e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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
Commission file number 1-8661
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
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NEW JERSEY
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13-2595722 |
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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) |
Registrants telephone number, including area code (908) 903-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 þ NO o
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):
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
The number of shares of common stock outstanding as of June 30, 2011 was 285,924,718.
THE CHUBB CORPORATION
INDEX
Page 1
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
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Second Quarter |
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Six Months |
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2011 |
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2010 |
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2011 |
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2010 |
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(in millions) |
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Revenues |
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Premiums Earned |
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$ |
2,913 |
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$ |
2,799 |
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$ |
5,767 |
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$ |
5,581 |
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Investment Income |
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416 |
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426 |
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820 |
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836 |
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Other Revenues |
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2 |
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3 |
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4 |
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7 |
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Realized Investment Gains (Losses), Net |
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Total Other-Than-Temporary
Impairment Losses on Investments |
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(14 |
) |
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(6 |
) |
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(16 |
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(6 |
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Other-Than-Temporary Impairment
Losses on Investments Recognized
in Other Comprehensive Income |
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(2 |
) |
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(3 |
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Other Realized Investment Gains, Net |
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83 |
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98 |
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245 |
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226 |
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Total Realized Investment
Gains, Net |
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69 |
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90 |
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229 |
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217 |
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Total Revenues |
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3,400 |
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3,318 |
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6,820 |
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6,641 |
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Losses and Expenses |
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Losses and Loss Expenses |
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1,847 |
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1,660 |
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3,612 |
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3,390 |
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Amortization of Deferred Policy
Acquisition Costs |
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816 |
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765 |
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1,591 |
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1,505 |
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Other Insurance Operating Costs
and Expenses |
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104 |
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107 |
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211 |
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222 |
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Investment Expenses |
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12 |
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8 |
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23 |
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18 |
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Other Expenses |
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3 |
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4 |
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5 |
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8 |
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Corporate Expenses |
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72 |
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72 |
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147 |
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148 |
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Total Losses and Expenses |
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2,854 |
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2,616 |
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5,589 |
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5,291 |
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Income Before Federal and Foreign
Income Tax |
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546 |
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702 |
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1,231 |
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1,350 |
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Federal and Foreign Income Tax |
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127 |
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184 |
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303 |
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368 |
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Net Income |
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$ |
419 |
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$ |
518 |
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$ |
928 |
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$ |
982 |
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Net Income Per Share |
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Basic |
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$ |
1.43 |
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$ |
1.60 |
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$ |
3.14 |
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$ |
2.99 |
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Diluted |
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1.42 |
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1.59 |
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3.12 |
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2.97 |
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Dividends Declared Per Share |
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.39 |
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.37 |
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.78 |
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.74 |
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See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
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June 30, |
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Dec. 31, |
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2011 |
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2010 |
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(in millions) |
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Assets |
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Invested Assets |
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Short Term Investments |
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$ |
1,690 |
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$ |
1,905 |
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Fixed Maturities |
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Tax Exempt (cost $19,216 and $19,072) |
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20,164 |
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19,774 |
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Taxable (cost $16,440 and $15,989) |
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17,203 |
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16,745 |
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Equity Securities (cost $1,292 and $1,285) |
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1,663 |
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1,550 |
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Other Invested Assets |
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2,337 |
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2,239 |
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TOTAL INVESTED ASSETS |
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43,057 |
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42,213 |
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Cash |
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71 |
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70 |
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Accrued Investment Income |
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458 |
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447 |
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Premiums Receivable |
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2,227 |
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2,098 |
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Reinsurance Recoverable on Unpaid Losses and Loss Expenses |
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1,778 |
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1,817 |
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Prepaid Reinsurance Premiums |
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328 |
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325 |
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Deferred Policy Acquisition Costs |
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1,634 |
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1,562 |
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Deferred Income Tax |
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98 |
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Goodwill |
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467 |
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467 |
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Other Assets |
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1,422 |
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1,152 |
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TOTAL ASSETS |
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$ |
51,442 |
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$ |
50,249 |
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Liabilities |
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Unpaid Losses and Loss Expenses |
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$ |
23,269 |
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$ |
22,718 |
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Unearned Premiums |
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6,399 |
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6,189 |
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Long Term Debt |
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3,975 |
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3,975 |
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Dividend Payable to Shareholders |
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113 |
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112 |
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Deferred Income Tax |
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106 |
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Accrued Expenses and Other Liabilities |
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1,789 |
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1,725 |
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TOTAL LIABILITIES |
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35,651 |
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34,719 |
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Contingent Liabilities (Note 6) |
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Shareholders Equity |
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Common Stock $1 Par Value; 371,980,460 Shares |
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372 |
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372 |
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Paid-In Surplus |
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157 |
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208 |
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Retained Earnings |
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18,643 |
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17,943 |
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Accumulated Other Comprehensive Income |
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1,130 |
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|
790 |
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Treasury Stock, at Cost 86,055,742 and 74,707,547 Shares |
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(4,511 |
) |
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(3,783 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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15,791 |
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15,530 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
51,442 |
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$ |
50,249 |
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See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
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Second Quarter |
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Six Months |
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2011 |
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2010 |
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2011 |
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2010 |
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(in millions) |
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Net Income |
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$ |
419 |
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$ |
518 |
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$ |
928 |
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$ |
982 |
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Other Comprehensive Income (Loss),
Net of Tax |
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Change in Unrealized Appreciation of Investments |
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290 |
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|
56 |
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232 |
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163 |
|
Change in Unrealized Other-Than-Temporary
Impairment Losses on Investments |
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(1 |
) |
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|
1 |
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|
1 |
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|
4 |
|
Foreign Currency Translation Gains (Losses) |
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24 |
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(66 |
) |
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|
85 |
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|
(94 |
) |
Amortization of Net Actuarial Loss and Prior
Service Cost Included in Net Postretirement
Benefit Costs |
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11 |
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9 |
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22 |
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19 |
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|
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|
324 |
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|
340 |
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|
92 |
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Comprehensive Income |
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$ |
743 |
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$ |
518 |
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$ |
1,268 |
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$ |
1,074 |
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See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
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2011 |
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2010 |
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(in millions) |
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Cash Flows from Operating Activities |
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Net Income |
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$ |
928 |
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$ |
982 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities |
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Increase in Unpaid Losses and Loss Expenses, Net |
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|
402 |
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|
|
272 |
|
Increase in Unearned Premiums, Net |
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|
147 |
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|
70 |
|
Increase in Premiums Receivable |
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|
(129 |
) |
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|
(51 |
) |
Change in Income Tax Payable or Recoverable |
|
|
(174 |
) |
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|
19 |
|
Amortization of Premiums and Discounts on Fixed Maturities |
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|
90 |
|
|
|
89 |
|
Depreciation |
|
|
29 |
|
|
|
31 |
|
Realized Investment Gains, Net |
|
|
(229 |
) |
|
|
(217 |
) |
Other, Net |
|
|
(216 |
) |
|
|
(196 |
) |
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|
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Net Cash Provided by Operating Activities |
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|
848 |
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|
999 |
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Cash Flows from Investing Activities |
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|
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Proceeds from Fixed Maturities |
|
|
|
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Sales |
|
|
832 |
|
|
|
1,593 |
|
Maturities, Calls and Redemptions |
|
|
1,445 |
|
|
|
1,215 |
|
Proceeds from Sales of Equity Securities |
|
|
66 |
|
|
|
42 |
|
Purchases of Fixed Maturities |
|
|
(2,644 |
) |
|
|
(2,457 |
) |
Purchases of Equity Securities |
|
|
(61 |
) |
|
|
(52 |
) |
Investments in Other Invested Assets, Net |
|
|
128 |
|
|
|
1 |
|
Decrease (Increase) in Short Term Investments, Net |
|
|
221 |
|
|
|
(275 |
) |
Increase in Net Payable from Security Transactions Not Settled |
|
|
200 |
|
|
|
118 |
|
Purchases of Property and Equipment, Net |
|
|
(19 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investing Activities |
|
|
168 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
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Increase in Funds Held Under Deposit Contracts |
|
|
11 |
|
|
|
24 |
|
Proceeds from Issuance of Common Stock Under Stock-Based Employee Compensation
Plans |
|
|
56 |
|
|
|
31 |
|
Repurchase of Shares |
|
|
(855 |
) |
|
|
(976 |
) |
Dividends Paid to Shareholders |
|
|
(227 |
) |
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Net Cash Used in Financing Activities |
|
|
(1,015 |
) |
|
|
(1,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Cash at Beginning of Year |
|
|
70 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period |
|
$ |
71 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The accompanying consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles (GAAP) and include the accounts of The Chubb
Corporation (Chubb) and its subsidiaries (collectively, the Corporation). Significant
intercompany transactions have been eliminated in consolidation.
The amounts included in this report are unaudited but include those adjustments,
consisting of normal recurring items, that management considers necessary for a fair
presentation. These consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Notes to Consolidated Financial
Statements included in the Corporations Annual Report on Form 10-K for the year ended
December 31, 2010.
2) Accounting Pronouncements Not Yet Adopted
(a) In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance
related to the presentation of comprehensive income. The guidance provides that an entity
has the option to present the components of net income and the components of other
comprehensive income either in a single statement of comprehensive income or in
two separate, but consecutive, statements. The guidance does not change whether items are
reported in net income or in other comprehensive income and does not change the guidance on
whether or when items of other comprehensive income are reclassified to net income. This
guidance is to be applied retrospectively and is effective for the Corporation for the year
beginning January 1, 2012. The adoption of this guidance will not have an effect on the
Corporations financial position or results of operations. The Corporation is in the process
of evaluating the presentation options permitted by the guidance.
(b) In October 2010, the FASB 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
is continuing to assess the effect that the implementation of the new guidance will have on
its financial position and results of operations. The amount of acquisition costs the
Corporation will defer under the new guidance will be less than the amount deferred under the
Corporations current accounting practice. If prospective application is elected, net income
in the year of adoption would be reduced as the amount of acquisition costs eligible for
deferral under the new guidance would be lower. Amortization of the balance of deferred
policy acquisition costs as of the date of adoption would continue over the period in which
the related premiums are earned. If retrospective application is elected, 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.
Page 6
3) Invested Assets
(a) The amortized cost and fair value of fixed maturities and equity securities were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Value |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
19,216 |
|
|
$ |
1,008 |
|
|
$ |
60 |
|
|
$ |
20,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agency and authority obligations |
|
|
803 |
|
|
|
36 |
|
|
|
7 |
|
|
|
832 |
|
Corporate bonds |
|
|
6,453 |
|
|
|
419 |
|
|
|
17 |
|
|
|
6,855 |
|
Foreign government and
government agency obligations |
|
|
6,312 |
|
|
|
222 |
|
|
|
12 |
|
|
|
6,522 |
|
Residential mortgage-backed
securities |
|
|
1,061 |
|
|
|
53 |
|
|
|
6 |
|
|
|
1,108 |
|
Commercial mortgage-backed
securities |
|
|
1,811 |
|
|
|
76 |
|
|
|
1 |
|
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,440 |
|
|
|
806 |
|
|
|
43 |
|
|
|
17,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
35,656 |
|
|
$ |
1,814 |
|
|
$ |
103 |
|
|
$ |
37,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,292 |
|
|
$ |
421 |
|
|
$ |
50 |
|
|
$ |
1,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Value |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
19,072 |
|
|
$ |
824 |
|
|
$ |
122 |
|
|
$ |
19,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agency and authority obligations |
|
|
807 |
|
|
|
31 |
|
|
|
9 |
|
|
|
829 |
|
Corporate bonds |
|
|
6,258 |
|
|
|
411 |
|
|
|
21 |
|
|
|
6,648 |
|
Foreign government and
government agency obligations |
|
|
5,943 |
|
|
|
231 |
|
|
|
13 |
|
|
|
6,161 |
|
Residential mortgage-backed
securities |
|
|
1,293 |
|
|
|
63 |
|
|
|
6 |
|
|
|
1,350 |
|
Commercial mortgage-backed
securities |
|
|
1,688 |
|
|
|
70 |
|
|
|
1 |
|
|
|
1,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,989 |
|
|
|
806 |
|
|
|
50 |
|
|
|
16,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
35,061 |
|
|
$ |
1,630 |
|
|
$ |
172 |
|
|
$ |
36,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,285 |
|
|
$ |
340 |
|
|
$ |
75 |
|
|
$ |
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 and December 31, 2010, the gross unrealized depreciation of fixed
maturities included $3 million and $4 million, respectively, of unrealized
other-than-temporary impairment losses recognized in accumulated other comprehensive income.
Page 7
|
|
The amortized cost and fair value of fixed maturities at June 30, 2011 by contractual
maturity were as follows: |
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
|
(in millions) |
|
Due in one year or less |
|
$ |
1,991 |
|
|
$ |
2,023 |
|
Due after one year through five years |
|
|
11,536 |
|
|
|
12,102 |
|
Due after five years through ten years |
|
|
11,870 |
|
|
|
12,647 |
|
Due after ten years |
|
|
7,387 |
|
|
|
7,601 |
|
|
|
|
|
|
|
|
|
|
|
32,784 |
|
|
|
34,373 |
|
Residential mortgage-backed securities |
|
|
1,061 |
|
|
|
1,108 |
|
Commercial mortgage-backed securities |
|
|
1,811 |
|
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,656 |
|
|
$ |
37,367 |
|
|
|
|
|
|
|
|
Actual maturities could differ from contractual maturities because borrowers may have
the right to call or prepay obligations.
The Corporations equity securities comprise a diversified portfolio of primarily U.S.
publicly-traded common stocks.
The Corporation is involved in the normal course of business with variable interest
entities (VIEs) primarily as a passive investor in residential mortgage-backed securities,
commercial mortgage-backed securities and private equity limited partnerships issued by third
party VIEs. The Corporation is not the primary beneficiary of these VIEs. The Corporations
maximum exposure to loss with respect to these investments is limited to the investment
carrying values included in the Corporations consolidated balance sheet and any unfunded
partnership commitments.
(b) The components of unrealized appreciation or depreciation, including unrealized
other-than-temporary impairment losses, of investments carried at fair value were as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
December 31 |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
Gross unrealized appreciation |
|
$ |
1,814 |
|
|
$ |
1,630 |
|
Gross unrealized depreciation |
|
|
103 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
1,711 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
Gross unrealized appreciation |
|
|
421 |
|
|
|
340 |
|
Gross unrealized depreciation |
|
|
50 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
371 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
2,082 |
|
|
|
1,723 |
|
Deferred income tax liability |
|
|
729 |
|
|
|
603 |
|
|
|
|
|
|
|
|
|
|
$ |
1,353 |
|
|
$ |
1,120 |
|
|
|
|
|
|
|
|
Page 8
When the fair value of an investment is lower than its cost, an assessment is made to
determine whether the decline is temporary or other than temporary. 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 other
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.
In determining whether fixed maturities are other than temporarily impaired, the
Corporation is required to recognize an other-than-temporary impairment loss when it
concludes it has the intent to sell or it is more likely than not it will be required to sell
an impaired fixed maturity before the security recovers to its amortized cost value or it is
likely it will not recover the entire amortized cost value of an impaired debt security. If
the Corporation has the intent to sell or it is more likely than not that the Corporation
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.
For fixed maturities, the split between the amount of other-than-temporary impairment
losses that represents credit losses and the amount that relates to all other factors is
principally based on assumptions regarding the amount and timing of projected cash flows.
For fixed maturities other than mortgage-backed securities, cash flow estimates are based on
assumptions regarding the probability of default and estimates regarding the timing and
amount of recoveries associated with a default. For mortgage-backed securities, cash flow
estimates are based on assumptions regarding future prepayment rates, default rates, loss
severity and timing of recoveries. The Corporation has developed the estimates of projected
cash flows using information based on historical market data, industry analyst reports and
forecasts and other data relevant to the collectability of a security.
In determining whether equity securities are other than temporarily impaired, the
Corporation considers its intent and ability to hold a security for a period of time
sufficient to allow for the recovery of cost. If the 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.
Page 9
The following table summarizes, for all investment securities in an unrealized loss
position at June 30, 2011, the aggregate fair value and gross unrealized depreciation,
including unrealized other-than-temporary impairment losses, by investment category and
length of time that individual securities have continuously been in an unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
1,453 |
|
|
$ |
22 |
|
|
$ |
253 |
|
|
$ |
38 |
|
|
$ |
1,706 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agency and authority obligations |
|
|
108 |
|
|
|
3 |
|
|
|
47 |
|
|
|
4 |
|
|
|
155 |
|
|
|
7 |
|
Corporate bonds |
|
|
552 |
|
|
|
10 |
|
|
|
156 |
|
|
|
7 |
|
|
|
708 |
|
|
|
17 |
|
Foreign government and
government agency
obligations |
|
|
1,120 |
|
|
|
10 |
|
|
|
42 |
|
|
|
2 |
|
|
|
1,162 |
|
|
|
12 |
|
Residential mortgage-backed securities |
|
|
70 |
|
|
|
2 |
|
|
|
23 |
|
|
|
4 |
|
|
|
93 |
|
|
|
6 |
|
Commercial mortgage-backed securities |
|
|
45 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,895 |
|
|
|
26 |
|
|
|
268 |
|
|
|
17 |
|
|
|
2,163 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities |
|
|
3,348 |
|
|
|
48 |
|
|
|
521 |
|
|
|
55 |
|
|
|
3,869 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
114 |
|
|
|
14 |
|
|
|
189 |
|
|
|
36 |
|
|
|
303 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,462 |
|
|
$ |
62 |
|
|
$ |
710 |
|
|
$ |
91 |
|
|
$ |
4,172 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011, approximately 600 individual fixed maturity and equity securities
were in an unrealized loss position, of which approximately 570 were fixed maturities. The
Corporation does not have the intent to sell and it is not more likely than not that the
Corporation will be required to sell these fixed maturities before the securities recover to
their amortized cost value. In addition, the Corporation believes that none of the declines
in the fair values of these fixed maturities relate to credit losses. The Corporation has
the intent and ability to hold the equity securities in an unrealized loss position for a
period of time sufficient to allow for the recovery of cost. The Corporation believes that
none of the declines in the fair value of these fixed maturities and equity securities were
other than temporary at June 30, 2011.
Page 10
The following table summarizes, for all investment securities in an unrealized loss
position at December 31, 2010, the aggregate fair value and gross unrealized depreciation,
including unrealized other-than-temporary impairment losses, by investment category and
length of time that individual securities have continuously been in an unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
2,498 |
|
|
$ |
79 |
|
|
$ |
284 |
|
|
$ |
43 |
|
|
$ |
2,782 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agency and authority obligations |
|
|
111 |
|
|
|
3 |
|
|
|
45 |
|
|
|
6 |
|
|
|
156 |
|
|
|
9 |
|
Corporate bonds |
|
|
474 |
|
|
|
12 |
|
|
|
166 |
|
|
|
9 |
|
|
|
640 |
|
|
|
21 |
|
Foreign government and government agency obligations |
|
|
990 |
|
|
|
12 |
|
|
|
27 |
|
|
|
1 |
|
|
|
1,017 |
|
|
|
13 |
|
Residential mortgage-backed securities |
|
|
9 |
|
|
|
1 |
|
|
|
41 |
|
|
|
5 |
|
|
|
50 |
|
|
|
6 |
|
Commercial mortgage-backed securities |
|
|
38 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,622 |
|
|
|
29 |
|
|
|
279 |
|
|
|
21 |
|
|
|
1,901 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities |
|
|
4,120 |
|
|
|
108 |
|
|
|
563 |
|
|
|
64 |
|
|
|
4,683 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
69 |
|
|
|
14 |
|
|
|
299 |
|
|
|
61 |
|
|
|
368 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,189 |
|
|
$ |
122 |
|
|
$ |
862 |
|
|
$ |
125 |
|
|
$ |
5,051 |
|
|
$ |
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in unrealized appreciation or depreciation of investments carried at
fair value, including the change in unrealized other-than-temporary impairment losses, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Change in unrealized appreciation
of fixed maturities |
|
$ |
430 |
|
|
$ |
331 |
|
|
$ |
253 |
|
|
$ |
442 |
|
Change in unrealized appreciation
of equity securities |
|
|
15 |
|
|
|
(243 |
) |
|
|
106 |
|
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
88 |
|
|
|
359 |
|
|
|
257 |
|
Deferred income tax |
|
|
156 |
|
|
|
31 |
|
|
|
126 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
289 |
|
|
$ |
57 |
|
|
$ |
233 |
|
|
$ |
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11
(c) Realized investment gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
10 |
|
|
$ |
19 |
|
|
$ |
23 |
|
|
$ |
57 |
|
Gross realized losses |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(15 |
) |
|
|
(11 |
) |
Other-than-temporary
impairment losses |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
11 |
|
|
|
8 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
10 |
|
|
|
3 |
|
|
|
29 |
|
|
|
12 |
|
Gross realized losses |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Other-than-temporary
impairment losses |
|
|
(14 |
) |
|
|
(6 |
) |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
12 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets |
|
|
68 |
|
|
|
83 |
|
|
|
209 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69 |
|
|
$ |
90 |
|
|
$ |
229 |
|
|
$ |
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) As of June 30, 2011 and December 31, 2010, fixed maturities still held by the
Corporation for which a portion of their other-than-temporary impairment losses were
recognized in other comprehensive income had cumulative credit-related losses of $20
million and $21 million, respectively, recognized in net income.
4) 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 the Corporations 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. Certain
financial instruments, particularly insurance contracts, are excluded from fair value
disclosure requirements.
Page 12
The methods and assumptions used to estimate the fair values of financial instruments
are as follows:
|
(i) |
|
The carrying value of short term investments approximates fair value
due to the short maturities of these investments. |
|
(ii) |
|
Fair values for fixed maturities are determined by management,
utilizing prices obtained from an independent, nationally recognized pricing
service or, in the case of securities for which prices are not provided by a
pricing service, from independent 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. |
|
|
(iii) |
|
Fair values of equity securities are based on quoted market prices. |
|
|
(iv) |
|
Fair values of long term debt issued by Chubb are determined by
management, utilizing prices obtained from an independent, nationally recognized
pricing service. |
The carrying values and fair values of financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
$ |
1,690 |
|
|
$ |
1,690 |
|
|
$ |
1,905 |
|
|
$ |
1,905 |
|
Fixed maturities |
|
|
37,367 |
|
|
|
37,367 |
|
|
|
36,519 |
|
|
|
36,519 |
|
Equity securities |
|
|
1,663 |
|
|
|
1,663 |
|
|
|
1,550 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
|
3,975 |
|
|
|
4,262 |
|
|
|
3,975 |
|
|
|
4,318 |
|
A pricing service provides fair value amounts for approximately 99% of the Corporations
fixed maturities. The prices obtained from a pricing service and brokers generally are
non-binding, but are reflective of current market transactions in the applicable financial
instruments.
Page 13
At June 30, 2011 and December 31, 2010, the Corporation held an insignificant amount of
financial instruments in its investment portfolio for which a lack of market liquidity
impacted the determination of fair value.
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 fair value of fixed maturities and equity securities categorized based upon the
lowest level of input that was significant to the fair value measurement was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
|
|
|
$ |
20,156 |
|
|
$ |
8 |
|
|
$ |
20,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agency and authority
obligations |
|
|
|
|
|
|
832 |
|
|
|
|
|
|
|
832 |
|
Corporate bonds |
|
|
|
|
|
|
6,666 |
|
|
|
189 |
|
|
|
6,855 |
|
Foreign government and
government agency obligations |
|
|
|
|
|
|
6,516 |
|
|
|
6 |
|
|
|
6,522 |
|
Residential mortgage-backed
securities |
|
|
|
|
|
|
1,092 |
|
|
|
16 |
|
|
|
1,108 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
1,886 |
|
|
|
|
|
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,992 |
|
|
|
211 |
|
|
|
17,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
37,148 |
|
|
|
219 |
|
|
|
37,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
1,655 |
|
|
|
|
|
|
|
8 |
|
|
|
1,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,655 |
|
|
$ |
37,148 |
|
|
$ |
227 |
|
|
$ |
39,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
|
|
|
$ |
19,765 |
|
|
$ |
9 |
|
|
$ |
19,774 |
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
agency and authority
obligations |
|
|
|
|
|
|
829 |
|
|
|
|
|
|
|
829 |
|
Corporate bonds |
|
|
|
|
|
|
6,483 |
|
|
|
165 |
|
|
|
6,648 |
|
Foreign government and
government agency obligations |
|
|
|
|
|
|
6,135 |
|
|
|
26 |
|
|
|
6,161 |
|
Residential mortgage-backed
securities |
|
|
|
|
|
|
1,329 |
|
|
|
21 |
|
|
|
1,350 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
1,757 |
|
|
|
|
|
|
|
1,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,533 |
|
|
|
212 |
|
|
|
16,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
36,298 |
|
|
|
221 |
|
|
|
36,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
1,537 |
|
|
|
|
|
|
|
13 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,537 |
|
|
$ |
36,298 |
|
|
$ |
234 |
|
|
$ |
38,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5) Segments Information
The principal business of the Corporation is the sale of property and casualty
insurance. The profitability of the property and casualty insurance business depends on the
results of both underwriting operations and investments, which are viewed as two distinct
operations. The underwriting operations are managed and evaluated separately from the
investment function.
The property and casualty insurance subsidiaries underwrite most lines of property and
casualty insurance. Underwriting operations consist of four separate business units:
personal insurance, commercial insurance, specialty insurance and reinsurance assumed. The
personal segment targets the personal insurance market. The personal classes include
automobile, homeowners and other personal coverages. The commercial segment includes those
classes of business that are generally available in broad markets and are of a more commodity
nature. Commercial classes include multiple peril, casualty, workers compensation and
property and marine. The specialty segment includes those classes of business that are
available in more limited markets since they require specialized underwriting and claim
settlement. Specialty classes include professional liability coverages and surety. The
reinsurance assumed business is in run-off following the transfer of the ongoing business to
a reinsurance company in 2005.
Corporate and other includes investment income earned on corporate invested assets,
corporate expenses and the results of the Corporations non-insurance subsidiaries.
Page 15
|
|
Revenues and income before income tax of each operating segment were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
$ |
980 |
|
|
$ |
933 |
|
|
$ |
1,937 |
|
|
$ |
1,858 |
|
Commercial insurance |
|
|
1,234 |
|
|
|
1,164 |
|
|
|
2,443 |
|
|
|
2,316 |
|
Specialty insurance |
|
|
697 |
|
|
|
698 |
|
|
|
1,384 |
|
|
|
1,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
2,911 |
|
|
|
2,795 |
|
|
|
5,764 |
|
|
|
5,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,913 |
|
|
|
2,799 |
|
|
|
5,767 |
|
|
|
5,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
405 |
|
|
|
393 |
|
|
|
796 |
|
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
insurance |
|
|
3,318 |
|
|
|
3,192 |
|
|
|
6,563 |
|
|
|
6,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
13 |
|
|
|
36 |
|
|
|
28 |
|
|
|
54 |
|
Realized investment gains, net |
|
|
69 |
|
|
|
90 |
|
|
|
229 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
3,400 |
|
|
$ |
3,318 |
|
|
$ |
6,820 |
|
|
$ |
6,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance Underwriting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
$ |
3 |
|
|
$ |
42 |
|
|
$ |
84 |
|
|
$ |
18 |
|
Commercial insurance |
|
|
(54 |
) |
|
|
68 |
|
|
|
(98 |
) |
|
|
111 |
|
Specialty insurance |
|
|
144 |
|
|
|
131 |
|
|
|
279 |
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
93 |
|
|
|
241 |
|
|
|
265 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
10 |
|
|
|
1 |
|
|
|
15 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
242 |
|
|
|
280 |
|
|
|
424 |
|
|
Increase in deferred policy
acquisition costs |
|
|
32 |
|
|
|
21 |
|
|
|
57 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
|
135 |
|
|
|
263 |
|
|
|
337 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
394 |
|
|
|
385 |
|
|
|
775 |
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (charges) |
|
|
11 |
|
|
|
4 |
|
|
|
16 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
Insurance |
|
|
540 |
|
|
|
652 |
|
|
|
1,128 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other loss |
|
|
(63 |
) |
|
|
(40 |
) |
|
|
(126 |
) |
|
|
(103 |
) |
Realized investment gains, net |
|
|
69 |
|
|
|
90 |
|
|
|
229 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income tax |
|
$ |
546 |
|
|
$ |
702 |
|
|
$ |
1,231 |
|
|
$ |
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
\
Page 16
6) Contingent Liabilities
Chubb and certain of its subsidiaries have been involved in the investigations by
various Attorneys General and other regulatory authorities of several states, the U.S.
Securities and Exchange Commission, the U.S. Attorney for the Southern District of New York
and certain non-U.S. regulatory authorities with respect to certain business practices in the
property and casualty insurance industry including (1) potential conflicts of interest and
anti-competitive behavior arising from the payment of contingent commissions to brokers and
agents and (2) loss mitigation and finite reinsurance arrangements. In connection with these
investigations, Chubb and certain of its subsidiaries received subpoenas and other requests
for information from various regulators. The Corporation has cooperated fully with these
investigations. The Corporation has settled with several state Attorneys General and
insurance departments all issues arising out of their investigations. Nevertheless, it is
possible that actions could be brought against the Corporation with respect to some or all of
the issues that were the focus of the business practice investigations.
Individual actions and purported class actions arising out of the investigations into
the payment of contingent commissions to brokers and agents have been filed in a number of
federal and state courts. On August 1, 2005, Chubb and certain of its subsidiaries were
named in a putative class action entitled In re Insurance Brokerage Antitrust Litigation in
the U.S. District Court for the District of New Jersey (N.J. District Court). This action,
brought against several brokers and insurers on behalf of a class of persons who purchased
insurance through the broker defendants, asserts claims under the Sherman Act, state law and
the Racketeer Influenced and Corrupt Organizations Act (RICO) arising from the alleged
unlawful use of contingent commission agreements. On September 28, 2007, the N.J. District
Court dismissed the second amended complaint filed by the plaintiffs in its entirety. In so
doing, the court dismissed the plaintiffs Sherman Act and RICO claims with prejudice for
failure to state a claim, and it dismissed the plaintiffs state law claims without prejudice
because it declined to exercise supplemental jurisdiction over them. The plaintiffs appealed
the dismissal of their second amended complaint to the U.S. Court of Appeals for the Third
Circuit (Third Circuit). On August 13, 2010, the Third Circuit affirmed in part and vacated
in part the N.J. District Court decision and remanded the case back to the N.J. District
Court for further proceedings. As a result of the Third Circuits decision, the plaintiffs
state law claims and certain of the plaintiffs Sherman Act and RICO claims were reinstated
against the Corporation. The Corporation and the other defendants filed on October 1, 2010
motions to dismiss the reinstated claims. Since that time, several of the defendants entered
into settlement agreements with the plaintiffs, which are in the process of being approved by
the N.J. District Court. In view of these settlements and their impact on the litigation,
the N.J. District Court on June 17, 2011 dismissed without prejudice the motions to dismiss
filed by the Corporation and the other non-settling defendants. The Corporation is reviewing
the N.J. District Courts decision.
Page 17
Chubb and certain of its subsidiaries also have been named as defendants in other
putative class actions relating or similar to the In re Insurance Brokerage Antitrust
Litigation that have been filed in various state courts or in U.S. district courts between
2005 and 2007. These actions have been subsequently removed and ultimately transferred to
the N.J. District Court for consolidation with the In re Insurance Brokerage Antitrust
Litigation. These actions are currently stayed.
In the various actions described above, the plaintiffs generally allege that the
defendants unlawfully used contingent commission agreements and conspired to reduce
competition in the insurance markets. The actions seek treble damages, injunctive and
declaratory relief and attorneys fees. The Corporation believes it has substantial defenses
to all of the aforementioned legal proceedings and intends to defend the actions vigorously.
The Corporation cannot predict at this time the ultimate outcome of the aforementioned
ongoing investigations and legal proceedings, including any potential amounts that the
Corporation may be required to pay in connection with them. Nevertheless, management
believes that it is likely that the outcome will not have a material adverse effect on the
Corporations results of operations or financial condition.
7) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
2010 |
|
|
|
(in millions, |
|
|
|
except for per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
419 |
|
|
$ |
518 |
|
|
$ |
928 |
|
|
$ |
982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding |
|
|
293.6 |
|
|
|
324.5 |
|
|
|
296.0 |
|
|
|
328.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.43 |
|
|
$ |
1.60 |
|
|
$ |
3.14 |
|
|
$ |
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
419 |
|
|
$ |
518 |
|
|
$ |
928 |
|
|
$ |
982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding |
|
|
293.6 |
|
|
|
324.5 |
|
|
|
296.0 |
|
|
|
328.7 |
|
Additional shares from assumed
exercise of stock-based
compensation awards |
|
|
1.8 |
|
|
|
2.2 |
|
|
|
1.7 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares and potential shares
assumed outstanding for computing
diluted earnings per share |
|
|
295.4 |
|
|
|
326.7 |
|
|
|
297.7 |
|
|
|
330.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.42 |
|
|
$ |
1.59 |
|
|
$ |
3.12 |
|
|
$ |
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18
|
|
|
Item 2 |
|
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 June 30, 2011 compared with December 31,
2010 and the results of operations for the six months and three months ended June 30, 2011 and
2010. This discussion should be read in conjunction with the condensed consolidated financial
statements and related notes contained in this report and the consolidated financial statements and
related notes and managements discussion and analysis of financial condition and results of
operations included in the Corporations Annual Report on Form 10-K for the year ended December 31,
2010.
Cautionary Statement Regarding Forward-Looking Information
Certain statements in this document are forward-looking statements as that term is defined
in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements
are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding our
loss reserve and reinsurance recoverable estimates; the cost of reinsurance in 2011; the adequacy
of the rates at which we renewed and wrote new business; premium
volume, competition and other market conditions in 2011;
the runoff of our employer healthcare stop loss business; property and casualty investment income
during 2011; our receipt of Medicare Part D subsidies; indications of our catastrophe exposure
under a newly released version of a catastrophe modeling tool and any actions we or third parties
may take in response thereto; the level of currency rate fluctuations for the rest
of 2011; the repurchase of common stock under
our share repurchase program; our capital position, capital adequacy and funding of liquidity
needs; the impact of a downgrade in our credit or financial strength ratings; and the impact on our
financial position and results of operations of the new guidance issued by the Financial Accounting
Standards Board related to the accounting for costs associated with acquiring or renewing insurance
contracts. Forward-looking statements frequently can be identified by words such as believe,
expect, anticipate, intend, plan, will, may, should, could, would, likely,
estimate, predict, potential, continue, or other similar expressions. 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; |
Page 19
|
|
the adequacy of our loss reserves, including: |
|
|
|
our expectations relating to reinsurance recoverables; |
|
|
|
|
the willingness of parties, including us, to settle disputes; |
|
|
|
|
developments in judicial decisions or regulatory or legislative
actions relating to coverage and liability, in particular, for
asbestos, toxic waste and other mass tort claims; |
|
|
|
|
development of new theories of liability; |
|
|
|
|
our estimates relating to ultimate asbestos liabilities; |
|
|
|
|
the impact from the bankruptcy protection sought by various asbestos
producers and other related businesses; and |
|
|
|
|
the effects of proposed asbestos liability legislation, including the
impact of claims patterns arising from the possibility of legislation
and those that may arise if legislation is not passed; |
|
|
the availability and cost of reinsurance coverage; |
|
|
|
the occurrence of significant weather-related or other natural or human-made disasters,
particularly in locations where we have concentrations of risk or changes to our estimates
(or the assessments of rating agencies and other third parties) of
our potential exposure to such events; |
|
|
|
the impact of economic factors on companies on whose behalf we have issued surety bonds,
and in particular, on those companies that file for bankruptcy or otherwise experience
deterioration in creditworthiness; |
|
|
|
the effects of disclosures by, and investigations of, companies relating to possible
accounting irregularities, practices in the financial services industry, investment losses or
other corporate governance issues, including: |
|
|
|
claims and litigation arising out of stock option backdating,
spring loading and other equity grant practices by public companies; |
|
|
|
|
the effects on the capital markets and the markets for directors and
officers and errors and omissions insurance; |
|
|
|
|
claims and litigation arising out of actual or alleged accounting or
other corporate malfeasance by other companies; |
|
|
|
|
claims and litigation arising out of practices in the financial
services industry; |
|
|
|
|
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; |
Page 20
|
|
general political, economic and market conditions, whether globally or in the markets in
which we operate and/or invest, including: |
|
|
|
changes in credit ratings, 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; and |
|
|
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 in Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2010 as supplemented 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.
Page 21
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 $928 million in the first six months of 2011 and $419 million
in the second quarter compared with $982 million and $518 million, respectively, in the
same periods of 2010. The decrease in net income in the first six months and the second
quarter of 2011 was due to lower operating income compared with the same periods in
2010. We define operating income as net income excluding realized investment gains and
losses after tax. |
|
|
|
|
Operating income was $779 million in the first six months of 2011 and $374
million in the second quarter compared with $841 million and $460 million, respectively,
in the same periods of 2010. The lower operating income in the 2011 periods was due to
lower underwriting income in our property and casualty business. Property and casualty
investment income increased slightly in the first six months and second quarter of 2011
compared with the same periods in 2010. 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 the first six months and second
quarter of both 2011 and 2010. Our combined loss and expense ratio was 94.3% in the
first six months of 2011 and 94.9% in the second quarter compared with 92.0% and 90.4%
in the respective periods of 2010. The less profitable results in the first six months
of 2011 were due to a higher impact from catastrophes as well as a higher current
accident year loss ratio excluding catastrophes, due partly to a higher impact from
non-catastrophe related property losses. Underwriting results in the second quarter of
2011 were less profitable than in the second quarter of 2010 primarily due to a
substantially higher impact from catastrophes. The impact of catastrophes accounted for
10.4 percentage points of the combined ratio in the first six months of 2011 and 11.3
percentage points in the second quarter, compared with 9.6 and 6.9 percentage points,
respectively, in the same periods of 2010. |
|
|
|
|
During the first six months and second quarter of 2011, we estimate that we
experienced overall favorable development of about $425 million and $205 million,
respectively, on loss reserves established as of the previous year end. In both
periods, the most significant amounts of favorable development occurred in the
commercial liability and professional liability classes. In the first six months and
second quarter of 2010, we estimate that we experienced overall favorable development of
about $400 million and $180 million, respectively, due primarily to favorable loss
experience in the professional liability, commercial liability and personal insurance
classes. |
Page 22
|
|
|
Total net premiums written increased by 5% in the first six months of 2011
and 6% in the second quarter compared with the same periods in 2010. Premium growth
occurred both in the United States as well as outside the U.S. Net premiums written in
the United States increased by 2% in the first six months of 2011 and 3% in the second
quarter. Net premiums written outside the U.S. increased by 12% in the first six months
and 14% in the second quarter. Premium growth outside the United States was also strong
in the first six months and second quarter of 2011 when measured in local currencies.
The growth in net premiums written in the U.S. in the first six months and second
quarter of 2011, while benefiting from positive pricing trends in the standard commercial
market, continued to reflect our emphasis on underwriting discipline in a market
environment that remains competitive. |
|
|
|
|
Property and casualty investment income after tax increased by 1% in the
first six months of 2011 and 2% in the second quarter compared with the same periods in
2010, in what continued to be a low yield investment environment. Approximately half of
the increase in the second quarter was attributable to the 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 performance because it reflects the impact
of any change in the proportion of the investment portfolio invested in tax exempt
securities and is therefore more meaningful for analysis purposes than investment income
before income tax. |
|
|
|
|
Net realized investment gains before tax were $229 million ($149 million
after tax) in the first six months of 2011 and $69 million ($45 million after tax) in
the second quarter compared with $217 million ($141 million after tax) and $90 million
($58 million after tax) in the comparable periods of 2010. The net realized gains in
the first six months and second quarter of both years 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Property and casualty insurance |
|
$ |
1,128 |
|
|
$ |
1,236 |
|
|
$ |
540 |
|
|
$ |
652 |
|
Corporate and other |
|
|
(126 |
) |
|
|
(103 |
) |
|
|
(63 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income before
income tax |
|
|
1,002 |
|
|
|
1,133 |
|
|
|
477 |
|
|
|
612 |
|
Federal and foreign income tax |
|
|
223 |
|
|
|
292 |
|
|
|
103 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income |
|
|
779 |
|
|
|
841 |
|
|
|
374 |
|
|
|
460 |
|
Realized investment gains
after income tax |
|
|
149 |
|
|
|
141 |
|
|
|
45 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
928 |
|
|
$ |
982 |
|
|
$ |
419 |
|
|
$ |
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 23
Property and Casualty Insurance
A summary of the results of operations of our property and casualty insurance business is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Underwriting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
5,914 |
|
|
$ |
5,651 |
|
|
$ |
3,055 |
|
|
$ |
2,886 |
|
Increase in unearned premiums |
|
|
(147 |
) |
|
|
(70 |
) |
|
|
(142 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
5,767 |
|
|
|
5,581 |
|
|
|
2,913 |
|
|
|
2,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
3,612 |
|
|
|
3,390 |
|
|
|
1,847 |
|
|
|
1,660 |
|
Operating costs and expenses |
|
|
1,859 |
|
|
|
1,751 |
|
|
|
955 |
|
|
|
889 |
|
Increase in deferred policy
acquisition costs |
|
|
(57 |
) |
|
|
(43 |
) |
|
|
(32 |
) |
|
|
(21 |
) |
Dividends to policyholders |
|
|
16 |
|
|
|
16 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
|
337 |
|
|
|
467 |
|
|
|
135 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses |
|
|
796 |
|
|
|
789 |
|
|
|
405 |
|
|
|
393 |
|
Investment expenses |
|
|
21 |
|
|
|
17 |
|
|
|
11 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
775 |
|
|
|
772 |
|
|
|
394 |
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (charges) |
|
|
16 |
|
|
|
(3 |
) |
|
|
11 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax |
|
$ |
1,128 |
|
|
$ |
1,236 |
|
|
$ |
540 |
|
|
$ |
652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty investment income
after tax |
|
$ |
628 |
|
|
$ |
624 |
|
|
$ |
318 |
|
|
$ |
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax was lower in the first six months and second quarter
of 2011 compared to the same periods in 2010. The lower income in the 2011 periods was due to a
decrease in underwriting income, which was primarily the result of a higher impact of catastrophes.
The decrease in underwriting income in the first six months of 2011 compared to the same period in
2010 was also attributable to a higher current accident year loss ratio excluding catastrophes, due
partly to a higher impact from non-catastrophe related property losses.
The profitability of the 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.
Page 24
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 were $5.9 billion in the first six months of 2011 and $3.1 billion in the
second quarter, compared with $5.7 billion and $2.9 billion, respectively, in the same periods of
2010.
Net premiums written by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
Quarter Ended June 30 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
Personal insurance |
|
$ |
1,957 |
|
|
$ |
1,882 |
|
|
|
4 |
% |
|
$ |
1,063 |
|
|
$ |
1,008 |
|
|
|
5 |
% |
Commercial insurance |
|
|
2,636 |
|
|
|
2,452 |
|
|
|
8 |
|
|
|
1,310 |
|
|
|
1,209 |
|
|
|
8 |
|
Specialty insurance |
|
|
1,319 |
|
|
|
1,312 |
|
|
|
1 |
|
|
|
680 |
|
|
|
666 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
5,912 |
|
|
|
5,646 |
|
|
|
5 |
|
|
|
3,053 |
|
|
|
2,883 |
|
|
|
6 |
|
Reinsurance assumed |
|
|
2 |
|
|
|
5 |
|
|
|
* |
|
|
|
2 |
|
|
|
3 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,914 |
|
|
$ |
5,651 |
|
|
|
5 |
|
|
$ |
3,055 |
|
|
$ |
2,886 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The change in net premiums written is not presented since the business is in runoff. |
Net premiums written increased by 5% in the first six months of 2011 and 6% in the second
quarter compared with the same periods in 2010. Premiums in the United States, which represented
72% of our premiums written in the first six months of 2011, increased by 2% in the first six
months and 3% in the second quarter. Net premiums written outside the United States, expressed in
U.S. dollars, increased by 12% in the first six months and 14% in the second quarter. The increase
in net premiums written outside the United States was partly due to the impact of the weaker U.S.
dollar relative to several currencies in which we wrote business in the first six months and second
quarter of 2011 compared to the same periods in 2010. However, net premiums written outside the
United States grew significantly in both periods when measured in local currencies.
Premium growth in the United States continued to be affected in the first six months and
second quarter of 2011 by the slow rate of recovery in the economy and a highly competitive
marketplace, although there were some indications of improvements in pricing in the second quarter,
primarily in the commercial classes. We have continued our emphasis on underwriting discipline in these competitive market conditions. Overall, renewal rates in the first six months of 2011 in
the U.S. were up slightly in commercial lines and down modestly in the professional liability
business in comparison to expiring rates. The amounts of coverage purchased or the insured exposure
amounts, both of which are bases upon which we calculate the premiums we charge, were generally
flat, although exposure amounts were up in select lines of business. We continued to retain a high
percentage of our existing customers, and to renew those accounts at what we believe are acceptable
rates relative to the risks. The overall level of new business was slightly higher in the first
six months of 2011 compared with the same periods in 2010.
Page 25
The highly competitive market is likely to continue throughout the remainder of 2011. We
expect our net written premiums for the year 2011 will increase at a rate similar to the rate in
the first half of the year, including a slight positive impact from currency fluctuation, assuming
average foreign currency to U.S. dollar exchange rates for the remainder of the year remain similar
to June 30, 2011 levels.
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.
The most significant component of our ceded reinsurance program is property reinsurance. We
purchase two types of property reinsurance: catastrophe and property per risk.
For property risks in the United States and Canada, we purchase catastrophe reinsurance in two
forms. 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 northeast United States exposures. We have also arranged
for the purchase of multiyear, collateralized reinsurance funded through the issuance of
collateralized risk linked securities, known as catastrophe bonds. We also purchase traditional
catastrophe reinsurance for events outside the United States.
We renewed our major traditional property catastrophe treaties and our commercial property per
risk treaty in April 2011, with only modest changes in coverage. In the first quarter of 2011, we
arranged for the purchase of reinsurance through the issuance of catastrophe bonds to replace two catastrophe bond coverages
that expired in March and April 2011. In June 2011, we purchased supplemental catastrophe
reinsurance for exposures in the northeast United States. In June 2011, we also purchased
additional catastrophe coverage for our exposures in Australia and Canada.
Our North American catastrophe treaty has an initial retention of $500 million.
The North American catastrophe treaty 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 United States
and in Florida, the combination of the North American catastrophe treaty, the supplemental
catastrophe reinsurance and the catastrophe bond coverages provide additional coverages as
discussed below.
The catastrophe bond coverages 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. Our two catastrophe bond coverages are: 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, portions
of which expire in March 2014 and March 2015, that provides coverage for homeowners and commercial
exposures for loss events in the northeastern United States.
Page 26
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 coverage 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 $170 million and
provides coverage of 90% of covered losses between approximately $170 million and $610 million. Additionally, the $150 million catastrophe bond coverage 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 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, the additional reinsurance purchased in June 2011 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 between approximately $625 million and $900 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.
Overall, reinsurance rates for property risks have remained consistent with those in 2010. We
expect that the overall cost of our property reinsurance program in 2011 will be similar to that in
2010.
Page 27
Profitability
The combined loss and expense ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the property and casualty insurance business.
Management evaluates the performance of our underwriting operations and of each of our business
units using, among other measures, the combined loss and expense ratio calculated in accordance
with statutory accounting principles. It is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio) plus the ratio of statutory underwriting expenses to
premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under
100%, underwriting results are generally considered profitable; when the
combined ratio is over 100%, underwriting results are generally considered unprofitable.
Statutory accounting principles applicable to property and casualty insurance companies differ
in certain respects from generally accepted accounting principles (GAAP). Under statutory accounting principles, policy acquisition and other
underwriting expenses are recognized immediately, not at the time premiums are earned. Management uses underwriting results determined
in accordance with GAAP, among other measures, to assess the overall performance of our underwriting operations. To convert statutory underwriting results to a
GAAP basis, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. Underwriting income determined in accordance with
GAAP is defined as premiums earned less losses and loss expenses incurred and GAAP underwriting
expenses incurred.
Underwriting results were profitable in the first six months and second quarter of 2011 and
2010, but more so in the 2010 periods. The combined loss and expense ratio for our overall
property and casualty business was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Loss ratio |
|
|
62.8 |
% |
|
|
60.9 |
% |
|
|
63.6 |
% |
|
|
59.5 |
% |
Expense ratio |
|
|
31.5 |
|
|
|
31.1 |
|
|
|
31.3 |
|
|
|
30.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.3 |
% |
|
|
92.0 |
% |
|
|
94.9 |
% |
|
|
90.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss ratio was higher in the first six months and second quarter of 2011 compared with the
same periods in 2010. The increase in the loss ratio in the 2011 periods was due to a higher
impact from catastrophe losses as well as a higher current accident year loss ratio excluding
catastrophes, offset in part by a higher amount of favorable prior year loss development. The loss
ratio in all periods reflected favorable prior accident year loss experience which we believe
resulted from our disciplined underwriting in recent years as well as relatively moderate loss
trends in several classes of business.
The impact of catastrophes in the first six months of 2011 was $599 million, which represented
10.4 percentage points of the combined loss and expense ratio. This compares with an impact of
catastrophes in the first six months of 2010 of $537 million, including incurred losses of $528 million and reinsurance
reinstatement premium costs of $9 million, which collectively represented 9.6 percentage points of
the combined loss and expense ratio. The $9 million reinstatement premium reinstated coverage
under property catastrophe treaties for events outside the United States, including parts of Latin
America,
Page 28
following an earthquake in Chile in the first quarter of 2010. The impact of catastrophes in the
second quarter of 2011 was $329 million, which represented 11.3 percentage points of the combined
loss and expense ratio. This compares with an impact of catastrophes of $193 million in the second
quarter of 2010, reflecting incurred losses of $197 million and a reduction in reinsurance
reinstatement premium costs of $4 million, which collectively represented 6.9 percentage points of
the combined loss and expense ratio. A significant portion of the catastrophe losses in the first
six months of 2011 related to tornadoes and other storms in the United States, primarily in the
second quarter, and flooding in Australia and earthquakes in New Zealand and Japan in the first
quarter. A significant portion of the catastrophe losses in the first six months of 2010 related
to numerous storms in the United States, including a severe hail storm in Oklahoma in the second
quarter and an earthquake in Chile in the first quarter.
The expense ratio was higher in the first six months and second quarter of 2011 compared with
the same periods in 2010. The increase in the 2011 periods was primarily due to an increase in
commission rates on business written outside the United States, offset in part by overhead expenses
increasing at a lesser rate than the rate of growth of premiums written.
Review of Underwriting Results by Business Unit
Personal Insurance
Net premiums written from personal insurance, which represented 33% of our premiums written in
the first six months of 2011, increased by 4% in the first six months of 2011 and 5% in the second
quarter compared with the same periods in 2010. The increase was primarily due to growth in
business written outside the United States, including a modest benefit from the effect of currency fluctuation. Net
premiums written for the classes of business within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
% Incr. |
|
|
Quarter Ended June 30 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
(Decr.) |
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
Automobile |
|
$ |
343 |
|
|
$ |
314 |
|
|
|
9 |
% |
|
$ |
181 |
|
|
$ |
168 |
|
|
|
8 |
% |
Homeowners |
|
|
1,214 |
|
|
|
1,164 |
|
|
|
4 |
|
|
|
681 |
|
|
|
647 |
|
|
|
5 |
|
Other |
|
|
400 |
|
|
|
404 |
|
|
|
(1 |
) |
|
|
201 |
|
|
|
193 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal |
|
$ |
1,957 |
|
|
$ |
1,882 |
|
|
|
4 |
|
|
$ |
1,063 |
|
|
$ |
1,008 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal automobile premiums increased significantly in the first six months and second
quarter of 2011, driven by growth outside the United States, due primarily to new business.
Premiums for automobile business written in the United States increased slightly in both periods,
but growth continued to be constrained by the highly competitive marketplace. Premium growth in
our homeowners business occurred both inside and outside the United States, due primarily to new
business, and to a lesser extent, increases in coverage on existing
policies reflecting improving
economic conditions. Premiums from our other personal business, which includes accident and
health, excess liability and yacht coverages, decreased slightly in the first six months of 2011
and increased modestly in the second quarter compared with the same periods in 2010. Premium growth
in 2011 was adversely affected by our decision to exit and runoff the employer healthcare stop loss
component of our U.S. accident and health business. The runoff of this business will negatively
impact premium growth for
Page 29
our other personal business for the remainder of this year. Other personal premiums increased
significantly outside the U.S. in both periods, primarily in our accident and health business.
Our personal insurance business produced profitable underwriting results in the first six
months and second quarter of 2011 and 2010. Results in all periods reflected a significant impact
of homeowners catastrophe losses. The
combined loss and expense ratios for the classes of business within the personal insurance segment
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Automobile |
|
|
92.4 |
% |
|
|
90.8 |
% |
|
|
92.0 |
% |
|
|
90.2 |
% |
Homeowners |
|
|
96.1 |
|
|
|
103.8 |
|
|
|
97.7 |
|
|
|
94.5 |
|
Other |
|
|
95.4 |
|
|
|
88.9 |
|
|
|
98.6 |
|
|
|
90.5 |
|
Total personal |
|
|
95.3 |
|
|
|
98.6 |
|
|
|
96.9 |
|
|
|
92.9 |
|
Our personal automobile business produced profitable results in the first six months and
second quarter of 2011 and 2010. Results in all periods, but more so in the 2010 periods,
benefited from favorable prior year loss development.
Homeowners results were profitable in the first six months of 2011 compared with unprofitable
results in the same period of 2010. Results were profitable in the second quarter of both years, but more so in 2010. Results in all periods were
adversely affected by high catastrophe losses. Catastrophe losses represented 17.4 and 22.5
percentage points of the combined ratio for this class in the first six months and second quarter
of 2011, respectively, compared with 27.7 and 20.3 percentage points, respectively, in the same
periods in 2010.
Other personal results were profitable in the first six months and second quarter of 2011
compared with highly profitable results in the same periods of 2010. The less profitable results
in the 2011 periods were primarily due to reduced profitability in the accident and health and
excess liability components of our other personal business. Our accident and health business
produced unprofitable results in the first six months and second quarter of 2011 compared with
profitable results in the same periods of 2010. Results were unprofitable in the 2011 periods
due, in part, to higher expenses and an increased
frequency of large losses outside the United States. Our excess liability business produced highly profitable
results in the first six months and second quarter of both 2011 and 2010, but more so in the 2010
periods due to higher amounts of favorable prior year loss development. Our yacht business
produced highly profitable results in the first six months of 2011 and profitable results in the
second quarter compared with highly profitable results in the same periods of 2010.
Page 30
Commercial Insurance
Net premiums written from commercial insurance, which represented 45% of our premiums written
in the first six months of 2011, increased by 8% in the first six months and second quarter of 2011
compared with the same periods a year ago. Net premiums written for the classes of business within
the commercial insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
|
Quarter Ended June 30 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Multiple peril |
|
$ |
562 |
|
|
$ |
540 |
|
|
|
4 |
% |
|
$ |
295 |
|
|
$ |
286 |
|
|
|
3 |
% |
Casualty |
|
|
855 |
|
|
|
812 |
|
|
|
5 |
|
|
|
419 |
|
|
|
398 |
|
|
|
5 |
|
Workers compensation |
|
|
463 |
|
|
|
409 |
|
|
|
13 |
|
|
|
220 |
|
|
|
187 |
|
|
|
18 |
|
Property and marine |
|
|
756 |
|
|
|
691 |
|
|
|
9 |
|
|
|
376 |
|
|
|
338 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
2,636 |
|
|
$ |
2,452 |
|
|
|
8 |
|
|
$ |
1,310 |
|
|
$ |
1,209 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium growth occurred in all classes of our commercial insurance business in the first six
months and second quarter of 2011 compared with the same periods in 2010. This premium growth
reflected signs of improving economic conditions and better pricing, in a market that continued to
be highly competitive. A portion of the overall growth in our commercial insurance business was
attributable to improvement in the retention levels of our existing customers in the first six
months of 2011 compared to the first six months of 2010. There was also improvement in the overall
rate environment, particularly in the second quarter of 2011, where rates in the United States for
many classes of our commercial business increased slightly over those from the same period in 2010.
In the first six months of 2011, the average renewal exposure change was flat overall and was
positive in some classes of business, including workers compensation and multiple peril, an
improvement over the renewal exposure changes in 2010. The amount of new business was up in the
first six months and second quarter compared with the comparable periods in 2010. We have
continued to maintain our underwriting discipline in the competitive market, renewing business and
writing new business where we believe we are securing acceptable rates and appropriate terms and
conditions for the exposures. We expect the competitive conditions in the market will continue for
the remainder of this year.
Our commercial insurance business produced modestly unprofitable underwriting results in the
first six months and second quarter of 2011 compared with profitable results in the same periods of 2010. The combined loss and expense ratios for the
classes of business within the commercial insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Multiple peril |
|
|
114.1 |
% |
|
|
103.6 |
% |
|
|
122.2 |
% |
|
|
95.2 |
% |
Casualty |
|
|
83.7 |
|
|
|
89.7 |
|
|
|
84.0 |
|
|
|
91.0 |
|
Workers compensation |
|
|
91.8 |
|
|
|
90.8 |
|
|
|
93.9 |
|
|
|
91.5 |
|
Property and marine |
|
|
119.1 |
|
|
|
90.8 |
|
|
|
113.2 |
|
|
|
93.9 |
|
Total commercial |
|
|
101.6 |
|
|
|
93.4 |
|
|
|
102.5 |
|
|
|
92.9 |
|
Page 31
Results for our commercial insurance business were unprofitable in the first six months and
second quarter of 2011 compared to profitable results in the same periods in 2010 due primarily to
the higher impact of catastrophes, and to a lesser extent, a higher current accident year loss
ratio excluding catastrophes, offset in part by a higher amount of favorable prior year loss
development. The impact of catastrophes represented 15.7 percentage points of the combined ratio
for the commercial insurance segment in the first six months of 2011 and 15.2 percentage points in
the second quarter compared with 8.5 and 5.6 percentage points, respectively, in the comparable
periods in 2010. Results in all periods benefited from disciplined risk selection and appropriate
policy terms and conditions in recent years.
Multiple peril results were highly unprofitable in the first six months of 2011 compared with
modestly unprofitable results in the same period of 2010. Results in the second quarter of 2011
were also highly unprofitable compared with profitable results in the same period of 2010. Results
in both years, but more so in 2011, were adversely impacted by catastrophe losses. The impact of
catastrophes was 27.2 percentage points of the combined ratio for this class in the first six
months of 2011 and 37.2 percentage points in the second quarter compared with 21.8 and 10.7
percentage points, respectively, in the same periods of 2010. Results for the property component
of this business were highly unprofitable in the first six months of 2011 compared with
unprofitable results in the same period of 2010. Results in the second quarter of 2011 for this
component were also highly unprofitable compared with profitable results in the same period of
2010. Results in the 2011 periods for this component were worse than in the 2010 periods primarily
due to the higher impact of catastrophes. The 2010 periods also benefited from significant favorable prior year loss development while prior
year loss development was not significant in the first six months and the second quarter of 2011.
The loss ratio for the property component for the current accident year excluding catastrophes was
also higher in the first six months of 2011 than in the same period of 2010. The liability
component of this business produced profitable results in the first six months of 2011 compared to
near breakeven results in the same period of 2010. Results for this component were also profitable
in the second quarter of 2011 compared with unprofitable results in the same period of 2010. The
improved results in the 2011 periods were due to higher amounts of favorable prior year loss
development, offset in part by slight deterioration in the current accident year loss experience.
Results for our casualty business were highly profitable in the first six months and second
quarter of both 2011 and 2010. Results in the 2011 periods were more profitable driven in large
part by the results for the excess liability component of this business, which were highly
profitable in the first six months and second quarter of both years, but more so in 2011 periods.
Results for the excess liability component in the first six months and second quarter of 2011
benefited from an increase in the amount of favorable prior year loss development compared with the
same periods in 2010. Results for the primary liability component were profitable in the first six
months and second quarter of both years. The automobile component of this business produced highly
profitable results in the first six months and second quarter of 2011 compared with the near
breakeven results in the same periods of 2010. Casualty results were adversely affected by
incurred losses related to asbestos and toxic waste claims in the first six months and second
quarter of both years. These losses represented 3.7 and 1.3 percentage points of the combined
ratio for the casualty business in the first six months of 2011 and
2010, respectively, and 3.7 and 0.8 percentage points in the second quarter of 2011 and 2010, respectively.
Page 32
Workers compensation results were profitable in the first six months and second quarter of
both 2011 and 2010. Results in both years benefited from our disciplined risk selection during the
past several years.
Property and marine results were highly unprofitable in the first six months and second
quarter of 2011 compared with profitable results in the same periods of 2010, mainly due to higher catastrophe losses. Catastrophe losses
represented 33.7 percentage points of the combined ratio for this class in the first six months of 2011 and 24.0 percentage points in the second quarter compared with 10.4 and
9.1 percentage points, respectively, in the same periods of 2010.
Specialty Insurance
Net premiums written from specialty insurance, which represented 22% of our premiums written
in the first six months of 2011, increased by 1% in the first six months of 2011 and 2% in the
second quarter compared with the same periods in 2010. Net premiums written for the classes of
business within the specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
% Incr. |
|
|
Quarter Ended June 30 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
(Decr.) |
|
|
2011 |
|
|
2010 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
Professional liability |
|
$ |
1,146 |
|
|
$ |
1,153 |
|
|
|
(1 |
)% |
|
$ |
595 |
|
|
$ |
583 |
|
|
|
2 |
% |
Surety |
|
|
173 |
|
|
|
159 |
|
|
|
9 |
|
|
|
85 |
|
|
|
83 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
$ |
1,319 |
|
|
$ |
1,312 |
|
|
|
1 |
|
|
$ |
680 |
|
|
$ |
666 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium growth in our professional liability business remained constrained by the highly
competitive marketplace. Renewal rates overall for our professional liability business in the U.S.
decreased modestly in the first six months and second quarter of 2011 compared with those in the
same periods of 2010. Rates decreased on average in all classes of business, with the most
significant decreases in the directors and officers liability class. Retention levels were higher
in the first six months and second quarter of 2011 compared with those in the same periods of 2010,
while new business volume was similar in the 2011 and 2010 periods. We have continued our focus on
underwriting discipline, obtaining what we believe are acceptable rates and appropriate terms and
conditions on both new business and renewals.
Net premiums written for our surety business increased significantly in the first six months
of 2011 compared with the same period in 2010, driven by strong growth in the first quarter.
Premium growth for this business, which occurred both inside and outside the United States, was
primarily attributable to new surety bonds being written for existing customers on contracts
awarded to them during the first quarter of 2011. The timing of such contract awards can vary.
Because of this, as well as the continuing challenges presented by the competitive market and the lingering effects on the construction business of the weak economic
conditions during the last few years, net premiums written for our surety business increased only modestly in the second quarter of 2011
compared to the same period in 2010.
Page 33
Our specialty insurance business produced highly profitable underwriting results in the first
six months and second quarter of 2011 and 2010. The combined loss and expense ratios for the
classes of business within the specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Professional liability |
|
|
85.6 |
% |
|
|
86.7 |
% |
|
|
84.6 |
% |
|
|
87.2 |
% |
Surety |
|
|
47.5 |
|
|
|
43.9 |
|
|
|
44.5 |
|
|
|
47.7 |
|
Total specialty |
|
|
81.2 |
|
|
|
81.7 |
|
|
|
80.0 |
|
|
|
82.5 |
|
Our professional liability business produced highly profitable results in the first six months
and second quarter of 2011 and 2010. Results in the directors and officers liability, fiduciary
liability and fidelity classes were highly profitable in the first six months and second quarter of
both 2011 and 2010. The directors and officers liability and fiduciary liability classes both
benefited from favorable prior year loss development in all periods. Results in the errors and
omissions liability class were highly unprofitable in all periods and included unfavorable prior
year loss development. The overall results for our professional liability business in the first
six months and second quarter of both years reflected similar amounts of favorable prior year loss
development. The favorable prior year loss development in both years was driven mainly by
continued positive loss experience related to accident years 2007 and prior.
Surety results were highly profitable in the first six months and second quarter of both 2011
and 2010. Surety business tends to be characterized by losses that are infrequent but have the
potential to be highly severe.
Reinsurance Assumed
Net premiums written from our reinsurance assumed business, which is in runoff, were not
significant in the first six months and second quarter of 2011 and 2010.
Reinsurance assumed results were profitable in the first six months and second quarter of 2011
and 2010. Results in the first six months of both years benefited from favorable prior year loss
development.
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.
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 and have strategies
and underwriting standards to manage these exposures 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
Page 34
to monitor and control our accumulations of potential losses in natural catastrophe exposed areas
of the United States, such as California and the gulf and east coasts, as well as in natural
catastrophe exposed areas of 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 a third-party catastrophe modeling tool that we and others in the insurance
industry utilize for estimating potential losses from natural catastrophes was released during the
first quarter of 2011. We have performed an initial analysis of the model to determine its impact
on our book of business. Overall, the model is indicating 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. We will continue to analyze the new
model and consider its indications along with the indications of other catastrophe models. In a
preliminary response to our analysis to date, we purchased additional catastrophe reinsurance for
our exposures in the northeast United States in June 2011. 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.
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.
Loss Reserves
Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability
of our business.
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.
Page 35
Our gross case and incurred but not reported (IBNR) loss reserves and related reinsurance
recoverable by class of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross Loss Reserves |
|
|
Reinsurance |
|
|
Loss |
|
June 30, 2011 |
|
Case |
|
|
IBNR |
|
|
Total |
|
|
Recoverable |
|
|
Reserves |
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
Personal insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
268 |
|
|
$ |
158 |
|
|
$ |
426 |
|
|
$ |
17 |
|
|
$ |
409 |
|
Homeowners |
|
|
395 |
|
|
|
396 |
|
|
|
791 |
|
|
|
9 |
|
|
|
782 |
|
Other |
|
|
377 |
|
|
|
651 |
|
|
|
1,028 |
|
|
|
143 |
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal |
|
|
1,040 |
|
|
|
1,205 |
|
|
|
2,245 |
|
|
|
169 |
|
|
|
2,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril |
|
|
675 |
|
|
|
1,194 |
|
|
|
1,869 |
|
|
|
35 |
|
|
|
1,834 |
|
Casualty |
|
|
1,372 |
|
|
|
5,196 |
|
|
|
6,568 |
|
|
|
355 |
|
|
|
6,213 |
|
Workers compensation |
|
|
903 |
|
|
|
1,579 |
|
|
|
2,482 |
|
|
|
178 |
|
|
|
2,304 |
|
Property and marine |
|
|
781 |
|
|
|
636 |
|
|
|
1,417 |
|
|
|
341 |
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
3,731 |
|
|
|
8,605 |
|
|
|
12,336 |
|
|
|
909 |
|
|
|
11,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
1,496 |
|
|
|
6,317 |
|
|
|
7,813 |
|
|
|
422 |
|
|
|
7,391 |
|
Surety |
|
|
25 |
|
|
|
50 |
|
|
|
75 |
|
|
|
8 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
1,521 |
|
|
|
6,367 |
|
|
|
7,888 |
|
|
|
430 |
|
|
|
7,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
6,292 |
|
|
|
16,177 |
|
|
|
22,469 |
|
|
|
1,508 |
|
|
|
20,961 |
|
|
Reinsurance assumed |
|
|
255 |
|
|
|
545 |
|
|
|
800 |
|
|
|
270 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,547 |
|
|
$ |
16,722 |
|
|
$ |
23,269 |
|
|
$ |
1,778 |
|
|
$ |
21,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 36
Loss reserves, net of reinsurance recoverable, increased by $590 million during the first six
months of 2011. Loss reserves related to our insurance business increased by $652 million during
the first six months of 2011, which included increases of approximately $392 million related to
catastrophe losses and approximately $188 million related to the effect of currency fluctuation due
to a weaker U.S. dollar at June 30, 2011 compared to December 31, 2010. Loss reserves related to
our reinsurance assumed business, which is in runoff, decreased by $62 million.
The increase in gross case and IBNR reserves related to our homeowners, commercial multiple
peril and property and marine classes of business during the first six months of 2011 was due
largely to catastrophe losses in the first six months of 2011 that remained unpaid at June 30. A
substantial amount of the increase in gross loss reserves related to the effect of currency
fluctuation in the first six months of 2011 impacted our casualty and professional liability
classes of business, but these classes also experienced a significant amount of 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 June 30, 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 discussed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2010, 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 June 30, 2011 may change, which could have a material effect on the Corporations
results of operations and financial condition.
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.
We estimate that we experienced overall favorable prior year development of about $425 million
during the first six months of 2011 and $205 million in the second quarter compared with favorable
prior year development of about $400 million and $180 million, respectively, in the comparable
periods of 2010.
The favorable development in the first six months of 2011 was primarily in the commercial
liability and professional liability classes related mainly to accident years 2007 and prior, and
to a lesser extent, in the personal insurance classes. The favorable development in the first six
months of 2010 occurred primarily in the professional liability classes due to continued favorable
loss trends related primarily to accident years 2006 and prior and particularly outside the United
States, in the commercial liability classes related mainly to accident years 2007 and prior, and in
the personal insurance classes.
Page 37
Investment Results
Property and casualty investment income before taxes increased slightly in the first six
months of 2011 compared with the same period in 2010. The increase was attributable to the positive impact
of foreign currency fluctuation on income from our investments denominated in
currencies other than the U.S. dollar and growth in average invested assets.
These positive impacts were mostly offset by the effect of lower average yields on
our investment portfolio. The average invested assets of the property and casualty subsidiaries
were modestly higher during the first six months of 2011 compared with the same period of 2010, but
growth was limited as a result of the dividend distributions made by the property and casualty
subsidiaries to Chubb during 2010 and the first quarter of 2011. The average yield of our
investment portfolio decreased for the first six months of 2011 compared to the same period of 2010
due to the continuing impact of lower reinvestment yields on fixed maturity securities that
matured, were redeemed by the issuer or were sold since the second quarter of 2010.
Investment income before taxes increased slightly in the second quarter of 2011 compared to the second quarter of
2010. The increase was largely due to the favorable impact of foreign currency fluctuation on income from our
investments denominated in currencies other than the U.S. dollar.
The effective tax rate on investment income was 19.0% in the first six months of 2011 compared
with 19.2% in the same period of 2010. The effective tax rate on investment income 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 increased by 1% in the first
six months of 2011 and increased by 2% in the second quarter of 2011 compared with the same periods
in 2010. The after-tax annualized yield on the investment portfolio that supports our property and
casualty insurance business was 3.22% and 3.26% in the first six months of 2011 and 2010,
respectively.
If investment yields and average foreign currency to the U.S. dollar exchange rates remain
about the same as June 30, 2011 levels, property and casualty investment income after taxes for the
year 2011 is expected to be similar to investment income for the year 2010.
Other Income and Charges
Other income and charges, which includes miscellaneous income and expenses of the property and
casualty subsidiaries, was income of $16 million in the first six months of 2011 compared with a
loss of $3 million in the same period of 2010. The income in the first six months of 2011
primarily included income from several small property and casualty insurance companies in which we
have an interest.
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.
Page 38
Corporate and other produced a loss before taxes of $126 million in the first six months of
2011 compared to a loss of $103 million for the same period of 2010. The lower loss in the first
six months of 2010 was due to higher investment income, which was largely due to a $20 million
special dividend received during the second quarter of 2010 on an equity investment.
Realized Investment Gains and Losses
Net realized investment gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
|
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Net realized gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
8 |
|
|
$ |
46 |
|
|
$ |
6 |
|
|
$ |
13 |
|
Equity securities |
|
|
28 |
|
|
|
11 |
|
|
|
9 |
|
|
|
2 |
|
Other invested assets |
|
|
209 |
|
|
|
169 |
|
|
|
68 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245 |
|
|
|
226 |
|
|
|
83 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
Equity securities |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
(14 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(9 |
) |
|
|
(14 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
before tax |
|
$ |
229 |
|
|
$ |
217 |
|
|
$ |
69 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
after tax |
|
$ |
149 |
|
|
$ |
141 |
|
|
$ |
45 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net realized gains of our other invested assets represent primarily the
aggregate of realized gains 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 the first six months of 2011
reflected the strong performance of the equity and high yield investment markets in the first
quarter of 2011 and the fourth quarter of 2010. The net realized gains of the limited partnerships
reported in the first six months of 2010 reflected the strong performance of the equity and high
yield investment markets in the first quarter of 2010 and the fourth quarter of 2009.
We regularly review those invested assets whose fair value is less than cost to determine if
an other-than-temporary decline in value has occurred. 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
potential other-than-temporary impairment.
Page 39
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, 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 debt security. 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.
Income Taxes
Net income in the first six months of 2010 included an income tax charge of $22 million in the
first quarter related to a decrease in deferred tax assets as a result of federal health care
legislation enacted in March 2010. The legislation eliminated the tax benefit associated with
Medicare Part D subsidies we expect to receive for providing qualifying prescription drug coverage
to retirees.
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 June 30, 2011, the Corporation had shareholders equity
of $15.8 billion and total debt of $4.0 billion.
Page 40
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 December 2010, the Board of Directors authorized the repurchase of up to 30,000,000 shares
of Chubbs common stock. The authorization has no expiration date. During the first six months of
2011, we repurchased 13,589,843 shares of Chubbs common stock in open market transactions at a
cost of $842 million. As of June 30, 2011, 14,902,453 shares remained under the share repurchase
authorization. We expect to repurchase all of the shares remaining under the authorization by the
end of January 2012, 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.
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.
Page 41
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.
For the first six months of 2011 and 2010, substantial cash from operations was generated by
the strong underwriting and investment results of our property and casualty subsidiaries. A
significant portion of this cash was used by the property and casualty subsidiaries for financing
activities (primarily the payment of dividends to Chubb). New cash available for investment by our
property and casualty subsidiaries was approximately $140 million and $60 million in the first six
months of 2011 and 2010, respectively. The property and casualty subsidiaries paid $800 million of
dividends to Chubb in the first six months of 2011 compared with $1.0 billion of dividends paid in
the comparable period of 2010. The cash provided by operating activities of the property and
casualty subsidiaries was modestly lower in the first six months of 2011 compared with the same
period in 2010 due in part to higher income tax payments, and to a lesser extent, higher loss
payments, partially offset by higher premium collections.
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.
During the first six months of 2011, the property and casualty subsidiaries paid aggregate
dividends of $800 million to Chubb. Included in these dividends was a $600 million dividend paid
in the first quarter of 2011 that was 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. As a result, regulatory approval was required and obtained for the payment of
this dividend. As of June 30, 2011, the maximum dividend distribution
that may be made by the property and casualty subsidiaries to Chubb
Page 42
for the
remainder of 2011 without prior regulatory approval is approximately
$1.2 billion. Regulatory approval could be required for the payment
of additional dividends by the subsidiaries during the remainder of
the year, depending on the timing and amount.
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.
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 June 30, 2011, 68% of our fixed
maturity portfolio that supports our U.S. operations was invested in highly rated tax exempt
securities. While about 35% of our tax exempt securities are insured, the effect of insurance on the average credit rating of
these securities is 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 June 30, 2011, 17% of our taxable fixed maturity portfolio was invested in highly rated
mortgage-backed securities. About 40% of these securities are 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 the CMOs are actively
traded in liquid markets. The balance of the mortgage-backed securities are call protected,
commercial mortgage-backed securities (CMBS). About 95% of our CMBS are senior securities with the
highest level of subordination. The remainder of our CMBS are seasoned securities that were issued
in 2004 or earlier.
The net unrealized appreciation before tax of our fixed maturities and equity securities
carried at fair value was $2.1 billion at June 30, 2011 compared with net unrealized appreciation
before tax of $1.7 billion at December 31, 2010. Such unrealized appreciation is reflected in
accumulated other comprehensive income, net of applicable deferred income tax.
Page 43
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 the
fair values of our fixed maturities and equity securities 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
an independent, nationally recognized pricing service or, in the case of securities for which
prices are not provided by a pricing service, from independent 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 an independent, nationally recognized pricing service.
Page 44
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 June 30, 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.
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. We are continuing to assess
the effect that the implementation of the new guidance will have on the Corporations financial
position and results of operations. The amount of acquisition costs we will defer under the new
guidance will be less than the amount deferred under our current accounting practice. If
prospective application is elected, net income in the year of adoption would be reduced as the
amount of acquisition costs eligible for deferral would be lower. Amortization of the balance of
deferred policy acquisition costs as of the date of adoption would continue over the period in
which the related premiums are earned. If retrospective application is elected, 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.
Item 4 Controls and Procedures
As of June 30, 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 June 30,
2011.
During the quarter ended June 30, 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.
Page 45
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
The information required with respect to Item 1 is included in Note (6) of the unaudited
Consolidated Financial Statements contained in this quarterly report, which information is
incorporated by reference into this Item 1.
Item 1A Risk Factors
The Corporations business is subject to a number of risks, including those identified in
Item 1A of Chubbs Annual Report on Form 10-K for the year ended December 31, 2010, that could have
a material effect on our business, results of operations, financial condition and/or liquidity and
that could cause our operating results to vary significantly from fiscal period to fiscal period.
The risks described in the Annual Report on Form 10-K are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also
could have a material effect on our business, results of operations, financial condition and/or
liquidity.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes Chubbs stock repurchased each month in the quarter ended June
30, 2011:
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Total Number of |
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Maximum Number of |
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Shares Purchased |
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Shares that May |
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Total Number |
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Average |
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as Part of |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Publicly Announced |
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Under the |
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Period |
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Purchased(a) |
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Per Share |
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Plans or Programs |
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Plans or Programs(b) |
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April 2011 |
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178,539 |
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$ |
62.68 |
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178,539 |
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21,750,504 |
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May 2011 |
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4,485,375 |
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|
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65.03 |
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4,485,375 |
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17,265,129 |
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June 2011 |
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2,362,676 |
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|
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64.71 |
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2,362,676 |
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14,902,453 |
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Total |
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7,026,590 |
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64.86 |
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7,026,590 |
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(a) |
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The stated amounts exclude 2,089 shares and 328 shares delivered to Chubb during the
months of April 2011 and May 2011, respectively, by employees of the Corporation to cover
option exercise prices in connection with the Corporations stock-based compensation plans. |
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(b) |
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On December 9, 2010, the Board of Directors authorized the repurchase of up to 30,000,000
shares of common stock. The authorization has no expiration date. |
Page 46
Item 6 Exhibits
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Exhibit |
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Number |
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Description |
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-
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Rule 13a-14(a)/15d-14(a) Certifications |
31.1
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Certification by John D. Finnegan filed herewith. |
31.2
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Certification by Richard G. Spiro filed herewith. |
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-
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Section 1350 Certifications |
32.1
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Certification by John D. Finnegan filed herewith. |
32.2
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Certification by Richard G. Spiro filed herewith. |
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-
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Interactive Data File |
101.INS*
101.SCH*
101.CAL*
101.LAB*
101.PRE*
101.DEF*
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XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document |
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* |
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Pursuant to applicable securities laws and regulations, the Corporation is deemed to have
complied with the reporting obligation relating to the submission of interactive data files in
such exhibits and is not subject to liability under any anti-fraud provisions of the federal
securities laws as long as the Corporation has made a good faith attempt to comply with the
submission requirements and promptly amends the interactive data files after becoming aware
that the interactive data files fail to comply with the submission requirements. Users of
this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not
filed and otherwise are not subject to liability. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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THE CHUBB CORPORATION
(Registrant)
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By: |
/s/ John J. Kennedy |
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John J. Kennedy |
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Senior Vice-President and
Chief Accounting Officer |
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Date:
August 5, 2011