverage for homeowners
and commercial exposures for loss events in the northeastern
United States.
For catastrophic events in the northeastern United States, the
combination of the North American catastrophe treaty, the
supplemental catastrophe reinsurance and the $475 million
catastrophe bond arrangement provides additional coverage of
approximately 64% of losses (net of recoveries from other
available reinsurance) between $1.65 billion and
$3.55 billion.
For hurricane events in Florida, we have reinsurance from the
Florida Hurricane Catastrophe Fund (FHCF), which is a
state-mandated fund designed to reimburse insurers for a portion
of their residential catastrophic hurricane losses. Our
participation in this mandatory program limits our initial
retention in Florida for homeowners-related losses to
approximately $160 million and provides coverage of 90% of
covered losses between approximately $160 million and
$570 million. Additionally, the $150 million
catastrophe bond arrangement provides coverage of approximately
60% of Florida homeowners-related hurricane losses between
$750 million and $1.0 billion.
Our primary property catastrophe treaty for events outside the
United States, including Canada, provides coverage of
approximately 75% of losses (net of recoveries from other
available reinsurance) between $100 million and
$350 million. For catastrophic events in Australia and
Canada, additional reinsurance provides coverage of 80% of
losses between $350 million and $475 million.
In addition to catastrophe treaties, we also have a commercial
property per risk treaty. This treaty provides coverage per risk
of approximately $625 million to $850 million
(depending upon the currency in which the insurance policy was
issued) in excess of our initial retention. Our initial
retention is generally between $25 million and
$35 million.
In addition to our major property catastrophe and property per
risk treaties, we purchase several smaller property treaties
that only cover specific classes of business or locations having
potential concentrations of risk.
Recoveries under our property reinsurance treaties are subject
to certain coinsurance requirements that affect the interaction
of some elements of our reinsurance program.
Our property reinsurance treaties generally contain terrorism
exclusions for acts perpetrated by foreign terrorists, and for
nuclear, biological, chemical and radiological loss causes
whether such acts are perpetrated by foreign or domestic
terrorists.
33
After decreasing somewhat in 2010, reinsurance rates for
property risks stabilized in 2011. Consequently, the overall
cost of our property reinsurance program was similar in 2011 and
2010. We do not expect the changes we made to our reinsurance
program during 2011 to have a material effect on the
Corporations results of operations, financial condition or
liquidity.
Our major, traditional property reinsurance treaties expire on
April 1, 2012 and we are in the process of evaluating our
2012 property reinsurance program. Due to the significant
worldwide catastrophe losses incurred by the industry in 2011,
we expect that reinsurance rates for property risks will
increase somewhat in 2012. The final structure of our
reinsurance program and amount of coverage purchased, including
the mixture of traditional catastrophe reinsurance and
collateralized reinsurance coverage funded through the issuance
of collateralized risk linked securities, is still being
determined and will affect our total reinsurance costs in 2012.
Profitability
The combined loss and expense ratio (or combined 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.
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. The total losses and loss
expenses incurred for a particular calendar year include current
accident year losses and loss expenses as well as any increases
or decreases to our estimates of losses and loss expenses that
occurred in all prior accident years, which we refer to as prior
year loss development.
Underwriting results were profitable in 2011 and highly
profitable in both 2010 and 2009. The combined loss and expense
ratio for our overall property and casualty business was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Loss ratio
|
|
|
63.8
|
%
|
|
|
58.1
|
%
|
|
|
55.4
|
%
|
Expense ratio
|
|
|
31.5
|
|
|
|
31.2
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined loss and expense ratio
|
|
|
95.3
|
%
|
|
|
89.3
|
%
|
|
|
86.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The loss ratio was higher in 2011 compared to 2010 due to a
higher impact of catastrophes and a modest increase in the
current accident year loss ratio excluding catastrophes. The
loss ratio was higher in 2010 compared to 2009 also due
primarily to a higher impact of catastrophes, but offset in part
by a modest decrease in the current accident year loss ratio
excluding catastrophes. In each of the last three years, the
loss ratio reflected positive loss experience excluding
catastrophes that we believe resulted from our disciplined
underwriting in recent years. Results in all three years
benefited to a similar extent from favorable prior year loss
development. For more information on prior year loss
development, see Property and Casualty
Insurance Loss Reserves, Prior Year Loss
Development.
In 2011, the impact of catastrophes was $1.0 billion, which
represented 8.9 percentage points of the combined ratio.
The impact of catastrophes was $634 million in 2010 and
$91 million in 2009, which represented 5.7 percentage
points and 0.8 percentage points, respectively, of the
combined ratio. A significant portion of the catastrophe losses
in 2011 related to flooding in Australia as well as tornadoes
and other storms in the United States, including losses of about
$300 million related to Hurricane Irene. A significant
portion of the catastrophe losses in 2010 related to numerous
storms in the United States and, to a lesser extent, an
earthquake in Chile.
We did not have any recoveries from our primary catastrophe
reinsurance treaties during the three year period ended
December 31, 2011 because there was no individual
catastrophe for which our losses exceeded our retention under
the treaties. Under a region-specific property catastrophe
reinsurance treaty, we made recoveries of about $60 million
of our gross losses related to the 2010 earthquake in Chile.
Our expense ratio was higher in 2011 compared with 2010, which
in turn was higher compared with 2009. The increase in 2011 was
due primarily to an increase in commission rates on business
written outside the United States partially offset by overhead
expenses increasing at a lower rate than the rate of growth of
premiums written. The increase in 2010 was due to an increase in
commissions and, to a lesser extent, overhead expenses
increasing at a rate that exceeded the rate of growth of
premiums written. In both 2011 and 2010, our overall commission
rate increased due primarily to premium growth outside the
United States in classes of business with higher commission
rates.
Review of
Underwriting Results by Business Unit
Personal
Insurance
Net premiums written from personal insurance, which represented
34% of our premiums written in 2011, increased by 4% in 2011 and
5% in 2010 compared with the respective prior year. Net premiums
written for the classes of business within the personal
insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
2011
|
|
|
2011 vs. 2010
|
|
|
2010
|
|
|
2010 vs. 2009
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
|
Automobile
|
|
$
|
682
|
|
|
|
7
|
%
|
|
$
|
638
|
|
|
|
11
|
%
|
|
$
|
577
|
|
Homeowners
|
|
|
2,477
|
|
|
|
4
|
|
|
|
2,382
|
|
|
|
2
|
|
|
|
2,339
|
|
Other
|
|
|
818
|
|
|
|
2
|
|
|
|
805
|
|
|
|
9
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
$
|
3,977
|
|
|
|
4
|
|
|
$
|
3,825
|
|
|
|
5
|
|
|
$
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Personal automobile premiums increased in 2011 and 2010,
reflecting new business growth in select
non-U.S. locations
and the positive impact of currency fluctuation on business
written outside the United States. Personal automobile
premiums in the United States increased slightly in 2011 and
decreased slightly in 2010 as growth continued to be constrained
by the highly competitive marketplace. Premiums for our
homeowners business increased modestly in 2011 and increased
slightly in 2010. Premium growth in this business has been
constrained due to the downturn in the U.S. economy in
recent years, which resulted in a slowdown in new housing
construction as well as lower demand for jewelry and fine arts
policy endorsements. In 2011, however, growth was achieved both
inside and outside the United States, due primarily to new
business and, to a lesser extent, increases in coverage on some
existing policies. Premiums from our other personal business,
which includes accident and health, excess liability and yacht
coverages, increased slightly in 2011 due to moderate growth in
the excess liability business. In accident and health,
significant growth in our
non-U.S. business
in 2011, attributable to new business initiatives and, to a
lesser extent, to the positive effect of currency fluctuation,
was offset by a significant decrease in premiums in the United
States, due to our decision to exit and run off the employer
health care stop loss component of this business. The growth in
other personal premiums in 2010 was primarily in our
non-U.S. accident
and health business and approximately half was attributable to
the effect of currency fluctuation.
Our personal insurance business produced modestly profitable
underwriting results in 2011. Results were highly profitable in
2010 and 2009, but less so in 2010. Results were less profitable
in each successive year due in large part to a higher impact of
catastrophe losses on our homeowners business. The impact of
catastrophes accounted for 13.1 percentage points of the
combined loss and expense ratio for our personal business in
2011, compared with 10.2 percentage points in 2010 and
0.9 percentage points in 2009. A significant portion of the
catastrophe losses in 2011 related to storms in the United
States, including Hurricane Irene. A significant portion of the
catastrophe losses in 2010 related to numerous storms in the
United States. The less profitable results in 2011 compared to
2010 were also attributable to a higher expense ratio, a higher
current accident year loss ratio excluding catastrophes and a
lower amount of favorable prior year loss development. The
combined loss and expense ratios for the classes of business
within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Automobile
|
|
|
94.4
|
%
|
|
|
90.8
|
%
|
|
|
90.4
|
%
|
Homeowners
|
|
|
100.2
|
|
|
|
91.7
|
|
|
|
80.4
|
|
Other
|
|
|
95.7
|
|
|
|
91.2
|
|
|
|
90.8
|
|
Total personal
|
|
|
98.3
|
|
|
|
91.5
|
|
|
|
84.1
|
|
Our personal automobile results were profitable in 2011 and
highly profitable in 2010 and 2009. Results in all three years
benefited from moderate claim frequency and favorable prior year
loss development.
Homeowners results were breakeven in 2011 and highly profitable
in 2010 and 2009. Results in each succeeding year were less
profitable than the respective prior year due primarily to
higher catastrophe losses. The impact of catastrophes accounted
for 20.6 percentage points of the combined loss and expense
ratio for this class in 2011 compared with 15.6 percentage
points in 2010 and 1.5 percentage points in 2009. Results
in 2011 were also adversely impacted by more severe
non-catastrophe weather-related losses than in 2010.
Other personal business produced profitable results in each of
the past three years, but less so in 2011. The less profitable
results in 2011 compared to 2010 were primarily due to reduced
profitability in the accident and health and excess liability
components. Results for our excess liability business, however,
were highly profitable in all three years and benefited from
favorable prior year loss development as a result of better than
expected loss trends. Our yacht business was also highly
profitable in each of the past three years. Our accident and
health business produced breakeven results in 2011 and 2009
compared with profitable results in 2010.
36
Commercial
Insurance
Net premiums written from commercial insurance, which
represented 43% of our premiums written in 2011, increased by 8%
in 2011 and were flat in 2010 compared with the respective prior
year. Net premiums written for the classes of business within
the commercial insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
2011
|
|
|
2011 vs. 2010
|
|
|
2010
|
|
|
2010 vs. 2009
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
|
Multiple peril
|
|
$
|
1,136
|
|
|
|
4
|
%
|
|
$
|
1,094
|
|
|
|
(2
|
)%
|
|
$
|
1,121
|
|
Casualty
|
|
|
1,639
|
|
|
|
7
|
|
|
|
1,532
|
|
|
|
1
|
|
|
|
1,514
|
|
Workers compensation
|
|
|
860
|
|
|
|
14
|
|
|
|
756
|
|
|
|
(1
|
)
|
|
|
761
|
|
Property and marine
|
|
|
1,416
|
|
|
|
9
|
|
|
|
1,294
|
|
|
|
2
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
5,051
|
|
|
|
8
|
|
|
$
|
4,676
|
|
|
|
|
|
|
$
|
4,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2011, premium growth occurred in all classes of our
commercial insurance business. This premium growth reflected
higher rates, new business opportunities and slightly higher
amounts of audit and endorsement premiums in a market that
continued to be highly competitive. In 2011, there was
improvement in the overall rate environment, particularly in the
United States, throughout the year. Average renewal rates in the
United States increased over those in 2010 for all major classes
of our commercial business. In 2011, the average renewal
exposure change was flat in the United States and up slightly
outside the United States, an improvement from 2010. Growth in
our commercial classes in 2010 was limited by a very competitive
marketplace and the restrained insurance purchasing demand of
customers operating in weakened economies worldwide. Net
premiums written in 2010 reflected slightly reduced exposures on
renewal business in the United States due to the continuing
effects of the weak economy, although the effect on renewal
exposures progressively lessened throughout the year. On
average, renewal rates in the United States for most classes of
commercial insurance business were about flat in 2010 compared
with 2009. Premium growth in both 2011 and 2010 in our
commercial insurance business benefited slightly from the impact
of currency fluctuation on business written outside the United
States.
Retention levels of our existing policyholders remained strong
over the last three years. New business volume was up modestly
in 2011 compared with 2010, driven by activity outside the
United States. New business volume was up modestly in 2010
compared with 2009.
We continued to maintain our underwriting discipline in the
highly 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 near breakeven
underwriting results in 2011 compared to profitable results in
2010 and highly profitable results in 2009. Results in all three
years benefited from favorable loss experience, disciplined risk
selection and appropriate terms and conditions in recent years.
Results were less profitable in each successive year mainly due
to a higher impact of catastrophes. The impact of catastrophes
accounted for 10.5 percentage points of the combined loss
and expense ratio for our commercial insurance business in 2011,
compared with 5.4 percentage points in 2010 and
1.2 percentage points in 2009. The less profitable results
in 2011 compared with 2010 were also due to a higher current
accident year loss ratio excluding catastrophes. Excluding the
effect of catastrophes, our commercial insurance results were
slightly more profitable in 2010 compared to 2009, due to a
higher amount of favorable prior year loss development in 2010.
37
The combined loss and expense ratios for the classes of business
within commercial insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2011
|
|
2010
|
|
2009
|
|
Multiple peril
|
|
|
101.5
|
%
|
|
|
94.7
|
%
|
|
|
85.8
|
%
|
Casualty
|
|
|
87.9
|
|
|
|
91.7
|
|
|
|
96.7
|
|
Workers compensation
|
|
|
93.2
|
|
|
|
93.4
|
|
|
|
92.7
|
|
Property and marine
|
|
|
114.7
|
|
|
|
90.5
|
|
|
|
83.3
|
|
Total commercial
|
|
|
99.3
|
|
|
|
92.3
|
|
|
|
89.9
|
|
Multiple peril results were slightly unprofitable in 2011
compared with profitable results in 2010 and highly profitable
results in 2009. The less profitable results in 2011 compared
with 2010 were mainly due to a higher impact of catastrophes in
the property component of this business, offset in part by more
profitable results in the liability component due to a higher
amount of favorable prior year loss development. The less
profitable results in 2010 compared with 2009 were due primarily
to a higher impact of catastrophes in the property component
and, to a lesser extent, less profitable results in the
liability component. The impact of catastrophes accounted for
15.1 percentage points of the combined loss and expense
ratio for the multiple peril class in 2011 compared with
10.3 percentage points in 2010 and 1.6 percentage
points in 2009. The property component reflected moderate
non-catastrophe losses in all three years, particularly outside
the United States in 2010.
Results for our casualty business were profitable in each of the
past three years, increasingly so in 2011 and 2010 compared to
the respective prior year. The automobile and primary liability
components of our casualty business were profitable in each of
the past three years, but more so in 2011 due to a higher amount
of favorable prior year loss development. Results in the excess
liability component were increasingly profitable in each of the
past three years. Excess liability results in all three years
benefited from favorable prior year loss development mainly due
to lower than expected claim severity. Casualty results in each
of the three years were adversely affected by incurred losses
related to toxic waste claims and, to a lesser extent in 2011,
asbestos claims. Our analysis of these exposures resulted in
increases in the estimate of our ultimate liabilities. Such
losses represented 4.0 percentage points of the combined
loss and expense ratio for this class in 2011,
3.5 percentage points in 2010 and 4.1 percentage
points in 2009.
Workers compensation results were profitable in each of
the past three years reflecting our disciplined risk selection
during the past several years. Results in 2011 benefited from
modest favorable prior year loss development.
Property and marine results were highly unprofitable in 2011
compared with profitable results in 2010 and highly profitable
results in 2009. The deterioration in results in each succeeding
year was primarily due to higher catastrophe losses. Catastrophe
losses accounted for 24.9 percentage points of the combined
loss and expense ratio in 2011 compared with 8.9 percentage
points in 2010 and 1.5 percentage points in 2009. Excluding
the impact of catastrophes, the combined ratio was 89.8%, 81.6%
and 81.8% in 2011, 2010 and 2009, respectively. On this basis,
the worse result in 2011 compared to 2010 and 2009 primarily
reflected a higher non-catastrophe loss ratio, including a
higher frequency of large losses, in the current accident year.
38
Specialty
Insurance
Net premiums written from specialty insurance, which represented
23% of our premiums written in 2011, were flat in 2011 and 2010
compared with the respective prior year. Net premiums written
for the classes of business within the specialty insurance
segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
2011
|
|
|
2011 vs. 2010
|
|
|
2010
|
|
|
2010 vs. 2009
|
|
|
2009
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Professional liability
|
|
$
|
2,388
|
|
|
|
|
%
|
|
$
|
2,398
|
|
|
|
(1
|
)%
|
|
$
|
2,413
|
|
Surety
|
|
|
332
|
|
|
|
1
|
|
|
|
329
|
|
|
|
1
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
$
|
2,720
|
|
|
|
|
|
|
$
|
2,727
|
|
|
|
|
|
|
$
|
2,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written in our professional liability business were
relatively flat in 2011 and 2010 compared with the respective
prior year. Premium growth for this business has been
constrained by the continuing effect of the economic downturn in
recent years and a highly competitive marketplace due to an
oversupply of capacity available from market participants. We
experienced a slight overall decrease in our average renewal
rates and new business volume but relatively strong retention of
our expiring policies in 2011 and 2010 compared with the
respective prior year. Premium growth in our professional
liability business in 2011 and 2010 benefited slightly from the
impact of currency fluctuation on business written outside the
United States.
Overall, the average renewal rates of our professional liability
business written in the United States decreased in both 2011 and
2010, but less so in 2011. Rates were down in most lines of our
professional liability business in 2010, with the most
significant reduction in rates in our directors and officers
liability business. However, in 2011, renewal rate reductions
moderated throughout the year for most lines of professional
liability business.
Retention levels in the professional liability classes remained
strong over the last three years. New business volume declined
slightly in each of the past two years, due in varying degrees
to the competition in the marketplace as well as the effects of
the economic downturn. We maintained our focus on small and
middle market publicly traded and privately held companies and
our commitment to maintaining underwriting discipline in this
environment. We continued to obtain what we believe are
acceptable rates and appropriate terms and conditions on both
new and renewal business.
Premium growth in our surety business was constrained in 2011
and 2010 by the highly competitive environment and the lingering
effects of the weak economic conditions on the construction
business during the last few years. The slight growth in both
2011 and 2010 was attributable to new business in
non-U.S. locations.
Our specialty 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 specialty insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Professional liability
|
|
|
89.9
|
%
|
|
|
87.8
|
%
|
|
|
90.1
|
%
|
Surety
|
|
|
49.1
|
|
|
|
41.3
|
|
|
|
37.4
|
|
Total specialty
|
|
|
85.1
|
|
|
|
82.2
|
|
|
|
84.1
|
|
39
Our professional liability business produced highly profitable
results in each of the past three years. The profitability of
our professional liability business was particularly strong
outside the United States in all three years, especially in
2010. The fiduciary liability class produced highly profitable
results in each of the three past years. The directors and
officers liability class was profitable in all three years,
particularly in 2011 and 2010. The fidelity class was profitable
in each of the past three years, but less so in each successive
year, primarily due to increased large loss activity resulting
from alleged third party and insured-employee criminal activity
in recent years. The employment practices liability class was
near breakeven in 2011 compared with highly profitable results
in 2010 and 2009. The less profitable results in 2011 in this
class were due to deterioration in the current accident year
loss ratio, while results in 2010 and 2009 benefited from
favorable prior year loss development. Our errors and omissions
liability business produced highly unprofitable results in each
of the past three years partly reflecting the impact of the
financial crisis and unfavorable prior year loss development.
Collectively, the results for the professional liability classes
benefited from favorable prior year loss development in the past
three years that was driven mainly by positive loss experience
related to accident years 2008 and prior. The combined ratio for
the current accident year in our professional liability business
in 2011 and 2010 was near breakeven, while the combined ratio
for the current accident year in 2009 was higher since that
accident year was more affected by the crisis in the financial
markets.
Our surety business produced highly profitable results in each
of the past three years due to favorable loss experience. Our
surety business tends to be characterized by losses that are
infrequent but have the potential to be highly severe. 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 by
individual account 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, especially in light of ongoing
economic conditions. 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.
Reinsurance
Assumed
In 2005, we transferred our ongoing reinsurance assumed business
and certain related assets, including renewal rights, to a
reinsurance company. The reinsurer 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, the same reinsurer
underwrote specific reinsurance business on our behalf. We
retained a portion of this business and ceded the balance to the
reinsurer.
Net premiums written from our reinsurance assumed business
during the past three years have not been significant as this
business is in runoff.
Reinsurance assumed results were profitable in each of the past
three years. Prior year loss development was favorable in all
three years, but more so in 2009.
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
as well as from man-made catastrophic events such as terrorism.
The frequency and severity of catastrophes are inherently
unpredictable.
40
Natural
Catastrophes
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 natural 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 coverage. We use catastrophe modeling
and a risk concentration management tool to monitor and control
our accumulations of potential losses in natural catastrophe
exposed areas in the United States, such as California and the
gulf and east coasts, as well as in natural catastrophe exposed
areas in other countries. The information provided by the
catastrophe modeling and the risk concentration management tool
has resulted in our non-renewing some accounts and refraining
from writing others.
A new version of one of the third party catastrophe modeling
tools that we and others in the insurance industry utilize for
estimating potential losses from natural catastrophes was
released during the first quarter of 2011. Overall, the model
indicates higher risk estimates for our exposure to hurricanes
in the United States, but the impact of the new model on our
book of business varies significantly among the regions that we
model for hurricanes. Based on our analysis, and the indications
of other catastrophe models, we are implementing targeted
underwriting and rate initiatives in some regions and we
purchased additional catastrophe reinsurance. We will continue
to take underwriting actions
and/or
purchase additional reinsurance to reduce or mitigate our
exposure as we believe is warranted.
Catastrophe modeling generally relies on multiple inputs based
on experience, science, engineering and history, and the
selection of those inputs requires a significant amount of
judgment. The modeling results may also fail to account for
risks that are outside the range of normal probability or are
otherwise unforeseen. Because of this, actual results may differ
materially from those derived from our modeling exercises.
We also continue to actively explore and analyze credible
scientific evidence, including the potential impact of global
climate change, that may affect our ability to manage exposure
under the insurance policies we issue as well as the impact that
laws and regulations intended to combat climate change may have
on us.
Despite our efforts to manage our catastrophe exposure, the
occurrence of one or more severe natural catastrophic events in
heavily populated areas could have a material 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, required us to change how we identify and
evaluate risk accumulations. We have licensed a terrorism model
that provides loss estimates under numerous event scenarios.
Actual results may differ materially from those suggested by the
model. The risk concentration management tool referred to above
also enables us to identify locations and geographic areas that
are exposed to risk accumulations. The information provided by
the terrorism model and the risk concentration management tool
has resulted in our non-renewing some accounts, subject to
regulatory constraints, and refraining from writing others.
The Terrorism Risk Insurance Act of 2002 and more recently, the
Terrorism Risk Insurance Program Reauthorization Act of 2007
(collectively TRIA), are limited duration programs under which
the U.S. federal government has agreed to share the risk of
loss arising from certain acts of terrorism with the insurance
industry. The current program, which will terminate on
December 31, 2014, is applicable to many lines of
commercial business but excludes, among others, commercial
automobile, surety and
41
professional liability insurance, other than directors and
officers liability. The current program provides protection from
all foreign and domestic acts of terrorism.
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. In the
event of an act of terrorism, each insurer has a separate
deductible that it must meet 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 2012, that deductible is 20% of
direct premiums earned in 2011 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 $930 million in 2012.
For certain classes of business, such as workers
compensation, terrorism coverage is mandatory. For those classes
of business where it is not mandatory, policyholders may choose
not to purchase terrorism coverage, which would, subject to
other statutory or regulatory restrictions, reduce our exposure.
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.
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 and the limitations
of existing government programs and uncertainty regarding their
availability in the future, the occurrence of a terrorist event
could have a material adverse effect on the Corporations
results of operations, financial condition or liquidity.
Loss
Reserves
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) reserve estimates are generally
calculated by first projecting the ultimate cost of all claims
that have occurred and then subtracting 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, about 70% of our aggregate net loss
reserves at December 31, 2011 were for IBNR losses.
42
Our gross case and IBNR loss reserves and related reinsurance
recoverable by class of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross Loss Reserves
|
|
|
Reinsurance
|
|
|
Loss
|
|
December 31, 2011
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Recoverable
|
|
|
Reserves
|
|
|
|
(in millions)
|
|
|
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
269
|
|
|
$
|
151
|
|
|
$
|
420
|
|
|
$
|
16
|
|
|
$
|
404
|
|
Homeowners
|
|
|
431
|
|
|
|
349
|
|
|
|
780
|
|
|
|
11
|
|
|
|
769
|
|
Other
|
|
|
392
|
|
|
|
649
|
|
|
|
1,041
|
|
|
|
139
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
1,092
|
|
|
|
1,149
|
|
|
|
2,241
|
|
|
|
166
|
|
|
|
2,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
600
|
|
|
|
1,169
|
|
|
|
1,769
|
|
|
|
34
|
|
|
|
1,735
|
|
Casualty
|
|
|
1,388
|
|
|
|
5,229
|
|
|
|
6,617
|
|
|
|
343
|
|
|
|
6,274
|
|
Workers compensation
|
|
|
913
|
|
|
|
1,669
|
|
|
|
2,582
|
|
|
|
190
|
|
|
|
2,392
|
|
Property and marine
|
|
|
896
|
|
|
|
558
|
|
|
|
1,454
|
|
|
|
336
|
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,797
|
|
|
|
8,625
|
|
|
|
12,422
|
|
|
|
903
|
|
|
|
11,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
1,498
|
|
|
|
6,098
|
|
|
|
7,596
|
|
|
|
416
|
|
|
|
7,180
|
|
Surety
|
|
|
27
|
|
|
|
54
|
|
|
|
81
|
|
|
|
6
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,525
|
|
|
|
6,152
|
|
|
|
7,677
|
|
|
|
422
|
|
|
|
7,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
6,414
|
|
|
|
15,926
|
|
|
|
22,340
|
|
|
|
1,491
|
|
|
|
20,849
|
|
Reinsurance assumed
|
|
|
240
|
|
|
|
488
|
|
|
|
728
|
|
|
|
248
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,654
|
|
|
$
|
16,414
|
|
|
$
|
23,068
|
|
|
$
|
1,739
|
|
|
$
|
21,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross Loss Reserves
|
|
|
Reinsurance
|
|
|
Loss
|
|
December 31, 2010
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Recoverable
|
|
|
Reserves
|
|
|
|
(in millions)
|
|
|
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
257
|
|
|
$
|
155
|
|
|
$
|
412
|
|
|
$
|
17
|
|
|
$
|
395
|
|
Homeowners
|
|
|
383
|
|
|
|
327
|
|
|
|
710
|
|
|
|
18
|
|
|
|
692
|
|
Other
|
|
|
359
|
|
|
|
663
|
|
|
|
1,022
|
|
|
|
145
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
999
|
|
|
|
1,145
|
|
|
|
2,144
|
|
|
|
180
|
|
|
|
1,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
607
|
|
|
|
1,136
|
|
|
|
1,743
|
|
|
|
38
|
|
|
|
1,705
|
|
Casualty
|
|
|
1,446
|
|
|
|
5,058
|
|
|
|
6,504
|
|
|
|
363
|
|
|
|
6,141
|
|
Workers compensation
|
|
|
897
|
|
|
|
1,512
|
|
|
|
2,409
|
|
|
|
175
|
|
|
|
2,234
|
|
Property and marine
|
|
|
664
|
|
|
|
487
|
|
|
|
1,151
|
|
|
|
332
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,614
|
|
|
|
8,193
|
|
|
|
11,807
|
|
|
|
908
|
|
|
|
10,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
1,477
|
|
|
|
6,329
|
|
|
|
7,806
|
|
|
|
418
|
|
|
|
7,388
|
|
Surety
|
|
|
16
|
|
|
|
50
|
|
|
|
66
|
|
|
|
8
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,493
|
|
|
|
6,379
|
|
|
|
7,872
|
|
|
|
426
|
|
|
|
7,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
6,106
|
|
|
|
15,717
|
|
|
|
21,823
|
|
|
|
1,514
|
|
|
|
20,309
|
|
Reinsurance assumed
|
|
|
261
|
|
|
|
634
|
|
|
|
895
|
|
|
|
303
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,367
|
|
|
$
|
16,351
|
|
|
$
|
22,718
|
|
|
$
|
1,817
|
|
|
$
|
20,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Loss reserves, net of reinsurance recoverable, increased by
$428 million or 2% in 2011. The effect of catastrophes
increased loss reserves by $285 million and the effect of
foreign currency fluctuation increased reserves by
$67 million, due to a weaker U.S. dollar at
December 31, 2011 compared to December 31, 2010. Loss
reserves related to our insurance business increased by
$540 million. Loss reserves related to our reinsurance
assumed business, which is in runoff, decreased by
$112 million.
Total gross case reserves related to our insurance business
increased by $308 million in 2011. A majority of this
increase was in the homeowners and property and marine classes
due to catastrophe losses reported during the year that remained
unpaid as of December 31, 2011. Total gross IBNR reserves
related to our insurance business increased by $209 million
in 2011. An increase in gross IBNR reserves in the commercial
classes, primarily in the casualty and workers
compensation classes due to increased exposures and in the
property-related classes due to higher catastrophe-related
reserves, was offset in part by a decrease in gross IBNR
reserves in the professional liability classes, reflecting
increased case activity and favorable prior year development.
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, 2011 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, 2011 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.
Given 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 in those instances where settlements do not occur
until well into the future. Our net loss reserves at
December 31, 2011 were $21.3 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 usually 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.
44
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 and economic
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. As a result,
the role of judgment is much greater for these reserve estimates.
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 review of loss reserves
for each of the numerous classes of business we write at least
once a year. The timing of such review varies by class of
business and, for some classes, the jurisdiction in which the
policy was written. The review process takes into consideration
the variety of trends that impact the ultimate settlement of
claims in each particular class of business. Additionally, each
quarter 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 amounts observed so far. Historical patterns of
the development of paid and reported losses by accident year can
be predictive of the expected future patterns that 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 through a regression analysis of historical
severity data. Generally, these methods work best for high
frequency, low severity classes of business.
45
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, where
appropriate, 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 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. In
doing so, management must evaluate whether a change in the data
represents credible actionable information or an anomaly. Such
an assessment requires considerable judgment. 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.
46
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. Examples
of such issues include professional liability claims arising out
of the recent crisis in the financial markets, directors and
officers liability and errors and omissions liability claims
arising out of 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 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.
47
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 $6.8 billion, net of reinsurance, at
December 31, 2011. 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 $3.1 billion, net of reinsurance,
at December 31, 2011. 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 changed by 20%, we estimate that the net
reserves for commercial excess liability would change by
approximately $400 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.
48
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,
2011 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 90 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.
There have been some positive legislative and judicial
developments in the asbestos environment over the past several
years:
|
|
|
|
|
Various challenges to the mass screening of claimants have been
mounted, which have led to higher medical evidentiary standards.
For example, several asbestos injury settlement trusts have
suspended their acceptance of claims that were based on the
diagnosis of specific physicians or screening companies. 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 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.
|
49
|
|
|
|
|
In recognition that many aspects of bankruptcy plans are unfair
to certain classes of claimants and to the insurance industry,
these plans are being more 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 bankruptcy impact; relevant
judicial interpretations; and applicable coverage defenses,
including asbestos exclusions.
Various U.S. federal proposals to solve the ongoing
asbestos litigation crisis have been considered by the
U.S. Congress over the years, but none have yet been
enacted. The prospect of federal asbestos reform legislation
remains uncertain. As a result, we have assumed a continuation
of the current legal environment with no benefit from any
federal asbestos reform legislation.
Our actuaries and claim personnel perform periodic analyses of
our asbestos related exposures. The analyses during 2011 noted
modest adverse developments related to a small number of
accounts. Based on these developments, we increased our net
asbestos loss reserves by $22 million in 2011. The analyses
during 2010 and 2009 noted no significant developments that
required a change in our estimate of ultimate liabilities
related to asbestos claims.
50
The following table presents a reconciliation of the beginning
and ending loss reserves related to asbestos claims.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Gross loss reserves, beginning of year
|
|
$
|
658
|
|
|
$
|
728
|
|
|
$
|
794
|
|
Reinsurance recoverable, beginning of year
|
|
|
27
|
|
|
|
39
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, beginning of year
|
|
|
631
|
|
|
|
689
|
|
|
|
747
|
|
Net incurred losses
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Net losses paid
|
|
|
48
|
|
|
|
58
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
|
605
|
|
|
|
631
|
|
|
|
689
|
|
Reinsurance recoverable, end of year
|
|
|
22
|
|
|
|
27
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss reserves, end of year
|
|
$
|
627
|
|
|
$
|
658
|
|
|
$
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2011 as well as the net
losses paid during 2011 by component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Net Loss
|
|
|
Net Losses
|
|
|
|
Policyholders
|
|
|
Reserves
|
|
|
Paid
|
|
|
|
|
|
|
(in millions)
|
|
|
Traditional defendants
|
|
|
16
|
|
|
$
|
143
|
|
|
$
|
5
|
|
Peripheral defendants
|
|
|
349
|
|
|
|
347
|
|
|
|
43
|
|
Future claims from unknown policyholders
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
605
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 expanding theories of liability and increased
focus on peripheral defendants;
|
|
|
|
the volume of claims by unimpaired plaintiffs and the extent to
which they can be precluded from making claims;
|
|
|
|
the sizes of settlements related to more severely impaired
plaintiffs;
|
|
|
|
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.
51
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 U.S. 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 claims arising from gradual pollution.
Since 1986, most policies have specifically excluded such
exposures.
Environmental remediation claims tendered by PRPs and others to
insurers have frequently resulted in disputes over
insurers contractual obligations with respect to pollution
claims. The resulting 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.
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.
In each of the past three years, the analysis of our toxic waste
exposures indicated that some of our insureds had become
responsible for the remediation of additional polluted sites and
that, as clean up standards continue to evolve as a result of
technology advances, the estimated cost of remediation of
certain sites had increased. Defense costs associated with some
of these cases have also increased. Based on these developments,
we increased our net toxic waste loss reserves by
$50 million in 2011, $61 million in 2010 and
$90 million in 2009.
52
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
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Reserves, beginning of year
|
|
$
|
248
|
|
|
$
|
215
|
|
|
$
|
181
|
|
Incurred losses
|
|
|
50
|
|
|
|
61
|
|
|
|
90
|
|
Losses paid
|
|
|
37
|
|
|
|
28
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, end of year
|
|
$
|
261
|
|
|
$
|
248
|
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011, $169 million of the net toxic
waste loss reserves were IBNR reserves.
Reinsurance
Recoverable. Reinsurance recoverable is
the estimated amount recoverable from reinsurers related to the
losses we have incurred. At December 31, 2011, reinsurance
recoverable included $139 million recoverable with respect
to paid losses and loss expenses, which is included in other
assets, and $1.7 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 us of 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 we believe it has 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
Changes in loss reserve estimates are unavoidable because such
estimates are subject to the outcome of future events. 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.
53
A reconciliation of our beginning and ending loss reserves, net
of reinsurance, for the three years ended December 31, 2011
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Net loss reserves, beginning of year
|
|
$
|
20,901
|
|
|
$
|
20,786
|
|
|
$
|
20,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred losses and loss expenses related to
Current year
|
|
|
8,174
|
|
|
|
7,245
|
|
|
|
7,030
|
|
Prior years
|
|
|
(767
|
)
|
|
|
(746
|
)
|
|
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,407
|
|
|
|
6,499
|
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments for losses and loss expenses related to
Current year
|
|
|
2,746
|
|
|
|
2,280
|
|
|
|
1,943
|
|
Prior years
|
|
|
4,300
|
|
|
|
4,074
|
|
|
|
4,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,046
|
|
|
|
6,354
|
|
|
|
6,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation effect
|
|
|
67
|
|
|
|
(30
|
)
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
$
|
21,329
|
|
|
$
|
20,901
|
|
|
$
|
20,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2011, we experienced overall favorable prior year
development of $767 million, which represented 3.7% of the
net loss reserves as of December 31, 2010. This compares
with favorable prior year development of $746 million
during 2010, which represented 3.6% of the net loss reserves at
December 31, 2009, and favorable prior year development of
$762 million during 2009, which represented 3.8% of the net
loss reserves at December 31, 2008. Such favorable
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, 2011 by
accident year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
|
|
(Favorable) Unfavorable Development
|
|
Accident Year
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
2010
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
(91
|
)
|
|
$
|
(38
|
)
|
|
|
|
|
2008
|
|
|
(181
|
)
|
|
|
(138
|
)
|
|
$
|
62
|
|
2007
|
|
|
(184
|
)
|
|
|
(183
|
)
|
|
|
(180
|
)
|
2006
|
|
|
(178
|
)
|
|
|
(139
|
)
|
|
|
(230
|
)
|
2005
|
|
|
(98
|
)
|
|
|
(147
|
)
|
|
|
(299
|
)
|
2004
|
|
|
(78
|
)
|
|
|
(105
|
)
|
|
|
(256
|
)
|
2003
|
|
|
(19
|
)
|
|
|
(46
|
)
|
|
|
(50
|
)
|
2002
|
|
|
(25
|
)
|
|
|
(33
|
)
|
|
|
(33
|
)
|
2001 and prior
|
|
|
43
|
|
|
|
83
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(767
|
)
|
|
$
|
(746
|
)
|
|
$
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net favorable development of $767 million in 2011 was
due to various factors. The most significant factors were:
|
|
|
|
|
We experienced favorable development of about $355 million
in the aggregate in the personal and commercial liability
classes. Favorable development in the more recent accident
years, particularly in accident years 2004 to 2009, more than
offset adverse development in accident years 2001 and prior,
which included $72 million of incurred losses related to
asbestos and toxic waste claims. The overall frequency and
severity of prior period liability claims were lower than
expected and
|
54
|
|
|
|
|
the effects of underwriting changes that affected these years
have been more positive than expected, especially in the
commercial excess liability class. These factors were reflected
in the determination of the carried loss reserves for these
classes at December 31, 2011.
|
|
|
|
|
|
We experienced overall favorable development of about
$310 million in the professional liability classes other
than fidelity. The most significant amount of favorable
development occurred in the directors and officers liability
class, particularly from our business outside the United States,
with additional favorable development in the fiduciary liability
class, partially offset by adverse development in the errors and
omissions liability class. The aggregate reported loss activity
related to accident years 2008 and prior was less than expected.
As these years have become increasingly mature, and as the
reported loss experience has emerged better than we expected, we
have gradually decreased the expected loss ratios for these
accident years. The favorable development was recognized as one
among many factors in the determination of loss reserves for
more current accident years. Among other important factors were
the continued uncertainty surrounding the recent crisis in the
financial markets and its aftermath and the general downward
trend in prices in recent years.
|
|
|
|
We experienced favorable development of about $80 million
in the aggregate in the personal and commercial property
classes, primarily related to the 2009 and 2010 accident years.
The severity and frequency of late developing property claims
that emerged during 2011 were lower than expected. Because the
incidence of large property losses is subject to a considerable
element of fortuity, reserve estimates for these claims are
based on an analysis of past loss experience on average over a
period of years. As a result, the favorable development in 2011
was recognized, but this factor had a relatively modest effect
on our determination of carried property loss reserves at
December 31, 2011.
|
|
|
|
We experienced unfavorable development of about $70 million
in the fidelity class due to higher than expected reported loss
emergence, related to the 2010 accident year and, to a lesser
extent, the 2009 accident year. Loss reserve estimates at the
end of 2010 included an expectation of less prior year loss
activity than actually occurred in 2011. This activity was
driven by case developments on a relatively small number of
large claims related to the recent economic and financial
environment. This continued adverse development was reflected in
the determination of carried loss reserves at December 31,
2011.
|
|
|
|
We experienced favorable development of about $30 million
in the personal automobile business due primarily to lower than
expected frequency of prior year claims. This factor was
reflected in our determination of carried personal automobile
loss reserves at December 31, 2011.
|
|
|
|
We experienced favorable development of about $30 million
in the runoff of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
|
|
|
We experienced favorable development of about $15 million
in the surety business due to lower than expected loss emergence
in recent accident years. Loss reserve estimates at the end of
2010 in this class included an expectation of more late reported
losses than actually occurred in 2011. However, since the
experience in this class is volatile and we would still expect
such losses to occur over time, the favorable development in
2011 was given only modest weight in our determination of
carried surety loss reserves at December 31, 2011.
|
The net favorable development of $746 million in 2010 was
also due to various factors. The most significant factors were:
|
|
|
|
|
We experienced overall favorable development of about
$315 million in the professional liability classes other
than fidelity, including about $190 million from our
business outside the United States. The most significant
amount of favorable development occurred in the directors and
officers liability class, particularly from our business outside
the United States, with additional favorable development in the
fiduciary liability and employment practices liability classes,
partially offset by adverse development in the errors and
omissions liability class. The aggregate
|
55
|
|
|
|
|
reported loss activity related to accident years 2007 and prior
was less than expected, reflecting a favorable business climate,
lower policy limits and better terms and conditions.
|
|
|
|
|
|
We experienced favorable development of about $265 million
in the aggregate in the personal and commercial liability
classes. Favorable development, primarily in accident years 2004
to 2008, more than offset adverse development in accident years
2000 and prior, which included $61 million of incurred
losses related to toxic waste claims. The overall frequency and
severity of prior period liability claims were lower than
expected and the effects of underwriting changes that affected
these years have been more positive than expected, especially in
the commercial excess liability class.
|
|
|
|
We experienced favorable development of about $110 million
in the aggregate in the personal and commercial property
classes, primarily related to the 2008 and 2009 accident years.
The severity and frequency of late developing property claims
that emerged during 2010 were lower than expected.
|
|
|
|
We experienced unfavorable development of about $70 million
in the fidelity class due to higher than expected reported loss
emergence, mainly related to the 2009 accident year and
primarily in the United States.
|
|
|
|
We experienced favorable development of about $40 million
in the personal automobile business due primarily to lower than
expected frequency of prior year claims.
|
|
|
|
We experienced favorable development of about $40 million
in the surety business due to lower than expected loss emergence.
|
|
|
|
We experienced favorable development of about $25 million
in the runoff of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
The net favorable development of $762 million in 2009 was
also due to various factors. The most significant factors were:
|
|
|
|
|
We experienced favorable development of about $340 million
in the professional liability classes other than fidelity,
including about $110 million from our business outside the
United States. A significant amount of favorable development
occurred in the directors and officers liability, fiduciary
liability and employment practices liability classes. We had a
modest amount of unfavorable development in the errors and
omissions liability class, particularly from our business
outside the United States. A majority of the favorable
development in the professional liability classes was in
accident years 2004 through 2006. Reported loss activity related
to these accident years was less than expected reflecting a
favorable business climate, lower policy limits and better terms
and conditions.
|
|
|
|
We experienced favorable development of about $160 million
in the aggregate in the homeowners and commercial property
classes, primarily related to the 2007 and 2008 accident years.
The severity of late reported property claims that emerged
during 2009 was lower than expected and development on prior
year catastrophe events was favorable.
|
|
|
|
We experienced favorable development of about $150 million
in the aggregate in the commercial and personal liability
classes. Favorable development, primarily in accident years 2004
through 2006, was partially offset by adverse development in
accident years 1999 and prior, which included $90 million
of incurred losses related to toxic waste claims. The frequency
and severity of prior period excess and primary liability claims
have been generally lower than expected and the effects of
underwriting changes that affected these years appear to have
been more positive than expected.
|
|
|
|
We experienced favorable development of about $55 million
in the runoff of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
56
|
|
|
|
|
We experienced favorable development of about $35 million
in the surety business due to lower than expected loss emergence.
|
|
|
|
We experienced favorable development of about $30 million
in the personal automobile business due primarily to lower than
expected severity.
|
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 2011. The variability in
reserve development over the ten year period illustrates the
uncertainty of the loss reserving process. Conditions and trends
that have affected reserve development in the past will not
necessarily recur in the future. It is not appropriate to
extrapolate future favorable or unfavorable reserve development
based on amounts experienced in prior years.
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 2011. 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.
Investment
Results
Property and casualty investment income before taxes was flat in
2011 compared with 2010 and increased by 1% in 2010 compared
with 2009. In 2011, the slightly positive impact of currency
fluctuation on income from our investments denominated in
currencies other than the U.S. dollar was offset by the
impact of lower average yields on our investment portfolio. In
2010, the impact of growth in average invested assets on
investment income was substantially offset by the impact of
lower average yields on our investment portfolio. In 2011 and
2010, the decrease in the average yield of our investment
portfolio primarily resulted from lower reinvestment yields on
fixed maturity securities that matured, were redeemed by the
issuer or were sold during the year. The growth in investment
income in 2011 was limited as average invested assets were
similar in 2011 and 2010 as a result of substantial dividend
distributions made by the property and casualty subsidiaries to
Chubb during 2011 and 2010. Average invested assets increased
only modestly in 2010 compared to 2009 also as a result of
substantial dividend distributions made by the property and
casualty subsidiaries during 2010 and 2009.
The effective tax rate on our investment income was 19.0% in
2011 compared with 19.1% in 2010 and 19.2% in 2009. The
effective tax rate fluctuates as the proportion of tax exempt
investment income relative to total investment income changes
from period to period.
On an after-tax basis, property and casualty investment income
was flat in 2011 compared to 2010 and increased by 1% in 2010
compared to 2009. The after-tax annualized yield on the
investment portfolio that supports our property and casualty
insurance business was 3.25% in 2011 compared with 3.29% in 2010
and 3.39% in 2009.
If both investment yields and average foreign currency to
U.S. dollar exchange rates are similar in 2012 to
2011 year-end levels, property and casualty investment
income after taxes for 2012 is expected to decline modestly.
This expected decline results, in part, from the effect of
investing funds from securities that matured in 2011 in
securities with yields lower than the yields of the maturing
securities, and the expectation that this pattern will continue
in 2012. To a lesser extent, the decline is also impacted by the
lower amount of average invested assets estimated to be held
during 2012, based on expectations of cash flows during the year.
Other
Income and Charges
Other income and charges, which includes miscellaneous income
and expenses of the property and casualty subsidiaries, was
income of $21 million in 2011 compared with income of
$2 million in 2010 and a loss of $3 million in 2009.
The income in 2011 primarily included income from several small
property and casualty insurance companies in which we have an
interest.
57
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 non-insurance subsidiaries.
Corporate and other produced a loss before taxes of
$246 million in 2011 compared with losses of
$220 million and $238 million in 2010 and 2009,
respectively. The higher loss in 2011 and 2009 compared to 2010
was primarily due to lower investment income in 2011 and 2009.
Investment income in 2010 included a $20 million special
dividend received on an equity security investment.
Chubb
Financial Solutions
Chubb Financial Solutions (CFS), a wholly owned subsidiary of
Chubb, participated in derivative financial instruments and has
been in runoff since 2003. Since that date, CFS has terminated
early or run off nearly all of its contractual obligations under
its derivative contracts.
CFSs aggregate exposure, or retained risk, from its
remaining derivative 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. Notional amounts are not
recorded on the balance sheet.
CFSs remaining derivative contracts at December 31,
2011 included a contract linked to an equity market index that
terminates in 2012 and a few other insignificant contracts. We
estimate that the notional amount under the remaining contracts
was about $340 million and the fair value of our future
obligations was $2 million at December 31, 2011.
REALIZED
INVESTMENT GAINS AND LOSSES
Net realized investment gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
31
|
|
|
$
|
72
|
|
|
$
|
72
|
|
Equity securities
|
|
|
73
|
|
|
|
49
|
|
|
|
84
|
|
Other invested assets
|
|
|
207
|
|
|
|
316
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
437
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(23
|
)
|
Equity securities
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(11
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains before tax
|
|
$
|
288
|
|
|
$
|
426
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains after tax
|
|
$
|
187
|
|
|
$
|
277
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 accumulated other comprehensive income.
58
The net realized gains and losses of other invested assets
represent primarily the aggregate of realized gain distributions
to us from the limited partnerships in which we have an interest
and changes in our equity in the net assets of those
partnerships based on valuations provided to us by the manager
of each partnership. Due to the timing of our receipt of
valuation data from the investment managers, these investments
are generally reported on a one quarter lag. The net realized
gains of the limited partnerships reported in 2011 reflect the
strong performance of the equity and high yield investment
markets in the fourth quarter of 2010 and in the first quarter
of 2011. The net realized gains of the limited partnerships
reported in 2010 reflected the strong performance of the equity
and high yield investment markets in the fourth quarter of 2009
and for the first nine months of 2010.
We regularly review invested assets that have a fair value less
than cost to determine if an
other-than-temporary
decline in value has occurred. We have a monitoring process
overseen by a committee of investment and accounting
professionals that is responsible for identifying those
securities to be specifically evaluated for a potential
other-than-temporary
impairment.
The determination of whether a decline in value of any
investment is temporary or other than temporary requires the
judgment of management. The assessment of
other-than-temporary
impairment of fixed maturities and equity securities is based on
both quantitative criteria and qualitative information and also
considers a number of factors including, but not limited to, 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, general
market conditions and industry or sector specific factors. 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.
In determining whether fixed maturities are other than
temporarily impaired, prior to April 1, 2009, we considered
many factors including the intent and ability to hold a security
for a period of time sufficient to allow for the recovery of the
securitys cost. When an impairment was deemed other than
temporary, the security was written down to fair value and the
entire writedown was included in net income as a realized
investment loss. Effective April 1, 2009, the Corporation
adopted new guidance that modified the previous guidance on the
recognition and presentation of
other-than-temporary
impairments of debt securities. Under the new guidance, we are
required to recognize an
other-than-temporary
impairment loss for a fixed maturity when we conclude that we
have the intent to sell or it is more likely than not that we
will be required to sell an impaired fixed maturity before the
security recovers to its amortized cost value or it is likely we
will not recover the entire amortized cost value of an impaired
security. Also under this guidance, if we have the intent to
sell or it is more likely than not we will be required to sell
an impaired fixed maturity before the security recovers to its
amortized cost value, the security is written down to fair value
and the entire amount of the writedown is included in net income
as a realized investment loss. For all other impaired fixed
maturities, the impairment loss is separated into the amount
representing the credit loss and the amount representing the
loss related to all other factors. The amount of the impairment
loss that represents the credit loss is included in net income
as a realized investment loss and the amount of the impairment
loss that relates to all other factors is included in other
comprehensive income.
In determining whether equity securities are other than
temporarily impaired, we consider our intent and ability to hold
a security for a period of time sufficient to allow us to
recover our cost. If a decline in the fair value of an equity
security is deemed to be other than temporary, the security is
written down to fair value and the amount of the writedown is
included in net income as a realized investment loss.
During each of the last three years, the fair value of some of
our investments declined to a level below our cost. Some of
these investments were deemed to be other than temporarily
impaired. The issuers of the equity securities deemed to be
other than temporarily impaired in each of the last three years
were not concentrated within any individual industry or sector.
Information related to investment securities in an unrealized
loss position at December 31, 2011 and 2010 is included in
Note (3)(b) of the Notes to Consolidated Financial Statements.
59
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, 2011, the Corporation had shareholders
equity of $15.6 billion and total debt of $3.6 billion.
In November 2011, Chubb repaid $400 million of outstanding
6% notes upon maturity.
Chubb has outstanding $275 million of 5.2% notes due
in 2013, $600 million of 5.75% notes and
$100 million of 6.6% debentures due in 2018,
$200 million of 6.8% debentures due in 2031,
$800 million of 6% notes due in 2037 and
$600 million of 6.5% notes due in 2038, all of which
are unsecured.
Chubb also has outstanding $1.0 billion of unsecured junior
subordinated capital securities that 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
specified replacement capital securities. 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 on 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.
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 current 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 2008 and 2009, the Board of Directors authorized the
repurchase of up to 20,000,000 shares and
25,000,000 shares, respectively, of Chubbs common
stock. In June 2010, the Board of Directors authorized an
increase of 14,000,000 shares of common stock to the
authorization approved in 2009. In December 2010, the Board of
Directors authorized the repurchase of up to an additional
30,000,000 shares of common stock.
60
In 2009, we repurchased 22,623,775 shares of Chubbs
common stock in open market transactions at a cost of
$1,065 million. In 2010, we repurchased
37,667,829 shares of Chubbs common stock in open
market transactions at a cost of $2,008 million. In 2011,
we repurchased 27,582,889 shares of Chubbs common
stock in open market transactions at a cost of
$1,718 million. As of December 31, 2011,
909,407 shares remained under the December 2010 share
repurchase authorization. We repurchased the shares remaining
under the December 2010 authorization during January 2012 at a
cost of $63 million.
In January 2012, the Board of Directors authorized the
repurchase of up to $1.2 billion of Chubbs common
stock. The authorization has no expiration date. We expect to
complete the repurchase of shares under this authorization by
the end of January 2013, subject to market conditions.
Ratings
Chubb and its property and casualty 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.
Credit ratings assess a companys ability to make timely
payments of interest and principal on its debt. Financial
strength ratings assess an insurers ability to meet its
financial obligations to policyholders.
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
generally been met by funds from operations and we expect that
in the future funds from operations will continue to be
sufficient to meet such requirements. Liquidity requirements
could also be met by funds received upon the maturity or sale of
marketable securities in our investment portfolio. The
Corporation also has the ability to borrow under its existing
$500 million credit facility and we believe we could issue
debt or equity securities.
Our property and casualty operations provide liquidity in that
insurance premiums are generally received months or even years
before losses are paid under the policies purchased by such
premiums. Cash receipts from operations, consisting of insurance
premiums and investment income, provide 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 with the expectation of generating
increased future investment income.
Our strong underwriting and investment results generated
substantial operating cash flows in 2011. In 2011, cash provided
by the property and casualty subsidiaries operating
activities declined compared to 2010 primarily as a result of
higher loss payments partially offset by higher premium
collections. Cash used by the property and casualty subsidiaries
for financing activities (primarily the payment of
61
dividends to Chubb) exceeded the cash provided by operating
activities by approximately $650 million. In 2011,
dividends paid to Chubb by the property and casualty
subsidiaries increased by $500 million compared to 2010. In
2010 and 2009, our strong underwriting and investment results
also generated substantial operating cash flows. In 2010, cash
provided by the property and casualty subsidiaries operating
activities was flat compared to 2009 and included the impact of
modestly higher loss payments. The cash provided by the property
and casualty subsidiaries operating activities exceeded
the cash used for financing activities (primarily the payment of
dividends to Chubb) by approximately $250 million in 2010
and $1.3 billion in 2009. In 2010, dividends paid to Chubb
by the property and casualty subsidiaries increased by
$1.0 billion compared to 2009.
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. The timing and amount of dividends paid
by the property and casualty subsidiaries to Chubb may vary from
year to year. Our property and casualty subsidiaries are subject
to laws and regulations in the jurisdictions in which they
operate that restrict the amount and timing of dividends they
may pay within twelve consecutive months 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. The maximum dividend distributions
that the subsidiaries could have paid to Chubb during 2011, 2010
and 2009 without prior approval were approximately
$2.0 billion, $1.5 billion and $1.2 billion,
respectively. During 2011, 2010 and 2009 these subsidiaries paid
dividends to Chubb of $2.7 billion, $2.2 billion and
$1.2 billion, respectively. Included in the dividends paid
in 2011 and 2010 were $2.5 billion and $1.9 billion,
respectively, of dividends deemed to be extraordinary under
applicable insurance regulations due to the limitation on the
amount of dividends that may be paid within twelve consecutive
months. Regulatory approval was required and obtained for the
payment of those dividends deemed extraordinary. As a result of
the timing
and/or
amount of the dividends paid in 2011, any dividends the property
and casualty subsidiaries pay to Chubb in the first six months
of 2012 also will require regulatory approval. Whether dividends
paid in the remainder of 2012 will require regulatory approval
will depend on the amount and timing of dividend payments by the
subsidiaries to Chubb during 2012. The maximum aggregate
dividend distribution that may be made by the subsidiaries to
Chubb during 2012 without prior regulatory approval is
approximately $1.8 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, 2011, 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 agreement has a termination date of
October 19, 2012. Under the agreement Chubb is permitted to
request on two occasions, at any time during the remaining term
of the agreement, an extension of the maturity date for an
additional one year period. On the termination date of the
agreement, any borrowings then outstanding become payable.
62
Contractual
Obligations and Off-Balance Sheet Arrangements
The following table provides our future payments due by period
under contractual obligations as of December 31, 2011,
aggregated by type of obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
and
|
|
|
There-
|
|
|
|
|
|
|
2012
|
|
|
2014
|
|
|
2016
|
|
|
after
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Principal due under long term debt
|
|
$
|
|
|
|
$
|
275
|
|
|
$
|
|
|
|
$
|
3,300
|
|
|
$
|
3,575
|
|
Interest payments on long term debt(a)
|
|
|
220
|
|
|
|
418
|
|
|
|
411
|
|
|
|
2,689
|
|
|
|
3,738
|
|
Purchase obligations(b)
|
|
|
127
|
|
|
|
138
|
|
|
|
117
|
|
|
|
109
|
|
|
|
491
|
|
Future minimum rental payments under operating leases
|
|
|
71
|
|
|
|
108
|
|
|
|
58
|
|
|
|
49
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
|
|
939
|
|
|
|
586
|
|
|
|
6,147
|
|
|
|
8,090
|
|
Loss and loss expense reserves(c)
|
|
|
5,075
|
|
|
|
5,767
|
|
|
|
3,460
|
|
|
|
8,766
|
|
|
|
23,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,493
|
|
|
$
|
6,706
|
|
|
$
|
4,046
|
|
|
$
|
14,913
|
|
|
$
|
31,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 LIBOR
rate as of December 31, 2011. 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 $848 million. It is our expectation that the capital
securities will be redeemed at the end of the fixed interest
rate period.
|
|
|
|
|
(b)
|
Includes agreements with vendors to purchase various goods and
services such as information technology, human resources and
administrative services.
|
|
|
|
|
(c)
|
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
$600 million at December 31, 2011 to fund limited
partnership investments. These commitments can be called by the
partnerships (generally over a period of five years or less), if
and when needed by the partnerships to fund certain partnership
expenses or the purchase of 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
(13) of the Notes to Consolidated Financial Statements.
63
INVESTED
ASSETS
The main objectives in managing our investment portfolios are to
maximize after-tax investment income and total investment return
while minimizing credit risk and managing interest rate risk in
order to ensure that funds will be available to meet our
insurance obligations. 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 primarily comprises high quality bonds,
principally tax exempt securities, corporate bonds,
mortgage-backed securities and U.S. Treasury securities, as
well as foreign government and corporate bonds that support our
operations outside the United States. 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 may involve more risk than other investments. We actively
manage our risk through type of asset class and domestic and
international diversification. At December 31, 2011, we had
investments in about 85 separate partnerships. We review the
performance of these investments on a quarterly basis and we
obtain audited financial statements annually.
During 2011, cash used for financing activities exceeded cash
provided by operating activities. As a result, our holdings of
tax exempt fixed maturities and mortgage-backed securities both
decreased slightly during the year, partly offset by a slight
increase in our holdings of corporate bonds. In 2010, we
invested new cash primarily in tax exempt fixed maturities and
we reduced our holdings of mortgage-backed securities. In 2009,
we invested new cash in tax exempt fixed maturities and taxable
fixed maturities. The taxable fixed maturities we invested in
were corporate bonds while we reduced our holdings of
mortgage-backed securities. Our objective is to achieve the
appropriate mix of taxable and tax exempt securities in our
portfolio to balance both investment and tax strategies. At
December 31, 2011, 68% of our U.S. fixed maturity
portfolio was invested in tax exempt securities compared with
67% at December 31, 2010 and December 31, 2009.
We classify our fixed maturity securities, which 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.
Fixed maturities classified as
available-for-sale
are carried at fair value.
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 fair 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 fair value of
existing investments, creating the opportunity for realized
investment gains on disposition.
The net unrealized appreciation before tax of our fixed
maturities and equity securities carried at fair value was
$2.7 billion at December 31, 2011, $1.7 billion
at December 31, 2010 and $1.6 billion at
December 31, 2009. Such unrealized appreciation is
reflected in accumulated other comprehensive income, net of
applicable deferred income taxes.
In 2011, market yields on fixed maturity investments declined
resulting in an increase in the fair value of many of our fixed
maturity investments.
64
FAIR
VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are determined using
valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. Fair values are
generally measured using quoted prices in active markets for
identical assets or liabilities or other inputs, such as quoted
prices for similar assets or liabilities that are observable,
either directly or indirectly. In those instances where
observable inputs are not available, fair values are measured
using unobservable inputs for the asset or liability.
Unobservable inputs reflect our own assumptions about the
assumptions that market participants would use in pricing the
asset or liability and are developed based on the best
information available in the circumstances. Fair value estimates
derived from unobservable inputs are affected by the assumptions
used, including the discount rates and the estimated amounts and
timing of future cash flows. The derived fair value estimates
cannot be substantiated by comparison to independent markets and
are not necessarily indicative of the amounts that would be
realized in a current market exchange.
The fair value hierarchy prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels as
follows:
Level 1 Unadjusted quoted prices in active
markets for identical assets.
Level 2 Other inputs that are observable for
the asset, either directly or indirectly.
Level 3 Inputs that are unobservable.
The methods and assumptions used to estimate the fair values of
financial instruments are as follows:
Fair values for fixed maturities are determined by management,
utilizing prices obtained from a third party, nationally
recognized pricing service or, in the case of securities for
which prices are not provided by a pricing service, from third
party brokers. For fixed maturities that have quoted prices in
active markets, market quotations are provided. For fixed
maturities that do not trade on a daily basis, the pricing
service and brokers provide fair value estimates using a variety
of inputs including, but not limited to, benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, bids,
offers, reference data, prepayment rates and measures of
volatility. Management reviews on an ongoing basis the
reasonableness of the methodologies used by the relevant pricing
service and brokers. In addition, management, using the prices
received for the securities from the pricing service and
brokers, determines the aggregate portfolio price performance
and reviews it against applicable indices. If management
believes that significant discrepancies exist, it will discuss
these with the relevant pricing service or broker to resolve the
discrepancies.
Fair values of equity securities are based on quoted market
prices.
The carrying value of short term investments approximates fair
value due to the short maturities of these investments.
Fair values of long term debt issued by Chubb are determined by
management, utilizing prices obtained from a third party,
nationally recognized pricing service.
We use a pricing service to estimate fair value measurements for
approximately 99% of our fixed maturities. The prices we obtain
from a pricing service and brokers generally are non-binding,
but are reflective of current market transactions in the
applicable financial instruments. At December 31, 2011 and
December 31, 2010, we held an insignificant amount of
financial instruments in our investment portfolio for which a
lack of market liquidity impacted our determination of fair
value.
The methods and assumptions used to estimate the fair value of
the Corporations pension plan and other postretirement
benefit plan assets, other than assets invested in pooled funds,
are similar to the methods and assumptions used for our other
financial instruments. The fair value of pooled funds is based
on the net asset value of the funds. At December 31, 2011
and December 31, 2010, approximately 99% of the pension
plan and other postretirement benefit plan assets are
categorized as Level 1 or Level 2 in the fair value
hierarchy.
65
PENSION
AND OTHER POSTRETIREMENT BENEFITS
In 2011, primarily as a result of a decline in the discount
rates used to value our pension and other postretirement
obligations, and lower than expected return on plan assets, the
liability related to our pension and other postretirement
benefit plans increased. Postretirement benefit costs not
recognized in net income increased by $329 million, which
was reflected in other comprehensive income, net of applicable
deferred income taxes.
In 2010, as a result of improvement in the financial markets,
the fair value of the assets in our pension and other
postretirement benefit plans increased. Postretirement benefit
costs not recognized in net income decreased by
$20 million, which was reflected in other comprehensive
income, net of applicable deferred income taxes. This decline
reflected the periodic amortization of net actuarial loss and
prior service cost and an increase in the fair value of the
assets held by our pension and other postretirement benefit
plans in excess of the expected return substantially offset by
actuarial losses primarily from a decrease in the discount rates
used to value our pension benefit obligations.
As a result of improvement in the financial markets in 2009, the
fair value of the assets in our pension and other postretirement
benefit plans increased, improving the funded status of these
plans. Postretirement benefit costs not recognized in net income
decreased by $134 million, which was reflected in other
comprehensive income, net of applicable deferred income taxes.
Employee benefits are discussed further in Note (11) of the
Notes to Consolidated Financial Statements.
ACCOUNTING
PRONOUNCEMENTS NOT YET ADOPTED
In October 2010, the Financial Accounting Standards Board issued
new guidance related to the accounting for costs associated with
acquiring or renewing insurance contracts. The guidance
identifies those costs relating to the successful acquisition of
new or renewal insurance contracts that should be capitalized.
This guidance is effective for the Corporation for the year
beginning January 1, 2012 and may be applied prospectively
or retrospectively. The Corporation expects to elect
retrospective application of the guidance. Under retrospective
application, deferred policy acquisition costs and related
deferred taxes would be reduced as of the beginning of the
earliest period presented in the financial statements with a
corresponding reduction to shareholders equity. The
adoption of the new guidance during the first quarter of 2012 is
currently expected to reduce the Corporations deferred
policy acquisition costs as of December 31, 2011 by
approximately 22% to 27% and shareholders equity by
approximately $250 million to $300 million.
|
|
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 obligations. Analytical tools and monitoring
systems are in place to assess each of these elements of market
risk.
INVESTMENT
PORTFOLIO
Interest
Rate Risk
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 fair 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
66
property and casualty loss reserves, to determine their
duration. Expressed in years, duration is the weighted average
payment period of cash flows, where the weighting is based on
the present value of the cash flows. We set duration targets for
our fixed income investment portfolios after consideration of
the estimated duration of these liabilities and other factors,
which allows us to prudently manage the overall effect of
interest rate risk for the Corporation.
The following table provides information about our fixed
maturity securities, 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, 2011 and 2010. Consideration is given
to the call dates of securities trading above par value and the
expected prepayment patterns of mortgage-backed securities.
Actual cash flows could differ from the expected amounts,
primarily due to future changes in interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Tax exempt
|
|
$
|
1,813
|
|
|
$
|
2,758
|
|
|
$
|
2,105
|
|
|
$
|
2,119
|
|
|
$
|
1,970
|
|
|
$
|
8,021
|
|
|
$
|
18,786
|
|
|
$
|
20,211
|
|
Average interest rate
|
|
|
4.0
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
Taxable other than mortgage-backed securities
|
|
|
1,747
|
|
|
|
1,662
|
|
|
|
1,796
|
|
|
|
1,741
|
|
|
|
1,440
|
|
|
|
4,885
|
|
|
|
13,271
|
|
|
|
14,156
|
|
Average interest rate
|
|
|
4.1
|
%
|
|
|
3.9
|
%
|
|
|
4.3
|
%
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
893
|
|
|
|
624
|
|
|
|
400
|
|
|
|
318
|
|
|
|
207
|
|
|
|
263
|
|
|
|
2,705
|
|
|
|
2,817
|
|
Average interest rate
|
|
|
5.0
|
%
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
|
5.1
|
%
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,453
|
|
|
$
|
5,044
|
|
|
$
|
4,301
|
|
|
$
|
4,178
|
|
|
$
|
3,617
|
|
|
$
|
13,169
|
|
|
$
|
34,762
|
|
|
$
|
37,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Tax exempt
|
|
$
|
1,527
|
|
|
$
|
1,607
|
|
|
$
|
2,855
|
|
|
$
|
2,188
|
|
|
$
|
2,233
|
|
|
$
|
8,662
|
|
|
$
|
19,072
|
|
|
$
|
19,774
|
|
Average interest rate
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
|
|
4.1
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
Taxable other than mortgage-backed securities
|
|
|
1,134
|
|
|
|
1,896
|
|
|
|
1,881
|
|
|
|
1,738
|
|
|
|
1,635
|
|
|
|
4,724
|
|
|
|
13,008
|
|
|
|
13,638
|
|
Average interest rate
|
|
|
4.2
|
%
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
|
|
4.4
|
%
|
|
|
4.1
|
%
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
707
|
|
|
|
855
|
|
|
|
640
|
|
|
|
270
|
|
|
|
177
|
|
|
|
332
|
|
|
|
2,981
|
|
|
|
3,107
|
|
Average interest rate
|
|
|
4.9
|
%
|
|
|
5.1
|
%
|
|
|
5.3
|
%
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,368
|
|
|
$
|
4,358
|
|
|
$
|
5,376
|
|
|
$
|
4,196
|
|
|
$
|
4,045
|
|
|
$
|
13,718
|
|
|
$
|
35,061
|
|
|
$
|
36,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011, our tax exempt fixed maturity
portfolio had an average expected maturity of five years.
Our taxable fixed maturity portfolio had an average expected
maturity of four years.
67
Credit
Risk
Credit risk is the potential loss resulting from adverse changes
in an issuers ability to repay its debt obligations. We
have consistently invested in high quality marketable
securities. At December 31, 2011, less than 2% of our fixed
maturity portfolio was below investment grade. Our investment
portfolio did not have any direct exposure to either
sub-prime
mortgages or collateralized debt obligations.
Our decisions to acquire and hold specific tax exempt fixed
maturities and taxable fixed maturities are primarily based on
an initial and ongoing evaluation of the underlying
characteristics, including credit quality, sector, structure and
liquidity of the issuer, performed by our internal investment
professionals. Third party credit ratings are also used by our
investment professionals to help assess the relative credit
quality of the issuer and manage the overall credit risk of our
fixed maturity portfolio. About 99% of the third party credit
ratings of our fixed maturity portfolio are obtained from
Moodys Investors Service.
Our tax exempt fixed maturities comprise bonds issued by states,
municipalities and political subdivisions within the United
States. Our holdings consist of: special revenue bonds issued by
state and local government agencies; state, municipal and
political subdivision general obligation bonds; and pre-refunded
bonds for which an irrevocable trust containing
U.S. government or government agency obligations has been
established to fund the remaining payment of principal and
interest.
Our evaluation of a special revenue bond includes analyzing key
credit factors such as the structure of the revenue pledge, the
rate covenant, debt service reserve fund, margin of debt service
coverage and the issuers historic financial performance.
Our evaluation of a general obligation bond issued by a state,
municipality or political subdivision includes analyzing key
credit factors such as the economic and financial condition of
the issuer and its ability and commitment to service its debt.
At December 31, 2011, about 80% of our tax exempt
securities were rated Aa or better with about 25% rated Aaa. The
average rating of our tax exempt securities was Aa. While about
30% of our tax exempt securities were insured, the effect of
insurance on the average credit rating of these securities was
insignificant. The insured tax exempt securities in our
portfolio have been selected based on the quality of the
underlying credit and not the value of the credit insurance
enhancement.
At December 31, 2011, about 5% of our taxable fixed
maturity portfolio was invested in U.S. government and
government agency and authority obligations other than
mortgage-backed securities and had an average rating of Aa.
About 70% of the U.S. government and government agency and
authority obligations other than mortgage-backed securities were
U.S. Treasury securities with an average rating of Aaa and
the remainder were taxable bonds issued by states,
municipalities and political subdivisions within the United
States with an average rating of Aa.
About 38% of our taxable fixed maturity portfolio consisted of
corporate bonds other than mortgage-backed securities, which
were issued by a diverse group of U.S. and foreign issuers
and had an average rating of A. About 60% of our corporate bonds
other than mortgage-backed securities were issued by
U.S. companies and about 40% were issued by foreign
companies. Our foreign corporate bonds included
$94 million, $45 million and $42 million issued
by companies, including banks, in Italy, Spain and Ireland,
respectively. We held no bonds issued by companies in Greece or
Portugal.
At December 31, 2011, about 40% of our taxable fixed
maturity portfolio was invested in foreign government and
government agency obligations, which had an average rating of
Aa. The foreign government and government agency obligations
consisted of high quality securities, primarily issued by
national governments and, to a lesser extent, government
agencies, regional governments and supranational organizations.
The five largest sovereign issuers within our portfolio were
Canada, the United Kingdom, Germany, Australia and Brazil, which
collectively accounted for about 75% of our total
68
foreign government and government agency obligations. Another 7%
of our total foreign government and government agency
obligations were issued by supranational organizations. We held
no sovereign securities issued by Greece, Portugal, Ireland or
Italy and held only $13 million of sovereign securities
issued by Spain. We do not hold any foreign government or
government agency fixed maturities that have third party
guarantees.
At December 31, 2011, 17% of our taxable fixed maturity
portfolio was invested in mortgage-backed securities. About 95%
of the mortgage-backed securities were rated Aaa. About half of
the remaining 5% were below investment grade. Of the Aaa rated
securities, 28% were residential mortgage-backed securities,
consisting of government agency pass-through securities
guaranteed by a government agency or a government sponsored
enterprise (GSE), GSE collateralized mortgage obligations (CMOs)
and other CMOs, all backed by single family home mortgages. The
majority of our CMOs are actively traded in liquid markets. The
other 72% of the Aaa rated securities were call protected,
commercial mortgage-backed securities (CMBS). About 95% of our
CMBS were senior securities with the highest level of
subordination. The remainder of our CMBS were seasoned
securities that were issued in 1998 or earlier.
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
Foreign currency risk is the sensitivity to foreign exchange
rate fluctuations of the fair 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, 2011, the property and casualty
subsidiaries held foreign currency denominated investments of
$7.6 billion supporting our international operations. The
principal currencies creating foreign exchange rate risk for the
property and casualty subsidiaries were the Canadian dollar, the
British pound sterling, the euro and the Australian dollar. The
following table provides information about those fixed maturity
securities 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,
2011. Actual cash flows could differ from the expected amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Canadian dollar
|
|
$
|
244
|
|
|
$
|
222
|
|
|
$
|
229
|
|
|
$
|
261
|
|
|
$
|
259
|
|
|
$
|
649
|
|
|
$
|
1,864
|
|
|
$
|
1,992
|
|
British pound sterling
|
|
|
170
|
|
|
|
159
|
|
|
|
328
|
|
|
|
289
|
|
|
|
156
|
|
|
|
600
|
|
|
|
1,702
|
|
|
|
1,850
|
|
Euro
|
|
|
88
|
|
|
|
205
|
|
|
|
147
|
|
|
|
190
|
|
|
|
144
|
|
|
|
484
|
|
|
|
1,258
|
|
|
|
1,317
|
|
Australian dollar
|
|
|
50
|
|
|
|
72
|
|
|
|
152
|
|
|
|
167
|
|
|
|
92
|
|
|
|
448
|
|
|
|
981
|
|
|
|
1,037
|
|
69
Equity
Price Risk
Equity price risk is the potential loss in fair 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 generally been
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, 2011 and 2010 would
have resulted in a decrease of $151 million and
$155 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
Interest
Rate Risk
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, 2011.
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At December 31, 2011
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There-
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Fair
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2012
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|
2013
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2014
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|
|
2015
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|
2016
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after
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Total
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|
|
Value
|
|
|
|
(in millions)
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|
|
Expected cash flows of principal amounts
|
|
$
|
|
|
|
$
|
275
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,300
|
|
|
$
|
3,575
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|
|
$
|
4,085
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|
Average interest rate
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5.2
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%
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6.2
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%
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Item 8.
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Consolidated
Financial Statements and Supplementary Data
|
Consolidated financial statements of the Corporation at December
31, 2011 and 2010 and for each of the three years in the period
ended December 31, 2011 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, 2011 are listed in Item
15(a) of this report.
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
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|
Item 9A.
|
Controls
and Procedures
|
As of December 31, 2011, 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,
2011.
During the three month period ended December 31, 2011,
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.
70
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. 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.
Management conducted an assessment of the effectiveness of the
Corporations internal control over financial reporting as
of December 31, 2011. 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, 2011, the Corporations internal control
over financial reporting is effective.
The Corporations internal control over financial reporting
as of December 31, 2011 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 72.
Item 9B. Other
Information
None.
71
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, 2011, 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, 2011, 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, 2011 and 2010, 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, 2011, and our report dated
February 27, 2012 expressed an unqualified opinion thereon.
February 27, 2012
72
PART
III.
Item 10. Directors,
Executive Officers and Corporate Governance
Information regarding Chubbs directors is incorporated by
reference from Chubbs definitive Proxy Statement for the
2012 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 2012 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 2012 Annual
Meeting of Shareholders under the captions Corporate
Governance Audit Committee, Audit
Committee Report and Committee Assignments.
Item 11. Executive
Compensation
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2012 Annual Meeting of Shareholders, under the
captions Corporate Governance Compensation
Committee Interlocks and Insider Participation,
Corporate Governance Directors
Compensation, Compensation Committee Report,
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 2012 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, and Director
Independence
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2012 Annual Meeting of Shareholders, under the
captions Corporate Governance Director
Independence, Corporate Governance
Related Person Transactions and Certain Transactions
and Other Matters.
Item 14. Principal
Accountant Fees and Services
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2012 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.
73
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.
The Chubb Corporation
(Registrant)
February 23, 2012
(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:
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Signature
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Title
|
|
Date
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|
|
/s/ John
D. Finnegan
(John
D. Finnegan)
|
|
Chairman, President, Chief
Executive Officer and
Director
|
|
February 23, 2012
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/s/ Zoë
Baird Budinger
(Zoë
Baird Budinger)
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|
Director
|
|
February 23, 2012
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|
|
/s/ Sheila
P. Burke
(Sheila
P. Burke)
|
|
Director
|
|
February 23, 2012
|
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|
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/s/ James
I. Cash, Jr.
(James
I. Cash, Jr.)
|
|
Director
|
|
February 23, 2012
|
|
|
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|
|
|
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|
|
/s/ Lawrence
W. Kellner
(Lawrence
W. Kellner)
|
|
Director
|
|
February 23, 2012
|
|
|
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|
|
/s/ Martin
G. McGuinn
(Martin
G. McGuinn)
|
|
Director
|
|
February 23, 2012
|
|
|
|
|
|
/s/ Lawrence
M. Small
(Lawrence
M. Small)
|
|
Director
|
|
February 23, 2012
|
|
|
|
|
|
/s/ Jess
Søderberg
(Jess
Søderberg)
|
|
Director
|
|
February 23, 2012
|
74
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Daniel
E. Somers
(Daniel
E. Somers)
|
|
Director
|
|
February 23, 2012
|
|
|
|
|
|
/s/ James
M. Zimmerman
(James
M. Zimmerman)
|
|
Director
|
|
February 23, 2012
|
|
|
|
|
|
/s/ Alfred
W. Zollar
(Alfred
W. Zollar)
|
|
Director
|
|
February 23, 2012
|
|
|
|
|
|
/s/ Richard
G. Spiro
(Richard
G. Spiro)
|
|
Executive Vice President and
Chief Financial Officer
|
|
February 23, 2012
|
|
|
|
|
|
/s/ John
J. Kennedy
(John
J. Kennedy)
|
|
Senior Vice President and
Chief Accounting Officer
|
|
February 23, 2012
|
75
THE CHUBB
CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
(Item 15(a))
|
|
|
|
|
|
|
|
|
|
|
Form 10-K
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
F-2
|
|
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|
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|
|
|
F-3
|
|
|
|
|
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|
|
|
F-4
|
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|
|
F-5
|
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F-6
|
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F-7
|
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|
|
F-8
|
|
|
|
|
|
|
Supplementary Information (unaudited)
|
|
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|
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|
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|
|
F-43
|
|
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|
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|
|
Schedules:
|
|
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|
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|
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|
|
S-1
|
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S-2
|
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|
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, 2011 and 2010, 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, 2011. 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,
2011 and 2010, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2011, 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, 2011, 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 27, 2012
expressed an unqualified opinion thereon.
February 27, 2012
F-2
THE CHUBB
CORPORATION
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions,
|
|
|
|
Except For Per Share Amounts
|
|
|
|
Years Ended December 31
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$
|
11,644
|
|
|
|
$
|
11,215
|
|
|
|
$
|
11,331
|
|
Investment Income
|
|
|
1,644
|
|
|
|
|
1,665
|
|
|
|
|
1,649
|
|
Other Revenues
|
|
|
9
|
|
|
|
|
13
|
|
|
|
|
1 |