10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|
|
|
x
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
|
|
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
|
Commission File No. 1-8661
|
The Chubb Corporation
(Exact name of registrant as
specified in its charter)
|
|
|
New Jersey
|
|
13-2595722
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
|
|
|
|
15 Mountain View Road
|
|
|
Warren, New Jersey
|
|
07059
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
(908) 903-2000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
(Title of each
class)
|
|
(Name of each exchange on which
registered)
|
Common Stock, par value $1 per share
|
|
New York Stock Exchange
|
Series B Participating Cumulative
|
|
New York Stock Exchange
|
Preferred Stock Purchase Rights
|
|
|
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
[ü]
No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes [ ] No
[ü]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[ü]
No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
Large accelerated
filer
[ü]
|
|
Accelerated filer [ ]
|
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
|
|
Smaller reporting company [ ]
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
[ ]
No [ü]
The aggregate market value of common stock held by
non-affiliates of the registrant was $17,629,416,359 as of
June 30, 2008, computed on the basis of the closing sale
price of the common stock on that date.
352,324,016
Number of shares of common stock
outstanding as of February 13, 2009
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the 2009 Annual
Meeting of Shareholders are incorporated by reference in
Part III of this Form 10-K.
CONTENTS
|
|
|
|
|
|
|
|
|
ITEM
|
|
DESCRIPTION
|
|
PAGE
|
|
PART I
|
|
1
|
|
|
|
3
|
|
|
1A
|
|
|
|
12
|
|
|
1B
|
|
|
|
17
|
|
|
2
|
|
|
|
17
|
|
|
3
|
|
|
|
18
|
|
|
4
|
|
|
|
20
|
|
|
|
|
|
|
|
PART II
|
|
5
|
|
|
|
21
|
|
|
6
|
|
|
|
23
|
|
|
7
|
|
|
|
24
|
|
|
7A
|
|
|
|
61
|
|
|
8
|
|
|
|
64
|
|
|
9
|
|
|
|
64
|
|
|
9A
|
|
|
|
64
|
|
|
9B
|
|
|
|
65
|
|
|
|
|
|
|
|
PART III
|
|
10
|
|
|
|
67
|
|
|
11
|
|
|
|
67
|
|
|
12
|
|
|
|
67
|
|
|
13
|
|
|
|
67
|
|
|
14
|
|
|
|
67
|
|
|
|
|
|
|
|
PART IV
|
|
15
|
|
|
|
67
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
E-1
|
2
PART
I.
Item 1. Business
General
The Chubb Corporation (Chubb) was incorporated as a business
corporation under the laws of the State of New Jersey in June
1967. Chubb and its subsidiaries are referred to collectively
as the Corporation. Chubb is a holding company for a family of
property and casualty insurance companies known informally as
the Chubb Group of Insurance Companies (the P&C Group).
Since 1882, the P&C Group has provided property and
casualty insurance to businesses and individuals around the
world. According to A.M. Best, the P&C Group is the
11th largest U.S. property and casualty insurance group based on
2007 net written premiums.
At December 31, 2008, the Corporation had total assets of
$48 billion and shareholders equity of
$13 billion. Revenues, income before income tax and assets
for each operating segment for the three years ended
December 31, 2008 are included in Note (11) of the
Notes to Consolidated Financial Statements. The Corporation
employed approximately 10,400 persons worldwide on
December 31, 2008.
The Corporations principal executive offices are located
at 15 Mountain View Road, Warren, New Jersey 07059, and our
telephone number is (908) 903-2000.
The Corporations internet address is www.chubb.com. The
Corporations annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a)of the Securities Exchange Act of 1934 are
available free of charge on this website as soon as reasonably
practicable after they have been electronically filed with or
furnished to the Securities and Exchange Commission.
Chubbs Corporate Governance Guidelines, charters of
certain key committees of its Board of Directors, Restated
Certificate of Incorporation, By-Laws, Code of Business Conduct
and Code of Ethics for CEO and Senior Financial Officers are
also available on the Corporations website or by writing
to the Corporations Corporate Secretary.
Property
and Casualty Insurance
The P&C Group is divided into three strategic business
units. Chubb Commercial Insurance offers a full range of
commercial insurance products, including coverage for multiple
peril, casualty, workers compensation and property and
marine. Chubb Commercial Insurance is known for writing niche
business, where our expertise can add value for our agents,
brokers and policyholders. Chubb Specialty Insurance offers a
wide variety of specialized professional liability products for
privately and publicly owned companies, financial institutions,
professional firms and healthcare organizations. Chubb Specialty
Insurance also includes our surety business. Chubb Personal
Insurance offers products for individuals with fine homes and
possessions who require more coverage choices and higher limits
than standard insurance policies.
The P&C Group provides insurance coverages principally in
the United States, Canada, Europe, Australia, and parts of Latin
America and Asia. Revenues of the P&C Group by geographic
area for the three years ended December 31, 2008 are
included in Note (11) of the Notes to Consolidated
Financial Statements.
The principal members of the P&C Group are Federal
Insurance Company (Federal), Pacific Indemnity Company (Pacific
Indemnity), Vigilant Insurance Company (Vigilant), Great
Northern Insurance Company (Great Northern), Chubb Custom
Insurance Company (Chubb Custom), Chubb National Insurance
Company (Chubb National), Chubb Indemnity Insurance Company
(Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb
New Jersey), Texas Pacific Indemnity Company, Northwestern
Pacific Indemnity Company, Executive Risk Indemnity Inc.
(Executive Risk Indemnity) and Executive Risk Specialty
Insurance Company (Executive Risk Specialty) in the United
States, as well as Chubb Atlantic Indemnity Ltd. (a Bermuda
company), Chubb Insurance Company of
3
Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance
Company of Australia Limited, Chubb Argentina de Seguros, S.A.,
Chubb Insurance (China) Company Ltd. and Chubb do Brasil
Companhia de Seguros.
Federal is the manager of Vigilant, Pacific Indemnity, Great
Northern, Chubb National, Chubb Indemnity, Chubb New Jersey,
Executive Risk Indemnity and Executive Risk Specialty. Federal
also provides certain services to other members of the P&C
Group. Acting subject to the supervision and control of the
boards of directors of the members of the P&C Group,
Federal provides day to day executive management and operating
personnel and makes available the economy and flexibility
inherent in the common operation of a group of insurance
companies.
Premiums
Written
A summary of the P&C Groups premiums written during
the past three years is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
Reinsurance
|
|
|
Reinsurance
|
|
|
Net
|
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Premiums
|
|
Year
|
|
Written
|
|
|
Assumed(a)
|
|
|
Ceded(a)
|
|
|
Written
|
|
|
|
(in millions)
|
|
2006
|
|
$
|
12,224
|
|
|
$
|
954
|
|
|
$
|
1,204
|
|
|
$
|
11,974
|
|
2007
|
|
|
12,432
|
|
|
|
775
|
|
|
|
1,335
|
|
|
|
11,872
|
|
2008
|
|
|
12,443
|
|
|
|
549
|
|
|
|
1,210
|
|
|
|
11,782
|
|
(a) Intercompany items eliminated.
The net premiums written during the last three years for major
classes of the P&C Groups business are included in
the Property and Casualty Insurance Underwriting
Results section of Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A).
One or more members of the P&C Group are licensed and
transact business in each of the 50 states of the United
States, the District of Columbia, Puerto Rico, the Virgin
Islands, Canada, Europe, Australia, and parts of Latin America
and Asia. In 2008, approximately 77% of the
P&C Groups direct business was produced in the
United States, where the P&C Groups businesses enjoy
broad geographic distribution with a particularly strong market
presence in the Northeast. The five states accounting for the
largest amounts of direct premiums written were New York with
12%, California with 8%, Texas with 5%, Florida with 5% and New
Jersey with 4%. Approximately 11% of the P&C Groups
direct premiums written was produced in Europe and 5% was
produced in Canada.
Underwriting
Results
A frequently used industry measurement of property and casualty
insurance underwriting results is the combined loss and expense
ratio. The P&C Group uses the combined loss and expense
ratio calculated in accordance with statutory accounting
principles applicable to property and casualty insurance
companies. This ratio is the sum of the ratio of losses and loss
expenses to premiums earned (loss ratio) plus the ratio of
statutory underwriting expenses to premiums written (expense
ratio) after reducing both premium amounts by dividends to
policyholders. When the combined ratio is under 100%,
underwriting results are generally considered profitable; when
the combined ratio is over 100%, underwriting results are
generally considered unprofitable. Investment income is not
reflected in the combined ratio. The profitability of property
and casualty insurance companies depends on the results of both
underwriting and investments operations.
The combined loss and expense ratios during the last three years
in total and for the major classes of the
P&C Groups business are included in the Property
and Casualty Insurance Underwriting Operations
section of MD&A.
4
Another frequently used measurement in the property and casualty
insurance industry is the ratio of statutory net premiums
written to policyholders surplus. At December 31,
2008 and 2007, the ratio for the P&C Group was .95 and .91,
respectively.
Producing
and Servicing of Business
The P&C Group does not utilize a significant in-house
distribution model for its products. Instead, in the United
States, the P&C Group offers products through independent
insurance agencies and accepts business on a regular basis from
insurance brokers. In most instances, these agencies and
brokers also offer products of other companies that compete with
the P&C Group. The P&C Groups branch and
service offices assist these agencies and brokers in producing
and servicing the P&C Groups business. In addition to
the administrative offices in Warren and Whitehouse Station, New
Jersey, the P&C Group has territory, branch and service
offices throughout the United States.
The P&C Group primarily offers products through insurance
brokers outside the United States. Local branch offices of the
P&C Group assist the brokers in producing and servicing the
business. In conducting its foreign business, the P&C Group
mitigates the risks relating to currency fluctuations by
generally maintaining investments in those foreign currencies in
which the P&C Group has loss reserves and other
liabilities. The net asset or liability exposure to the various
foreign currencies is regularly reviewed.
Business for the P&C Group is also produced through
participation in certain underwriting pools and syndicates. Such
pools and syndicates provide underwriting capacity for risks
which an individual insurer cannot prudently underwrite because
of the magnitude of the risk assumed or which can be more
effectively handled by one organization due to the need for
specialized loss control and other services.
Reinsurance
Ceded
In accordance with the normal practice of the insurance
industry, the P&C Group cedes reinsurance to other
insurance companies. Reinsurance is ceded to provide greater
diversification of risk and to limit the P&C Groups
maximum net loss arising from large risks or from catastrophic
events.
A large portion of the P&C Groups ceded reinsurance
is effected under contracts known as treaties under which all
risks meeting prescribed criteria are automatically covered.
Most of the P&C Groups treaty reinsurance
arrangements consist of excess of loss and catastrophe contracts
that protect against a specified part or all of certain types of
losses over stipulated amounts arising from any one occurrence
or event. In certain circumstances, reinsurance is also
effected by negotiation on individual risks. The amount of each
risk retained by the P&C Group is subject to maximum limits
that vary by line of business and type of coverage. Retention
limits are regularly reviewed and are revised periodically as
the P&C Groups capacity to underwrite risks changes.
For a discussion of the P&C Groups reinsurance
program and the cost and availability of reinsurance, see the
Property and Casualty Insurance Underwriting Results
section of MD&A.
Ceded reinsurance contracts do not relieve the P&C Group of
the primary obligation to its policyholders. Thus, an exposure
exists with respect to reinsurance recoverable to the extent
that any reinsurer is unable to meet its obligations or disputes
the liabilities assumed under the reinsurance contracts. The
collectibility of reinsurance is subject to the solvency of the
reinsurers, coverage interpretations and other factors. The
P&C Group is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers that the P&C Group
believes have strong balance sheets and superior underwriting
ability. The P&C Group monitors the financial strength of
its reinsurers on an ongoing basis.
5
Unpaid
Losses and Loss Adjustment Expenses and Related Amounts
Recoverable from Reinsurers
Insurance companies are required to establish a liability in
their accounts for the ultimate costs (including loss adjustment
expenses) of claims that have been reported but not settled and
of claims that have been incurred but not reported. Insurance
companies are also required to report as assets the portion of
such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid losses and
loss adjustment expenses is complex and imprecise as it must
take into consideration many variables that are subject to the
outcome of future events. As a result, informed subjective
estimates and judgments as to our ultimate exposure to losses
are an integral component of our loss reserving process.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for unpaid losses and loss
adjustment expenses. Estimates of the ultimate value of all
unpaid losses are based in part on the development of paid
losses, which reflect actual inflation. Inflation is also
reflected in the case estimates established on reported open
claims which, when combined with paid losses, form another basis
to derive estimates of reserves for all unpaid losses. There is
no precise method for subsequently evaluating the adequacy of
the consideration given to inflation, since claim settlements
are affected by many factors.
The P&C Group continues to emphasize early and accurate
reserving, inventory management of claims and suits, and control
of the dollar value of settlements. The number of outstanding
claims at year-end 2008 was approximately 3% lower than the
number at year-end 2007. The number of new arising claims during
2008 was approximately 1% higher than in the prior year.
Additional information related to the P&C Groups
estimates related to unpaid losses and loss adjustment expenses
and the uncertainties in the estimation process is presented in
the Property and Casualty Insurance Loss Reserves
section of MD&A.
The table on page 7 presents the subsequent development of
the estimated year-end liability for unpaid losses and loss
adjustment expenses, net of reinsurance recoverable, for the ten
years prior to 2008. The Corporation acquired Executive Risk
Inc. in 1999. The amounts in the table for the year 1998 do not
include Executive Risks unpaid losses and loss adjustment
expenses.
The top line of the table shows the estimated net liability for
unpaid losses and loss adjustment expenses recorded at the
balance sheet date for each of the indicated years. This
liability represents the estimated amount of losses and loss
adjustment expenses for claims arising in all years prior to the
balance sheet date that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to
the P&C Group.
The upper section of the table shows the reestimated amount of
the previously recorded net liability based on experience as of
the end of each succeeding year. The estimate is increased or
decreased as more information becomes known about the frequency
and severity of losses for each individual year. The increase or
decrease is reflected in operating results of the period in
which the estimate is changed. The cumulative deficiency
(redundancy) as shown in the table represents the
aggregate change in the reserve estimates from the original
balance sheet dates through December 31, 2008. The amounts
noted are cumulative in nature; that is, an increase in a loss
estimate that is related to a prior period occurrence generates
a deficiency in each intermediate year. For example, a
deficiency recognized in 2008 relating to losses incurred prior
to December 31, 1998 would be included in the cumulative
deficiency amount for each year in the period 1998 through 2007.
Yet, the deficiency would be reflected in operating results only
in 2008. The effect of changes in estimates of the liabilities
for losses occurring in prior years on income before income
taxes in each of the past three years is shown in the
reconciliation of the beginning and ending liability for unpaid
losses and loss adjustment expenses in the Property and Casualty
Insurance Loss Reserves section of MD&A.
6
ANALYSIS
OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Year Ended
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net Liability for Unpaid Losses and Loss Adjustment Expenses
|
|
$
|
9,050
|
|
|
$
|
9,749
|
|
|
$
|
10,051
|
|
|
$
|
11,010
|
|
|
$
|
12,642
|
|
|
$
|
14,521
|
|
|
$
|
16,809
|
|
|
$
|
18,713
|
|
|
$
|
19,699
|
|
|
$
|
20,316
|
|
|
$
|
20,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability Reestimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
8,855
|
|
|
|
9,519
|
|
|
|
9,856
|
|
|
|
11,799
|
|
|
|
13,039
|
|
|
|
14,848
|
|
|
|
16,972
|
|
|
|
18,417
|
|
|
|
19,002
|
|
|
|
19,443
|
|
|
|
|
|
Two years later
|
|
|
8,517
|
|
|
|
9,095
|
|
|
|
10,551
|
|
|
|
12,143
|
|
|
|
13,634
|
|
|
|
15,315
|
|
|
|
17,048
|
|
|
|
17,861
|
|
|
|
18,215
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
8,058
|
|
|
|
9,653
|
|
|
|
10,762
|
|
|
|
12,642
|
|
|
|
14,407
|
|
|
|
15,667
|
|
|
|
16,725
|
|
|
|
17,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
8,527
|
|
|
|
9,740
|
|
|
|
11,150
|
|
|
|
13,246
|
|
|
|
14,842
|
|
|
|
15,584
|
|
|
|
16,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
8,656
|
|
|
|
9,999
|
|
|
|
11,605
|
|
|
|
13,676
|
|
|
|
14,907
|
|
|
|
15,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
8,844
|
|
|
|
10,373
|
|
|
|
11,936
|
|
|
|
13,812
|
|
|
|
15,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
9,119
|
|
|
|
10,602
|
|
|
|
12,019
|
|
|
|
13,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
9,324
|
|
|
|
10,702
|
|
|
|
12,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
9,434
|
|
|
|
10,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
9,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cumulative Net Deficiency
(Redundancy)
|
|
|
486
|
|
|
|
1,079
|
|
|
|
2,119
|
|
|
|
2,984
|
|
|
|
2,422
|
|
|
|
1,136
|
|
|
|
(283
|
)
|
|
|
(1,415
|
)
|
|
|
(1,484
|
)
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Net Deficiency Related to Asbestos and Toxic Waste
Claims (Included in Above Total)
|
|
|
1,437
|
|
|
|
1,390
|
|
|
|
1,359
|
|
|
|
1,298
|
|
|
|
557
|
|
|
|
307
|
|
|
|
232
|
|
|
|
197
|
|
|
|
173
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amount of
Net Liability Paid as of*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
2,520
|
|
|
|
2,483
|
|
|
|
2,794
|
|
|
|
3,135
|
|
|
|
3,550
|
|
|
|
3,478
|
|
|
|
3,932
|
|
|
|
4,118
|
|
|
|
4,066
|
|
|
|
4,108
|
|
|
|
|
|
Two years later
|
|
|
3,708
|
|
|
|
4,079
|
|
|
|
4,699
|
|
|
|
5,499
|
|
|
|
5,911
|
|
|
|
6,161
|
|
|
|
6,616
|
|
|
|
6,896
|
|
|
|
6,789
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
4,653
|
|
|
|
5,306
|
|
|
|
6,070
|
|
|
|
7,133
|
|
|
|
7,945
|
|
|
|
8,192
|
|
|
|
8,612
|
|
|
|
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
5,362
|
|
|
|
6,196
|
|
|
|
7,137
|
|
|
|
8,564
|
|
|
|
9,396
|
|
|
|
9,689
|
|
|
|
10,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
5,925
|
|
|
|
6,909
|
|
|
|
8,002
|
|
|
|
9,588
|
|
|
|
10,543
|
|
|
|
10,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
6,370
|
|
|
|
7,453
|
|
|
|
8,765
|
|
|
|
10,366
|
|
|
|
11,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
6,719
|
|
|
|
8,009
|
|
|
|
9,305
|
|
|
|
10,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
7,086
|
|
|
|
8,402
|
|
|
|
9,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
7,382
|
|
|
|
8,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
7,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Liability, End of Year
|
|
$
|
10,357
|
|
|
$
|
11,435
|
|
|
$
|
11,904
|
|
|
$
|
15,515
|
|
|
$
|
16,713
|
|
|
$
|
17,948
|
|
|
$
|
20,292
|
|
|
$
|
22,482
|
|
|
$
|
22,293
|
|
|
$
|
22,623
|
|
|
$
|
22,367
|
|
Reinsurance Recoverable, End of Year
|
|
|
1,307
|
|
|
|
1,686
|
|
|
|
1,853
|
|
|
|
4,505
|
|
|
|
4,071
|
|
|
|
3,427
|
|
|
|
3,483
|
|
|
|
3,769
|
|
|
|
2,594
|
|
|
|
2,307
|
|
|
|
2,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability, End of Year
|
|
$
|
9,050
|
|
|
$
|
9,749
|
|
|
$
|
10,051
|
|
|
$
|
11,010
|
|
|
$
|
12,642
|
|
|
$
|
14,521
|
|
|
$
|
16,809
|
|
|
$
|
18,713
|
|
|
$
|
19,699
|
|
|
$
|
20,316
|
|
|
$
|
20,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Gross Liability
|
|
$
|
11,166
|
|
|
$
|
13,265
|
|
|
$
|
15,013
|
|
|
$
|
19,460
|
|
|
$
|
19,901
|
|
|
$
|
19,450
|
|
|
$
|
19,936
|
|
|
$
|
20,838
|
|
|
$
|
20,720
|
|
|
$
|
21,691
|
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
1,630
|
|
|
|
2,437
|
|
|
|
2,843
|
|
|
|
5,466
|
|
|
|
4,837
|
|
|
|
3,793
|
|
|
|
3,410
|
|
|
|
3,540
|
|
|
|
2,505
|
|
|
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reestimated Net Liability
|
|
$
|
9,536
|
|
|
$
|
10,828
|
|
|
$
|
12,170
|
|
|
$
|
13,994
|
|
|
$
|
15,064
|
|
|
$
|
15,657
|
|
|
$
|
16,526
|
|
|
$
|
17,298
|
|
|
$
|
18,215
|
|
|
$
|
19,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gross Deficiency
(Redundancy)
|
|
$
|
809
|
|
|
$
|
1,830
|
|
|
$
|
3,109
|
|
|
$
|
3,945
|
|
|
$
|
3,188
|
|
|
$
|
1,502
|
|
|
$
|
(356
|
)
|
|
$
|
(1,644
|
)
|
|
$
|
(1,573
|
)
|
|
$
|
(932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts for the year 1998 do not include the unpaid losses
and loss adjustment expenses of Executive Risk, which was
acquired in 1999.
|
|
*
|
The cumulative amount of net
liability paid amounts in the table for years prior to 2008 have
been revised to remove the foreign currency fluctuation offset
amounts that had been included in the past. The change did not
have an effect on the other amounts in the table.
|
The subsequent development of the net liability for unpaid
losses and loss adjustment expenses as of year-ends 1998 through
2003 was adversely affected by substantial unfavorable
development related to asbestos and toxic waste claims. The
cumulative net deficiencies experienced related to asbestos and
toxic waste claims were the result of: (1) an increase in the
actual number of claims filed; (2) an increase in the estimated
number of potential claims; (3) an increase in the severity of
actual and potential claims; (4) an increasingly adverse
litigation environment; and (5) an increase in litigation costs
associated with such claims. For the years 1998 and
1999, the unfavorable development related to asbestos and toxic
waste claims was offset in varying degrees by favorable loss
experience in the professional liability classes, particularly
directors and officers liability and fiduciary liability. For
2000, in addition to the unfavorable development related to
asbestos and toxic waste claims, there was significant
unfavorable development in the commercial casualty and
workers compensation classes. For the years 2001 through
2003, in addition to the unfavorable development related to
asbestos and toxic waste claims, there was significant
unfavorable development in the professional liability
classes principally directors and officers liability
and errors and omissions liability, due in large part to adverse
loss trends related to corporate failures and allegations of
management misconduct and accounting irregularities
and the commercial casualty classes and, to a lesser extent,
workers compensation. For the years 2004 through 2007,
there was significant favorable development, primarily in the
professional liability classes due to favorable loss trends in
recent years and in the homeowners and commercial property
classes due to lower than expected emergence of losses.
Conditions and trends that have affected development of the
liability for unpaid losses and loss adjustment expenses in the
past will not necessarily recur in the future. Accordingly, it
is not appropriate to extrapolate future redundancies or
deficiencies based on the data in this table.
The middle section of the table on page 7 shows the
cumulative amount paid with respect to the reestimated net
liability as of the end of each succeeding year. For example, in
the 1998 column, as of December 31, 2008 the P&C Group
had paid $7,562 million of the currently estimated
$9,536 million of net losses and loss adjustment expenses
that were unpaid at the end of 1998; thus, an estimated
$1,974 million of net losses incurred on or before December
31, 1998 remain unpaid as of December 31, 2008,
approximately 47% of which relates to asbestos and toxic waste
claims.
The lower section of the table on page 7 shows the gross
liability, reinsurance recoverable and net liability recorded at
the balance sheet date for each of the indicated years and the
reestimation of these amounts as of December 31, 2008.
The liability for unpaid losses and loss adjustment expenses,
net of reinsurance recoverable, reported in the accompanying
consolidated financial statements prepared in accordance with
generally accepted accounting principles (GAAP) comprises the
liabilities of U.S. and foreign members of the P&C Group as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
U.S. subsidiaries
|
|
$
|
16,871
|
|
|
$
|
16,597
|
|
Foreign subsidiaries
|
|
|
3,284
|
|
|
|
3,719
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,155
|
|
|
$
|
20,316
|
|
|
|
|
|
|
|
|
|
|
Members of the P&C Group are required to file annual
statements with insurance regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities
(statutory basis). The difference between the liability for
unpaid losses and loss expenses, net of reinsurance recoverable,
reported in the statutory basis financial statements of the U.S.
members of the P&C Group and such liability reported on a
GAAP basis in the consolidated financial statements is not
significant.
8
Investments
Investment decisions are centrally managed by investment
professionals based on guidelines established by management and
approved by the respective boards of directors for each company
in the P&C Group.
Additional information about the Corporations investment
portfolio as well as its approach to managing risks is presented
in the Invested Assets section of MD&A, the Investment
Portfolio section of Quantitative and Qualitative Disclosures
About Market Risk and Note (4) of the Notes to Consolidated
Financial Statements.
The investment results of the P&C Group for each of the
past three years are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested
|
|
|
Investment
|
|
|
Percent Earned
|
|
Year
|
|
Assets(a)
|
|
|
Income(b)
|
|
|
Before Tax
|
|
|
After Tax
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
33,492
|
|
|
$
|
1,454
|
|
|
|
4.34
|
%
|
|
|
3.48
|
%
|
2007
|
|
|
36,406
|
|
|
|
1,590
|
|
|
|
4.37
|
|
|
|
3.50
|
|
2008
|
|
|
37,190
|
|
|
|
1,622
|
|
|
|
4.36
|
|
|
|
3.49
|
|
|
|
|
|
(a)
|
Average of amounts with fixed maturity securities at amortized
cost, equity securities at fair value and other invested assets,
which include private equity limited partnerships, at the
P&C Groups equity in the net assets of the
partnerships.
|
|
|
|
|
(b)
|
Investment income after deduction of investment expenses, but
before applicable income tax.
|
Competition
The property and casualty insurance industry is highly
competitive both as to price and service. Members of the
P&C Group compete not only with other stock companies but
also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors produce
their business at a lower cost through the use of salaried
personnel rather than independent agents and brokers. Rates are
not uniform among insurers and vary according to the types of
insurers, product coverage and methods of operation. The
P&C Group competes for business not only on the basis of
price, but also on the basis of financial strength, availability
of coverage desired by customers and quality of service,
including claim adjustment service. The P&C Groups
products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization
that is of value to the insured. The P&C Group continues to
work closely with its customers and to reinforce with them the
stability, expertise and added value the P&C Groups
products provide.
There are approximately 3,200 property and casualty insurance
companies in the United States operating independently or in
groups and no single company or group is dominant across all
lines of business or jurisdictions. However, the relatively
large size and underwriting capacity of the P&C Group
provide it opportunities not available to smaller companies.
Regulation
and Premium Rates
Chubb is a holding company with subsidiaries primarily engaged
in the property and casualty insurance business and is therefore
subject to regulation by certain states as an insurance holding
company. All states have enacted legislation that regulates
insurance holding company systems such as the Corporation. This
legislation generally provides that each insurance company in
the system is required to register with the department of
insurance of its state of domicile and furnish information
concerning the operations of companies within the holding
company system that may materially affect the operations,
management or financial condition of the insurers within the
system. All transactions within a holding company system
affecting insurers must be fair and equitable. Notice to the
insurance commissioners is required prior to the consummation of
transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any
person in its holding
9
company system and, in addition, certain of such transactions
cannot be consummated without the commissioners prior
approval.
Companies within the P&C Group are subject to regulation
and supervision in the respective states in which they do
business. In general, such regulation is designed to protect the
interests of policyholders, and not necessarily the interests of
insurers, their shareholders and other investors. The extent of
such regulation varies but generally has its source in statutes
that delegate regulatory, supervisory and administrative powers
to a department of insurance. The regulation, supervision and
administration relate, among other things, to: the
standards of solvency that must be met and maintained; the
licensing of insurers and their agents; restrictions on
insurance policy terminations; unfair trade practices; the
nature of and limitations on investments; premium rates;
restrictions on the size of risks that may be insured under a
single policy; deposits of securities for the benefit of
policyholders; approval of policy forms; periodic examinations
of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of companies or
for other purposes; limitations on dividends to policyholders
and shareholders; and the adequacy of provisions for unearned
premiums, unpaid losses and loss adjustment expenses, both
reported and unreported, and other liabilities.
The extent of insurance regulation on business outside the
United States varies significantly among the countries in which
the P&C Group operates. Some countries have minimal
regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are subject to
greater restrictions than domestic competitors. In certain
countries, the P&C Group has incorporated insurance
subsidiaries locally to improve its competitive position.
The National Association of Insurance Commissioners (NAIC) has a
risk-based capital requirement for property and casualty
insurance companies. The risk-based capital formula is used by
state regulatory authorities to identify insurance companies
that may be undercapitalized and that merit further regulatory
attention. The formula prescribes a series of risk measurements
to determine a minimum capital amount for an insurance company,
based on the profile of the individual company. The ratio of a
companys actual policyholders surplus to its minimum
capital requirement will determine whether any state regulatory
action is required. At December 31, 2008, each member of
the P&C Group had more than sufficient capital to meet
the risk-based capital requirement. The NAIC periodically
reviews the risk-based capital formula and changes to the
formula could be considered in the future.
Regulatory requirements applying to premium rates vary from
state to state, but generally provide that rates cannot be
excessive, inadequate or unfairly discriminatory. In many
states, these regulatory requirements can impact the P&C
Groups ability to change rates, particularly with respect
to personal lines products such as automobile and homeowners
insurance, without prior regulatory approval. For example, in
certain states there are measures that limit the use of
catastrophe models or credit scoring as well as premium rate
freezes or limitations on the ability to cancel or nonrenew
certain policies, which can affect the P&C Groups
ability to charge adequate rates.
Subject to legislative and regulatory requirements, the P&C
Groups management determines the prices charged for its
policies based on a variety of factors including loss and loss
adjustment expense experience, inflation, anticipated changes in
the legal environment, both judicial and legislative, and tax
law and rate changes. Methods for arriving at prices vary by
type of business, exposure assumed and size of risk.
Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to
approve changes in those rates that they control and by certain
other matters, such as underwriting selectivity and expense
control.
In all states, insurers authorized to transact certain classes
of property and casualty insurance are required to become
members of an insolvency fund. In the event of the insolvency of
a licensed insurer writing a class of insurance covered by the
fund in the state, companies in the P&C Group, together
with the other fund members, are assessed in order to provide
the funds necessary to pay certain claims against the insolvent
insurer. Generally, fund assessments are proportionately based
on the members written premiums for the classes of
insurance written by the insolvent insurer. In certain states,
the P&C Group can recover a portion of these assessments
through premium tax offsets and policyholder
10
surcharges. In 2008, assessments of the members of the P&C
Group were insignificant. The amount of future assessments
cannot be reasonably estimated.
Insurance regulation in certain states requires the companies in
the P&C Group, together with other insurers operating in
the state, to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations, which are
mechanisms that generally provide applicants with various basic
insurance coverages when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and
workers compensation insurance, but a majority of states
also mandate that insurers, such as the P&C Group,
participate in Fair Plans or Windstorm Plans, which offer basic
property coverages to insureds where not otherwise available.
Some states also require insurers to participate in facilities
that provide homeowners, crime and other classes of insurance
where periodic market constrictions may occur. Participation is
based upon the amount of a companys voluntary written
premiums in a particular state for the classes of insurance
involved. These involuntary market plans generally are
underpriced and produce unprofitable underwriting results.
In several states, insurers, including members of the P&C
Group, participate in market assistance plans. Typically, a
market assistance plan is voluntary, of limited duration and
operates under the supervision of the insurance commissioner to
provide assistance to applicants unable to obtain commercial and
personal liability and property insurance. The assistance may
range from identifying sources where coverage may be obtained to
pooling of risks among the participating insurers. A few states
require insurers, including members of the P&C Group, to
purchase reinsurance from a mandatory reinsurance fund.
Although the federal government and its regulatory agencies
generally do not directly regulate the business of insurance,
federal initiatives often have an impact on the business in a
variety of ways. Current and proposed federal measures that may
significantly affect the P&C Groups business and the
market as a whole include federal terrorism insurance, asbestos
liability reform measures, tort reform, natural catastrophes,
corporate governance, ergonomics, health care reform including
the containment of medical costs, medical malpractice reform and
patients rights, privacy,
e-commerce,
international trade, federal regulation of insurance companies
and the taxation of insurance companies.
Companies in the P&C Group are also affected by a variety
of state and federal legislative and regulatory measures as well
as by decisions of their courts that define and extend the risks
and benefits for which insurance is provided. These include:
redefinitions of risk exposure in areas such as water damage,
including mold, flood and storm surge; products liability and
commercial general liability; credit scoring; and extension and
protection of employee benefits, including workers
compensation and disability benefits.
Legislative and judicial developments pertaining to asbestos and
toxic waste exposures are discussed in the Property and Casualty
Insurance Loss Reserves section of MD&A.
Real
Estate
The Corporations wholly owned subsidiary, Bellemead
Development Corporation (Bellemead), and its subsidiaries were
involved in commercial development activities primarily in
New Jersey and residential development activities primarily
in central Florida. The real estate operations are in run-off.
Chubb
Financial Solutions
Chubb Financial Solutions (CFS) provided customized financial
products to corporate clients. The business of CFS was
primarily structured credit derivatives, principally as a
counterparty in portfolio credit default swaps. CFS has been in
run-off since 2003. Since that date, CFS has terminated early or
run-off nearly all of its contractual obligations within its
financial products portfolio. Additional information related to
CFSs operations is included in the Corporate and
Other Chubb Financial Solutions section of MD&A.
11
The Corporations business is subject to a number of risks,
including those described below, that could have a material
effect on the Corporations results of operations,
financial condition or liquidity and that could cause our
operating results to vary significantly from period to period.
References to we, us and our
appearing in this
Form 10-K
should be read to refer to the Corporation.
If our
property and casualty loss reserves are insufficient, our
results could be adversely affected.
The process of establishing loss reserves is complex and
imprecise as it must take into consideration many variables that
are subject to the outcome of future events. As a result,
informed subjective estimates and judgments as to our ultimate
exposure to losses are an integral component of our loss
reserving process. Variations between our loss reserve estimates
and the actual emergence of losses could be material and could
have a material adverse effect on our results of operations or
financial condition.
A further discussion of the risk factors related to our property
and casualty loss reserves is presented in the Property and
Casualty Insurance Loss Reserves section of
MD&A.
The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social, environmental
and other conditions change, unexpected or unintended issues
related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these issues may not become
apparent for some time after we have written the insurance
policies that are affected by such issues. As a result, the full
extent of liability under our insurance policies may not be
known for many years after the policies are issued. Emerging
claim and coverage issues could have a material adverse effect
on our results of operations or financial condition.
Catastrophe
losses could materially and adversely affect our
business.
As a property and casualty insurance holding company, our
insurance operations expose us to claims arising out of
catastrophes. Catastrophes can be caused by various natural
perils, including hurricanes and other windstorms, earthquakes,
severe winter weather and brush fires. Catastrophes can also be
man-made, such as a terrorist attack. The frequency and severity
of catastrophes are inherently unpredictable. It is possible
that both the frequency and severity of natural and man-made
catastrophic events will increase.
The extent of losses from a catastrophe is a function of both
the total amount of exposure under our insurance policies in the
area affected by the event and the severity of the event. Most
catastrophes are restricted to relatively small geographic
areas; however, hurricanes and earthquakes may produce
significant damage over larger areas, especially those that are
heavily populated. Natural or man-made catastrophic events could
cause claims under our insurance policies to be higher than we
anticipated and could cause substantial volatility in our
financial results for any fiscal quarter or year. Our ability to
write new business could also be affected. We believe that
increases in the value and geographic concentration of insured
property and the effects of inflation could increase the
severity of claims from catastrophic events in the future. In
addition, states have from time to time passed legislation that
has the effect of limiting the ability of insurers to manage
catastrophe risk, such as legislation limiting insurers ability
to increase rates and prohibiting insurers from withdrawing from
catastrophe-exposed areas.
As a result of the foregoing, it is possible that the occurrence
of any natural or man-made catastrophic event could have a
material adverse effect on our business, results of operations,
financial condition and liquidity. A further discussion of the
risk factors related to catastrophes is presented in the
Property and Casualty Insurance Catastrophe Risk
Management section of MD&A.
12
The
occurrence of certain catastrophic events could have a
materially adverse effect on our systems and could impact our
ability to conduct business effectively.
Our computer, information technology and telecommunications
systems, which we use to conduct our business, interface with
and rely upon third-party systems. Systems failures or outages
could compromise our ability to perform business functions in a
timely manner, which could harm our ability to conduct business
and hurt our relationships with our business partners and
customers. In the event of a disaster such as a natural
catastrophe, an industrial accident, a blackout, a computer
virus, a terrorist attack or war, our systems may be
inaccessible to our employees, customers or business partners
for an extended period of time. Even if our employees or third
party providers are able to report to work, they may be unable
to perform their duties for an extended period of time if our
computer, information technology or telecommunication systems
are disabled or destroyed. Our systems could also be subject to
physical and electronic break-ins, and subject to similar
disruptions from unauthorized tampering. This may impede or
interrupt our business operations, which could have a material
adverse effect on our results of operations or financial
condition.
We may
experience reduced returns or losses on our investments
especially during periods of heightened volatility, which could
have a material adverse effect on our results of operations or
financial condition.
The returns on our investment portfolio may be reduced or we may
incur losses as a result of changes in general economic
conditions, interest rates, real estate markets, fixed income
markets, equity markets, alternative investment markets, credit
markets, exchange rates, global capital market conditions and
numerous other factors that are beyond our control.
The worldwide financial markets experience high levels of
volatility during certain periods, as was the case during 2008,
which could have an increasingly adverse impact on the
U.S. and foreign economies. The financial market volatility
and the resulting negative economic impact could continue and it
is possible that it may be prolonged, which could adversely
affect our current investment portfolio, make it difficult to
determine the value of certain assets in our portfolio
and/or make
it difficult for us to purchase suitable investments that meet
our risk and return criteria. These factors could cause us to
realize less than expected returns on invested assets, sell
investments for a loss or write off or write down investments,
any of which could have a material adverse effect on our results
of operations or financial condition.
A significant portion of our investment portfolio consists of
tax exempt securities and we receive certain tax benefits
relating to such securities based on current laws and
regulations. Our portfolio has also benefited from certain other
laws and regulations, including without limitation, tax credits
(such as foreign tax credits). Federal
and/or state
tax legislation could be enacted that would lessen or eliminate
some or all of the tax advantages currently benefiting us and
could negatively impact the value of our investment portfolio.
If we
experience difficulties with outsourcing relationships, our
ability to conduct our business might be negatively
impacted.
We outsource certain business and administrative functions to
third parties and may do so increasingly in the future. If we
fail to develop and implement our outsourcing strategies or our
third party providers fail to perform as anticipated, we may
experience operational difficulties, increased costs and a loss
of business that may have a material adverse effect on our
results of operations or financial condition. By outsourcing
certain business and administrative functions to third parties,
we may be exposed to enhanced risk of data security breaches.
Any breach of data security could damage our reputation
and/or
result in monetary damages, which, in turn, could have a
material adverse effect on our results of operations or
financial condition.
13
The
failure of the risk mitigation strategies we utilize could have
a material adverse effect on our financial condition or results
of operations.
We utilize a number of strategies to mitigate our risk exposure,
such as:
|
|
|
|
|
engaging in vigorous underwriting;
|
|
|
|
carefully evaluating terms and conditions of our policies;
|
|
|
|
focusing on our risk aggregations by geographic zones, industry
type, credit exposure and other bases; and
|
|
|
|
ceding reinsurance.
|
However, there are inherent limitations in all of these tactics
and no assurance can be given that an event or series of
unanticipated events will not result in loss levels in excess of
our probable maximum loss models, which could have a material
adverse effect on our financial condition or results of
operations.
These risks may be heightened during difficult economic
conditions such as those currently being experienced in the
United States and elsewhere.
We are
exposed to credit risk in our business operations and in our
investment portfolio.
We are exposed to credit risk in several areas of our business
operations, including, without limitation, credit risk relating
to reinsurance, co-sureties on surety bonds, policyholders of
certain of our insurance products, independent agents and
brokers, issuers of securities, insurers of certain securities
and certain other counterparties relating to our investment
portfolio.
With respect to reinsurance coverages that we have purchased,
our ability to recover amounts due from reinsurers may be
affected by the creditworthiness and willingness to pay of the
reinsurers. Although certain reinsurance we have purchased is
collateralized, the collateral is exposed to credit risk of the
counterparty that has guaranteed a fixed investment return on
such collateral.
It is customary practice in the surety business for multiple
insurers to participate as co-sureties on large surety bonds,
meaning that each insurer (each referred to as a co-surety)
assumes its proportionate share of the risk and receives a
corresponding percentage of the bond premium. Under these
arrangements, the co-sureties obligations are joint and
several. Consequently, if a co-surety defaults on its
obligations, the remaining co-surety or co-sureties are
obligated to make up the shortfall to the beneficiary of the
surety bond even though the non-defaulting co-sureties did not
receive the premium for that portion of the risk. Therefore, we
are subject to credit risk with respect to the insurers with
whom we are co-sureties on surety bonds.
In accordance with industry practice, when insureds purchase our
insurance products through independent agents and brokers, they
generally pay the premiums to the agent or broker, which in turn
is required to remit the collected premium to us. In many
jurisdictions, we are deemed to have received payment upon the
receipt of the payment by the agent or broker, regardless of
whether the agent or broker actually remits payment to us. As a
result, we assume credit risk associated with amounts due from
independent agents and brokers.
The value of our investment portfolio is subject to credit risk
from the issuers
and/or
guarantors of the securities in the portfolio, other
counterparties in certain transactions and, for certain
securities, insurers that guarantee specific issuers
obligations. Defaults by the issuer and, where applicable, an
issuers guarantor, insurer or other counterparties with
regard to any of such investments could reduce our net
investment income and net realized investment gains or result in
investment losses.
Our exposure to any of the above credit risks could have a
material adverse effect on our results of operations or
financial condition.
14
Reinsurance
coverage may not be available to us in the future at
commercially reasonable rates or at all.
The availability and cost of reinsurance are subject to
prevailing market conditions that are beyond our control. No
assurances can be made that reinsurance will remain continuously
available to us in amounts that we consider sufficient and at
prices that we consider acceptable, which would cause us to
increase the amount of risk we retain, reduce the amount of
business we underwrite or look for alternatives to reinsurance.
This, in turn, could have a material adverse effect on our
financial condition or results of operations.
Payment
of obligations under surety bonds could adversely affect our
future operating results.
The surety business tends to be characterized by infrequent but
potentially high severity losses. The majority of our surety
obligations are intended to be performance-based guarantees.
When losses occur, they may be mitigated, at times, by recovery
rights to the customers assets, contract payments,
collateral and bankruptcy recoveries. We have substantial
commercial and construction surety exposure for current and
prior customers. In that regard, we have exposures related to
surety bonds issued on behalf of companies that have experienced
or may experience deterioration in creditworthiness. If the
financial condition of these companies were adversely affected
by the economy or otherwise, we may experience an increase in
filed claims and may incur high severity losses, which could
have a material adverse effect on our results of operations.
A
downgrade in our credit ratings and financial strength ratings
could adversely impact the competitive positions of our
operating businesses.
Credit ratings and financial strength ratings can be important
factors in establishing our competitive position in the
insurance markets. There can be no assurance that our ratings
will continue for any given period of time or that they will not
be changed. If our credit ratings were downgraded in the future,
we could incur higher borrowing costs and may have more limited
means to access capital. In addition, a downgrade in our
financial strength ratings could adversely affect the
competitive position of our insurance operations, including a
possible reduction in demand for our products in certain markets.
Cyclicality
of the property and casualty insurance industry may cause
fluctuations in our results.
The property and casualty insurance business historically has
been cyclical, experiencing periods characterized by intense
price competition, relatively low premium rates and less
restrictive underwriting standards followed by periods of
relatively low levels of competition, high premium rates and
more selective underwriting standards. We expect this
cyclicality to continue. The periods of intense price
competition in the cycle could adversely affect our financial
condition, profitability or cash flows.
A number of factors, including many that are volatile and
unpredictable, can have a significant impact on cyclical trends
in the property and casualty insurance industry and the
industrys profitability. These factors include:
|
|
|
|
|
an apparent trend of courts to grant increasingly larger awards
for certain damages;
|
|
|
|
catastrophic hurricanes, windstorms, earthquakes and other
natural disasters, as well as the occurrence of man-made
disasters (e.g., a terrorist attack);
|
|
|
|
availability, price and terms of reinsurance;
|
|
|
|
fluctuations in interest rates;
|
|
|
|
changes in the investment environment that affect market prices
of and income and returns on investments; and
|
|
|
|
inflationary pressures that may tend to affect the size of
losses experienced by insurance companies.
|
15
We cannot predict whether or when market conditions will
improve, remain constant or deteriorate. Negative market
conditions may impair our ability to write insurance at rates
that we consider appropriate relative to the risk assumed. If we
cannot write insurance at appropriate rates, our ability to
transact business would be materially and adversely affected.
Intense
competition for our products could harm our ability to maintain
or increase our profitability and premium volume.
The property and casualty insurance industry is highly
competitive. We compete not only with other stock companies but
also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. We compete for business not
only on the basis of price, but also on the basis of financial
strength, availability of coverage desired by customers and
quality of service, including claim adjustment service. We may
have difficulty in continuing to compete successfully on any of
these bases in the future.
If competition limits our ability to write new business at
adequate rates, our results of operations could be adversely
affected.
We are
dependent on a distribution network comprised of independent
insurance brokers and agents to distribute our
products.
We generally do not use salaried employees to promote or
distribute our insurance products. Instead, we rely on a large
number of independent insurance brokers and agents. Accordingly,
our business is dependent on the willingness of these brokers
and agents to recommend our products to their customers.
Deterioration in relationships with our broker and agent
distribution network could materially and adversely affect our
ability to sell our products, which, in turn, could have a
material adverse effect on our results of operations or
financial condition.
The
inability of our insurance subsidiaries to pay dividends in
sufficient amounts would harm our ability to meet our
obligations and to pay future dividends.
As a holding company, Chubb relies primarily on dividends from
its insurance subsidiaries to meet its obligations for payment
of interest and principal on outstanding debt obligations and to
pay dividends to shareholders. The ability of our insurance
subsidiaries to pay dividends in the future will depend on their
statutory surplus, on earnings and on regulatory restrictions.
We are subject to regulation by some states as an insurance
holding company system. Such regulation generally provides that
transactions between companies within the holding company system
must be fair and equitable. Transfers of assets among affiliated
companies, certain dividend payments from insurance subsidiaries
and certain material transactions between companies within the
system may be subject to prior notice to, or prior approval by,
state regulatory authorities. The ability of our insurance
subsidiaries to pay dividends is also restricted by regulations
that set standards of solvency that must be met and maintained,
that limit investments and that limit dividends to shareholders.
These regulations may affect Chubbs insurance
subsidiaries ability to provide Chubb with dividends.
Our
businesses are heavily regulated, and changes in regulation may
reduce our profitability and limit our growth.
Our insurance subsidiaries are subject to extensive regulation
and supervision in the jurisdictions in which they conduct
business. This regulation is generally designed to protect the
interests of policyholders, and not necessarily the interests of
insurers, their shareholders or other investors. The regulation
relates to authorization for lines of business, capital and
surplus requirements, investment limitations, underwriting
limitations, transactions with affiliates, dividend limitations,
changes in control, premium rates and a variety of other
financial and nonfinancial components of an insurance
companys business.
16
Virtually all states in which we operate require us, together
with other insurers licensed to do business in that state, to
bear a portion of the loss suffered by some insureds as the
result of impaired or insolvent insurance companies. In
addition, in various states, our insurance subsidiaries must
participate in mandatory arrangements to provide various types
of insurance coverage to individuals or other entities that
otherwise are unable to purchase that coverage from private
insurers. A few states require us to purchase reinsurance from a
mandatory reinsurance fund. Such reinsurance funds can create a
credit risk for insurers if not adequately funded by the state
and, in some cases, the existence of a reinsurance fund could
affect the prices charged for our policies. The effect of these
and similar arrangements could reduce our profitability in any
given period or limit our ability to grow our business.
In recent years, the state insurance regulatory framework has
come under increased scrutiny, including scrutiny by federal
officials, and some state legislatures have considered or
enacted laws that may alter or increase state authority to
regulate insurance companies and insurance holding companies.
Further, the NAIC and state insurance regulators are continually
reexamining existing laws and regulations, specifically focusing
on modifications to statutory accounting principles,
interpretations of existing laws and the development of new laws
and regulations. Any proposed or future legislation or NAIC
initiatives, if adopted, may be more restrictive on our ability
to conduct business than current regulatory requirements or may
result in higher costs.
We are
subject to a number of risks associated with our business
outside the United States.
A significant portion of our business is conducted outside the
United States, including in Asia, Australia, Canada, Europe and
Latin America. By doing business outside the United States, we
are subject to a number of risks, including without limitation,
dealing with jurisdictions, especially in emerging markets, that
may lack political, financial or social stability
and/or a
strong legal and regulatory framework, which may make it
difficult to do business and comply with local laws and
regulations in such jurisdictions. Failure to comply with local
laws in a particular jurisdiction or doing business in a country
that becomes increasingly unstable could have a significant
negative effect on our business and operations in that market as
well as on our reputation generally.
As part of our international operations, we engage in
transactions denominated in a currency other than the United
States dollar. To reduce our exposure to currency fluctuation,
we attempt to match the currency of the liabilities we incur
under insurance policies with assets denominated in the same
local currency. However, in the event that we underestimate our
exposure, negative movements in the United States dollar versus
the local currency will exacerbate the impact of the exposure on
our results of operations and financial condition.
We report the results of our international operations on a
consolidated basis with our domestic business. These results are
reported in United States dollars. A significant portion of the
business we write outside the United States, however, is
transacted in local currencies. Consequently, fluctuations in
the relative value of local currencies in which the policies are
written versus the United States dollar can mask the underlying
trends in our international business.
Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
The executive offices of the Corporation are in Warren, New
Jersey. The administrative offices of the P&C Group
are located in Warren and Whitehouse Station, New Jersey. The
P&C Group maintains territory, branch and service
offices in major cities throughout the United States and also
has offices in Canada, Europe, Australia, Latin America and
Asia. Office facilities are leased with the exception of
buildings in Whitehouse Station, New Jersey and Simsbury,
Connecticut. Management considers its office facilities suitable
and adequate for the current level of operations.
17
Item 3. Legal
Proceedings
As previously disclosed, beginning in December 2002, Chubb
Indemnity was named in a series of actions commenced by various
plaintiffs against Chubb Indemnity and other non-affiliated
insurers in the District Courts in Nueces, Travis and Bexar
Counties in Texas. The plaintiffs generally allege that Chubb
Indemnity and the other defendants breached duties to asbestos
product end-users and conspired to conceal risks associated with
asbestos exposure. The plaintiffs seek to impose liability on
insurers directly. The plaintiffs seek unspecified monetary
damages and punitive damages. Pursuant to the asbestos reform
bill passed by the Texas legislature in May 2005, these actions
were transferred to the Texas state asbestos Multidistrict
Litigation on December 1, 2005. Chubb Indemnity is
vigorously defending all of these actions and has been
successful in getting a number of them dismissed through summary
judgment, special exceptions, or voluntary withdrawal by the
plaintiff.
Beginning in June 2003, Chubb Indemnity was also named in a
number of similar cases in Cuyahoga, Mahoning, and Trumbull
Counties in Ohio. The allegations and the damages sought in the
Ohio actions are substantially similar to those in the Texas
actions. In May 2005, the Ohio Court of Appeals sustained the
trial courts dismissal of a group of nine cases for
failure to state a claim. Following the appellate courts
decision, Chubb Indemnity and other non-affiliated insurers were
dismissed from the remaining cases filed in Ohio, except for a
single case which had been removed to federal court and
transferred to the federal asbestos Multidistrict Litigation.
There has been no activity in that case since its removal.
In December 2007, certain of Chubbs subsidiaries were
named in an action filed in the Superior Court of Los Angeles
County, California that contains allegations similar to those
made in the Texas and Ohio actions. In August 2008, Chubbs
motion to dismiss the complaint was granted, but permitted
plaintiffs to amend their complaint. Chubbs motion to
dismiss the amended complaint was granted, with prejudice, in
January 2009.
As previously disclosed, 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. As
described in more detail below, the Attorney General of Ohio in
August 2007 filed an action against Chubb and certain of its
subsidiaries, as well as several other insurers and one broker,
as a result of the Ohio Attorney Generals business
practices investigation. Although no other Attorney General or
regulator has initiated an action against the Corporation, it is
possible that such an action may be brought against the
Corporation with respect to some or all of the issues that are
the focus of these ongoing investigations.
As previously disclosed, individual actions and purported class
actions arising out of the investigations into the payment of
contingent commissions to brokers and agents have been filed in
a number of federal and state courts. On August 1, 2005,
Chubb and certain of its subsidiaries were named in a putative
class action entitled In re Insurance Brokerage Antitrust
Litigation in the U.S. District Court for the District
of New Jersey. This action, brought against several brokers and
insurers on behalf of a class of persons who purchased insurance
through the broker defendants, asserts claims under the Sherman
Act and state law and the Racketeer Influenced and Corrupt
Organizations Act (RICO) arising from the alleged unlawful use
of contingent commission agreements.
As previously disclosed, Chubb and certain of its subsidiaries
have also been named as defendants in two purported class
actions relating to allegations of unlawful use of contingent
commission arrangements that were originally filed in state
court. The first was filed on February 16, 2005 in Seminole
County, Florida. The second was filed on May 17, 2005 in
Essex County, Massachusetts. Both cases were
18
removed to federal court and then transferred by the Judicial
Panel on Multidistrict Litigation to the U.S. District
Court for the District of New Jersey for consolidation with the
In re Insurance Brokerage Antitrust Litigation. Since
being transferred to the District of New Jersey, the plaintiff
in the former action has been inactive, and that action
currently is stayed. The latter action has been voluntarily
dismissed. On September 28, 2007, the U.S. District Court
for the District of New Jersey dismissed the second amended
complaint filed by the plaintiffs in In re Insurance
Brokerage Antitrust Litigation in its entirety. In so doing,
the court dismissed the plaintiffs Sherman Act and RICO
claims with prejudice for failure to state a claim, and it
dismissed the plaintiffs state law claims without
prejudice because it declined to exercise supplemental
jurisdiction over them. The plaintiffs have appealed the
dismissal of their second amended complaint to the U.S. Court of
Appeals for the Third Circuit, and that appeal is currently
pending.
In December 2005, Chubb and certain of its subsidiaries were
named in a putative class action similar to the In re
Insurance Brokerage Antitrust Litigation. The action is
pending in the U.S. District Court for the District of New
Jersey and has been assigned to the judge who is presiding over
the In re Insurance Brokerage Antitrust Litigation. The
complaint has never been served in this matter. Separately, in
April 2006, Chubb and one of its subsidiaries were named in an
action similar to the In re Insurance Brokerage Antitrust
Litigation. This action was filed in the U.S. District Court
for the Northern District of Georgia and subsequently was
transferred by the Judicial Panel on Multidistrict Litigation to
the U.S. District for the District of New Jersey for
consolidation with the In re Insurance Brokerage Antitrust
Litigation. This action currently is stayed. On May 21,
2007, Chubb and one of its subsidiaries were named as defendants
in another action similar to In re Insurance Brokerage
Antitrust Litigation. This action was filed in the
U.S. District Court for the District of New Jersey and
consolidated with In re Insurance Brokerage Antitrust
Litigation. This action currently is stayed.
As previously disclosed, on October 12, 2007, certain of
Chubbs subsidiaries were named as defendants in an action
similar to In re Insurance Brokerage Antitrust
Litigation. This action was filed in the U.S. District
Court for the Northern District of Georgia. This action has been
identified to the Judicial Panel on Multidistrict Litigation as
a potential tag-along action to In re Insurance
Brokerage Antitrust Litigation. The Corporation currently
anticipates that this action will be transferred by the Judicial
Panel on Multidistrict Litigation to the U.S. District
Court for the District of New Jersey and consolidated with In
re Insurance Brokerage Antitrust Litigation.
On August 24, 2007, Chubb and certain of its subsidiaries
were named as defendants in an action filed by the Ohio Attorney
General against several insurers and one broker. This action
alleges violations of Ohios antitrust laws. In July 2008,
the court denied the Corporations and the other
defendants motions to dismiss the Attorney Generals
complaint. In August 2008, the Corporation and the other
defendants filed answers to the complaint and discovery is
proceeding.
In these actions, the plaintiffs generally allege that the
defendants unlawfully used contingent commission agreements and
conspired to reduce competition in the insurance markets. The
actions seek treble damages, injunctive and declaratory relief,
and attorneys fees. The Corporation believes it has
substantial defenses to all of the aforementioned legal
proceedings and intends to defend the actions vigorously.
Information regarding certain litigation to which the P&C
Group is a party is included in the Property and Casualty
Insurance Loss Reserves section of MD&A.
Chubb and its subsidiaries are also defendants in various
lawsuits arising out of their businesses. It is the opinion of
management that the final outcome of these matters will not have
a material adverse effect on the Corporations results of
operations or financial condition.
19
Item 4. Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders during
the quarter ended December 31, 2008.
Executive
Officers of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
|
|
|
|
Age(a)
|
|
|
Election(b)
|
|
|
John D. Finnegan, Chairman, President and Chief Executive Officer
|
|
|
60
|
|
|
|
2002
|
|
W. Brian Barnes, Senior Vice President and Chief Actuary of
Chubb & Son, a division of Federal
|
|
|
46
|
|
|
|
2008
|
|
Maureen A. Brundage, Executive Vice President and General Counsel
|
|
|
52
|
|
|
|
2005
|
|
Robert C. Cox, Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
51
|
|
|
|
2003
|
|
John J. Degnan, Vice Chairman and Chief Operating Officer
|
|
|
64
|
|
|
|
1994
|
|
John J. Kennedy, Senior Vice President and Chief Accounting
Officer
|
|
|
53
|
|
|
|
2008
|
|
Paul J. Krump, Executive Vice President and Chief Underwriting
Officer of Chubb & Son, a division of Federal
|
|
|
49
|
|
|
|
2001
|
|
Andrew A. McElwee, Jr., Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
54
|
|
|
|
1997
|
|
Harold L. Morrison, Jr., Executive Vice President and Chief
Global Field Officer of Chubb & Son, a division of
Federal
|
|
|
51
|
|
|
|
2008
|
|
Steven R. Pozzi, Executive Vice President of Chubb &
Son, a division of Federal
|
|
|
52
|
|
|
|
2009
|
|
Dino E. Robusto, Executive Vice President and Chief
Administrative Officer of Chubb & Son, a division of
Federal
|
|
|
50
|
|
|
|
2006
|
|
Richard G. Spiro, Executive Vice President and Chief Financial
Officer
|
|
|
44
|
|
|
|
2008
|
|
(a) Ages listed above are as of April 28, 2009.
(b) Date indicates year first elected or designated as an
executive officer.
All of the foregoing officers serve at the pleasure of the Board
of Directors of the Corporation and have been employees of the
Corporation for more than five years except for
Ms. Brundage and Mr. Spiro.
Before joining the Corporation in 2005, Ms. Brundage was a
partner in the law firm of White & Case LLP,
where she headed the securities practice in New York and
co-chaired its global securities practice.
Before joining the Corporation in 2008, Mr. Spiro was an
investment banker at Citigroup Global Markets Inc., where he
served as a Managing Director in Citigroups financial
institutions investment banking group.
20
PART
II.
|
|
Item 5.
|
Market
for the Registrants Common Stock and Related Stockholder
Matters
|
The common stock of Chubb is listed and principally traded on
the New York Stock Exchange (NYSE) under the trading symbol
CB. The following are the high and low closing sale
prices as reported on the NYSE Composite Tape and the quarterly
dividends declared per share for each quarter of 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Common stock prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
54.38
|
|
|
$
|
54.65
|
|
|
$
|
64.50
|
|
|
$
|
53.06
|
|
Low
|
|
|
48.02
|
|
|
|
49.01
|
|
|
|
45.61
|
|
|
|
38.75
|
|
Dividends declared
|
|
|
.33
|
|
|
|
.33
|
|
|
|
.33
|
|
|
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Common stock prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
53.34
|
|
|
$
|
55.91
|
|
|
$
|
54.63
|
|
|
$
|
55.52
|
|
Low
|
|
|
48.82
|
|
|
|
51.68
|
|
|
|
47.36
|
|
|
|
49.80
|
|
Dividends declared
|
|
|
.29
|
|
|
|
.29
|
|
|
|
.29
|
|
|
|
.29
|
|
At February 13, 2009, there were approximately
8,900 common shareholders of record.
The declaration and payment of future dividends to Chubbs
shareholders will be at the discretion of Chubbs Board of
Directors and will depend upon many factors, including the
Corporations operating results, financial condition and
capital requirements, and the impact of regulatory constraints
discussed in Note (18)(f) of the Notes to Consolidated
Financial Statements.
The following table summarizes the stock repurchased by Chubb
during each month in the quarter ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Shares that May Yet Be
|
|
|
|
Number of
|
|
|
|
|
|
Part of Publicly
|
|
|
Purchased Under
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
the Plans or
|
|
Period
|
|
Purchased(a)
|
|
|
Paid Per Share
|
|
|
Programs
|
|
|
Programs(b)
|
|
|
October 2008
|
|
|
1,921,900
|
|
|
$
|
43.61
|
|
|
|
1,921,900
|
|
|
|
1,478,982
|
|
November 2008
|
|
|
860,200
|
|
|
|
45.66
|
|
|
|
860,200
|
|
|
|
618,782
|
|
December 2008
|
|
|
834,882
|
|
|
|
48.37
|
|
|
|
834,882
|
|
|
|
19,783,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,616,982
|
|
|
|
45.20
|
|
|
|
3,616,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The stated amounts exclude 6,971 shares and
8,493 shares delivered to Chubb during the months of
November 2008 and December 2008, respectively, by
employees of the Corporation to cover option exercise prices and
withholding taxes in connection with the Corporations
stock-based compensation plans.
|
|
|
(b) |
On December 13, 2007, the Board of Directors authorized the
repurchase of up to 28,000,000 shares of common stock. No
shares remain under this share repurchase authorization. On
December 4, 2008, the Board of Directors authorized the
repurchase of up to 20,000,000 additional shares of common
stock. The authorization has no expiration date.
|
21
Stock
Performance Graph
The following performance graph compares the performance of
Chubbs common stock during the five-year period from
December 31, 2003 through December 31, 2008 with the
performance of the Standard & Poors 500 Index
and the Standard & Poors Property & Casualty
Insurance Index. The graph plots the changes in value of an
initial $100 investment over the indicated time periods,
assuming all dividends are reinvested.
Cumulative
Total Return
Based upon an initial investment of $100 on December 31,
2003
with dividends reinvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
Chubb
|
|
$
|
100
|
|
|
$
|
115
|
|
|
$
|
150
|
|
|
$
|
165
|
|
|
$
|
174
|
|
|
$
|
167
|
|
S&P 500
|
|
|
100
|
|
|
|
111
|
|
|
|
116
|
|
|
|
135
|
|
|
|
142
|
|
|
|
90
|
|
S&P 500 Property & Casualty Insurance
|
|
|
100
|
|
|
|
110
|
|
|
|
127
|
|
|
|
143
|
|
|
|
123
|
|
|
|
87
|
|
Our filings with the Securities and Exchange Commission (SEC)
may incorporate information by reference, including this Form
10-K. Unless we specifically state otherwise, the information
under this heading Stock Performance Graph shall not
be deemed to be soliciting materials and shall not
be deemed to be filed with the SEC or incorporated
by reference into any of our filings under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.
22
Item 6. Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions except for per share amounts)
|
|
FOR THE YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$
|
11,828
|
|
|
$
|
11,946
|
|
|
$
|
11,958
|
|
|
$
|
12,176
|
|
|
$
|
11,636
|
|
Investment Income
|
|
|
1,652
|
|
|
|
1,622
|
|
|
|
1,485
|
|
|
|
1,342
|
|
|
|
1,207
|
|
Other Revenues
|
|
|
4
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
108
|
|
|
|
154
|
|
|
|
315
|
|
|
|
181
|
|
|
|
116
|
|
Realized Investment Gains
(Losses), Net
|
|
|
(371
|
)
|
|
|
374
|
|
|
|
245
|
|
|
|
384
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
13,221
|
|
|
$
|
14,107
|
|
|
$
|
14,003
|
|
|
$
|
14,083
|
|
|
$
|
13,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Income
|
|
$
|
1,361
|
|
|
$
|
2,116
|
|
|
$
|
1,905
|
|
|
$
|
921
|
(a)
|
|
$
|
846
|
|
Investment Income
|
|
|
1,622
|
|
|
|
1,590
|
|
|
|
1,454
|
|
|
|
1,315
|
|
|
|
1,184
|
|
Other Income (Charges)
|
|
|
9
|
|
|
|
6
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
Insurance Income
|
|
|
2,992
|
|
|
|
3,712
|
|
|
|
3,369
|
|
|
|
2,235
|
|
|
|
2,026
|
|
Corporate and Other
|
|
|
(214
|
)
|
|
|
(149
|
)
|
|
|
(89
|
)
|
|
|
(172
|
)
|
|
|
(176
|
)
|
Realized Investment Gains
(Losses), Net
|
|
|
(371
|
)
|
|
|
374
|
|
|
|
245
|
|
|
|
384
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
|
|
2,407
|
|
|
|
3,937
|
|
|
|
3,525
|
|
|
|
2,447
|
|
|
|
2,068
|
|
Federal and Foreign Income Tax
|
|
|
603
|
|
|
|
1,130
|
|
|
|
997
|
|
|
|
621
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,804
|
|
|
$
|
2,807
|
|
|
$
|
2,528
|
|
|
$
|
1,826
|
|
|
$
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4.92
|
|
|
$
|
7.01
|
|
|
$
|
5.98
|
|
|
$
|
4.47
|
|
|
$
|
4.01
|
|
Dividends Declared on
Common Stock
|
|
|
1.32
|
|
|
|
1.16
|
|
|
|
1.00
|
|
|
|
.86
|
|
|
|
.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
48,429
|
|
|
$
|
50,574
|
|
|
$
|
50,277
|
|
|
$
|
48,061
|
|
|
$
|
44,260
|
|
Long Term Debt
|
|
|
3,975
|
|
|
|
3,460
|
|
|
|
2,466
|
|
|
|
2,467
|
|
|
|
2,814
|
|
Total Shareholders Equity
|
|
|
13,432
|
|
|
|
14,445
|
|
|
|
13,863
|
|
|
|
12,407
|
|
|
|
10,126
|
|
Book Value Per Share
|
|
|
38.13
|
|
|
|
38.56
|
|
|
|
33.71
|
|
|
|
29.68
|
|
|
|
26.28
|
|
|
|
(a) |
Underwriting income in 2005 reflected net costs of
$462 million ($300 million
after-tax or
$0.74 per share) related to Hurricane Katrina.
|
23
|
|
Item
7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses the financial condition of
the Corporation as of December 31, 2008 compared with
December 31, 2007 and the results of operations for each of
the three years in the period ended December 31, 2008. This
discussion should be read in conjunction with the consolidated
financial statements and related notes and the other information
contained in this report.
INDEX
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
25
|
|
|
|
|
27
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
29
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
33
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
45
|
|
|
|
|
45
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
54
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
56
|
|
|
|
|
58
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
61
|
|
24
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this document are forward-looking
statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 (PSLRA). These
forward-looking statements are made pursuant to the safe harbor
provisions of the PSLRA and include statements regarding our
loss reserve and reinsurance recoverable estimates; the impact
of future catastrophes (including acts of terrorism); asbestos
and toxic waste liability developments; the number and severity
of surety-related claims as well as surety market conditions;
the impact of changes to our reinsurance program in 2007 and
2008 and the cost and availability of reinsurance in 2009; the
adequacy of the rates at which we renewed and wrote new
business; premium volume and competition in 2009; property and
casualty investment income during 2009; changes in the value of
our limited partnership investments during the first quarter of
2009; securities in our investment portfolio that may become
other-than-temporarily impaired; cash flows generated by our
fixed income investments; the impact of dislocations in the
property and casualty insurance market, the ongoing economic
downturn and currency rate fluctuations; estimates with respect
to our credit derivatives exposure; the repurchase of common
stock under our share repurchase program; our capital adequacy
and funding of liquidity needs; and the impact of the
amortization of net losses relating to our pension and other
postretirement benefit plans. Forward-looking statements are
made based upon managements current expectations and
beliefs concerning trends and future developments and their
potential effects on us. These statements are not guarantees of
future performance. Actual results may differ materially from
those suggested by forward-looking statements as a result of
risks and uncertainties, which include, among others, those
discussed or identified from time to time in our public filings
with the Securities and Exchange Commission and those associated
with:
|
|
|
|
|
global political conditions and the occurrence of terrorist
attacks, including any nuclear, biological, chemical or
radiological events;
|
|
|
|
the effects of the outbreak or escalation of war or hostilities;
|
|
|
|
premium pricing and profitability or growth estimates overall or
by lines of business or geographic area, and related
expectations with respect to the timing and terms of any
required regulatory approvals;
|
|
|
|
adverse changes in loss cost trends;
|
|
|
|
our ability to retain existing business and attract new business;
|
|
|
|
our expectations with respect to cash flow and investment income
and with respect to other income;
|
|
|
|
the adequacy of loss reserves, including:
|
|
|
|
|
|
our expectations relating to reinsurance recoverables;
|
|
|
|
the willingness of parties, including us, to settle disputes;
|
|
|
|
developments in judicial decisions or regulatory or legislative
actions relating to coverage and liability, in particular, for
asbestos, toxic waste and other mass tort claims;
|
|
|
|
development of new theories of liability;
|
|
|
|
our estimates relating to ultimate asbestos liabilities;
|
|
|
|
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;
|
25
|
|
|
|
|
the occurrence of significant weather-related or other natural
or human-made disasters, particularly in locations where we have
concentrations of risk;
|
|
|
|
the impact of economic factors on companies on whose behalf we
have issued surety bonds, and in particular, on those companies
that file for bankruptcy or otherwise experience deterioration
in creditworthiness;
|
|
|
|
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, in
particular contingent commissions and loss mitigation and finite
reinsurance arrangements, arising from any legal or regulatory
proceedings, related settlements and industry reform, including
changes that have been announced and changes that may occur in
the future;
|
|
|
|
the impact of legislative and regulatory developments on our
business, including those relating to terrorism, catastrophes
and the financial markets;
|
|
|
|
any downgrade in our claims-paying, financial strength or other
credit ratings;
|
|
|
|
the ability of our subsidiaries to pay us dividends;
|
|
|
|
general economic and market conditions including:
|
|
|
|
|
|
changes in interest rates, market credit spreads and the
performance of the financial markets;
|
|
|
|
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.
26
CRITICAL
ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on
informed estimates and judgments of management for transactions
that are not yet complete. Such estimates and judgments affect
the reported amounts in the financial statements. Those
estimates and judgments that were most critical to the
preparation of the financial statements involved the
determination of loss reserves and the recoverability of related
reinsurance recoverables and the evaluation of whether a decline
in value of any investment is temporary or other-than-temporary.
These estimates and judgments, which are discussed within the
following analysis of our results of operations, require the use
of assumptions about matters that are highly uncertain and
therefore are subject to change as facts and circumstances
develop. If different estimates and judgments had been applied,
materially different amounts might have been reported in the
financial statements.
OVERVIEW
The following highlights do not address all of the matters
covered in the other sections of Managements Discussion
and Analysis of Financial Condition and Results of Operations or
contain all of the information that may be important to
Chubbs shareholders or the investing public. This overview
should be read in conjunction with the other sections of
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
|
|
|
|
|
Net income was $1.8 billion in 2008 compared with
$2.8 billion in 2007 and $2.5 billion in 2006. The
lower net income in 2008 was due primarily to two factors.
First, underwriting income in our property and casualty
insurance business was substantially lower in 2008 than in 2007
and 2006. Second, we had realized investment losses in 2008
compared with realized investment gains in 2007 and 2006.
|
|
|
|
Underwriting results were highly profitable in 2008, 2007 and
2006, but more so in 2007 and 2006. Our combined loss and
expense ratio was 88.7% in 2008 compared with 82.9% in 2007 and
84.2% in 2006. The less profitable results in 2008 were due in
large part to higher catastrophe losses and the cumulative
impact of rate reductions experienced in our commercial and
professional liability classes over the past several years. The
impact of catastrophes accounted for 5.1 percentage points
of the combined ratio in 2008 compared with 3.0 percentage
points in 2007 and 1.4 percentage points in 2006.
|
|
|
|
During 2008, we experienced overall favorable development of
$873 million on loss reserves established as of the
previous year end, due primarily to favorable loss experience in
certain professional liability and commercial liability classes
as well as lower than expected emergence of losses in the
homeowners and commercial property classes. During 2007, we
experienced overall favorable development of $697 million
due primarily to favorable loss trends in the professional
liability classes, lower than expected emergence of losses in
the homeowners and commercial property classes and better than
expected reported loss activity in the run-off of our
reinsurance assumed business. During 2006, we experienced
overall favorable development of $296 million due primarily
to lower than expected emergence of losses in the homeowners and
commercial property classes.
|
|
|
|
Total net premiums written decreased by 1% in both 2008 and
2007. The lack of growth in both years reflected our continued
emphasis on underwriting discipline in a highly competitive
market environment. Net premiums written in the United States
decreased by 2% in 2008 and 1% in 2007. Net premiums written
outside the United States increased by 6% in 2008 and 10% in
2007; such growth was largely attributable to the impact of
currency fluctuation.
|
|
|
|
Property and casualty investment income after tax increased by
2% in 2008 and 9% in 2007. The growth in 2008 was limited as
average invested assets increased only modestly during the year.
For more information on this non-GAAP financial measure, see
Property and Casualty Insurance Investment
Results.
|
27
|
|
|
|
|
Net realized investment losses before taxes were
$371 million in 2008 compared with net realized gains
before taxes of $374 million in 2007 and $245 million
in 2006. The net realized losses in 2008 were primarily
attributable to other-than-temporary impairment losses on equity
securities. The net realized gains in 2007 and 2006 were
primarily attributable to gains from investments in limited
partnerships.
|
A summary of our consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Property and casualty insurance
|
|
$
|
2,992
|
|
|
$
|
3,712
|
|
|
$
|
3,369
|
|
Corporate and other
|
|
|
(214
|
)
|
|
|
(149
|
)
|
|
|
(89
|
)
|
Realized investment gains (losses)
|
|
|
(371
|
)
|
|
|
374
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income tax
|
|
|
2,407
|
|
|
|
3,937
|
|
|
|
3,525
|
|
Federal and foreign income tax
|
|
|
603
|
|
|
|
1,130
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
1,804
|
|
|
$
|
2,807
|
|
|
$
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND CASUALTY INSURANCE
A summary of the results of operations of our property and
casualty insurance business is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Underwriting
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
11,782
|
|
|
$
|
11,872
|
|
|
$
|
11,974
|
|
Decrease (increase) in unearned premiums
|
|
|
46
|
|
|
|
74
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
11,828
|
|
|
|
11,946
|
|
|
|
11,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses
|
|
|
6,898
|
|
|
|
6,299
|
|
|
|
6,574
|
|
Operating costs and expenses
|
|
|
3,546
|
|
|
|
3,564
|
|
|
|
3,467
|
|
Increase in deferred policy acquisition costs
|
|
|
(17
|
)
|
|
|
(52
|
)
|
|
|
(19
|
)
|
Dividends to policyholders
|
|
|
40
|
|
|
|
19
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
1,361
|
|
|
|
2,116
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before expenses
|
|
|
1,652
|
|
|
|
1,622
|
|
|
|
1,485
|
|
Investment expenses
|
|
|
30
|
|
|
|
32
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,622
|
|
|
|
1,590
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
9
|
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax
|
|
$
|
2,992
|
|
|
$
|
3,712
|
|
|
$
|
3,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty investment income after tax
|
|
$
|
1,297
|
|
|
$
|
1,273
|
|
|
$
|
1,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax in 2008 was lower than
in 2007 due to substantially lower underwriting income. The
decrease in underwriting income in 2008 was due in large part to
higher catastrophe losses and the cumulative impact of rate
reductions experienced over the past several years in our
commercial and specialty insurance businesses. Property and
casualty income before tax in 2007 was higher than in 2006 due
to higher underwriting income, particularly in our specialty
insurance business, as well as a substantial increase in
investment income due to an increase in invested assets.
28
The profitability of our property and casualty insurance
business depends on the results of both our underwriting and
investment operations. We view these as two distinct operations
since the underwriting functions are managed separately from the
investment function. Accordingly, in assessing our performance,
we evaluate underwriting results separately from investment
results.
Underwriting
Operations
Underwriting
Results
We evaluate the underwriting results of our property and
casualty insurance business in the aggregate and also for each
of our separate business units.
Net
Premiums Written
Net premiums written amounted to $11.8 billion in 2008, a
decrease of 1% compared with 2007. Net premiums written in 2007
decreased 1% compared with 2006.
Net premiums written by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
2008
|
|
|
2008 vs. 2007
|
|
|
2007
|
|
|
2007 vs. 2006
|
|
|
2006
|
|
|
|
(dollars in millions)
|
|
|
Personal insurance
|
|
$
|
3,826
|
|
|
|
3
|
%
|
|
$
|
3,709
|
|
|
|
5
|
%
|
|
$
|
3,518
|
|
Commercial insurance
|
|
|
4,993
|
|
|
|
(2
|
)
|
|
|
5,083
|
|
|
|
(1
|
)
|
|
|
5,125
|
|
Specialty insurance
|
|
|
2,899
|
|
|
|
(2
|
)
|
|
|
2,944
|
|
|
|
|
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
11,718
|
|
|
|
|
|
|
|
11,736
|
|
|
|
1
|
|
|
|
11,584
|
|
Reinsurance assumed
|
|
|
64
|
|
|
|
(53
|
)
|
|
|
136
|
|
|
|
(65
|
)
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,782
|
|
|
|
(1
|
)
|
|
$
|
11,872
|
|
|
|
(1
|
)
|
|
$
|
11,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written from our insurance business were flat in
2008 compared with 2007 and grew 1% in 2007 compared with 2006.
Premiums in the United States, which represent about 75% of our
insurance premiums, decreased 2% in 2008 and 1% in 2007.
Insurance premiums outside the U.S. grew 6% in 2008 and 10%
in 2007. The growth outside the U.S. in 2008 and 2007 was
largely attributable to the impact of currency fluctuation due
to the weakness of the U.S. dollar. In both years, such
growth was 3% when measured in local currencies.
The overall lack of premium growth in both 2008 and 2007
reflected our continued emphasis on underwriting discipline in a
highly competitive market environment. Rates were under
competitive pressure that varied by class of business and
geographic area. In both years, we retained a high percentage of
our existing customers and renewed these accounts at what we
believe are acceptable rates relative to the risks. While we
continued to be disciplined, we found opportunities to write new
business at acceptable rates; however, the number of such
opportunities declined throughout 2007 and most of 2008.
During the second half of 2008, the property and casualty
insurance market experienced disruption as a result of broader
issues in the financial markets and the economies of the United
States and other countries. The crisis in the financial markets
had an adverse impact on some of our competitors. This has
resulted in an increase in opportunities for us to write new
business and we expect further opportunities in 2009. There are
some factors that indicate that rates should increase during
2009, but the timing and magnitude of those changes are
difficult to predict. Although these developments should have a
positive effect on our business in 2009, we expect that the
continued economic downturn will negatively impact our business
in 2009. We expect net written premiums, excluding the impact of
currency fluctuation, will be flat to modestly higher in 2009
compared with 2008. Assuming the foreign currency to U.S. dollar
29
exchange rates remain at current levels, premium growth
expressed in U.S. dollars would be adversely affected, resulting
in a modest decrease in premiums in 2009 compared to 2008.
Net reinsurance assumed premiums written decreased by 53% in
2008 and 65% in 2007. The significant premium decline reflects
the sale of our ongoing reinsurance assumed business to Harbor
Point Limited in December 2005, which is discussed below.
Reinsurance
Ceded
Our premiums written are net of amounts ceded to reinsurers, who
assume a portion of the risk under certain insurance policies we
write that are subject to the reinsurance.
Reinsurance rates generally remained steady in 2007 due in part
to a relatively low level of catastrophes in 2006. Capacity
restrictions continued in some segments of the marketplace in
both years. Our overall reinsurance costs were similar in 2007
and 2006.
We did not renew our casualty clash treaty in 2007 as we
believed the cost was not justified given the limited capacity
and terms available. The treaty had provided coverage of
approximately 55% of losses between $75 million and
$150 million per insured event.
On our commercial property per risk treaty, in 2007 we increased
the reinsurance coverage at the top of the program by
$100 million.
The structure of our property catastrophe program for events in
the United States was modified in 2007 but the overall coverage
was similar to the previous program. In place of traditional
reinsurance, we purchased fully collateralized four-year
reinsurance coverage for homeowners-related losses sustained
from qualifying hurricane loss events in the northeastern part
of the United States. This reinsurance was purchased from East
Lane Re Ltd., a Cayman Islands reinsurance company, which
financed the provision of reinsurance through the issuance of
$250 million in catastrophe bonds to investors under two
separate bond tranches.
Reinsurance rates for property risks declined somewhat in 2008.
Capacity restrictions for certain coverages continued in the
marketplace. The overall cost of our property reinsurance
program was modestly lower in 2008 than that in 2007.
On our commercial property per risk treaty, in 2008 we increased
the reinsurance coverage in the top layer of the treaty by
$60 million. This treaty now provides approximately
$560 million of coverage per risk in excess of our
$25 million retention.
The structure of our property catastrophe program for events in
the United States was again modified in 2008, but the overall
coverage remains similar to the previous program. We purchased
$200 million of fully collateralized three-year reinsurance
coverage in place of traditional reinsurance. This reinsurance
was purchased from East Lane Re II Ltd., a Cayman Islands
reinsurance company, which financed the provision of reinsurance
through the issuance of $200 million in catastrophe bonds
to investors under three separate bond tranches. The current
traditional catastrophe reinsurance treaty, in combination with
the collateralized coverage purchased in 2008, provides coverage
of approximately 70% of losses (net of recoveries from other
available reinsurance) between $350 million and
$1.3 billion, with additional coverage of about 60% of
losses between $1.3 billion and $2.05 billion in the
northeastern part of the United States, where we have our
greatest concentration of catastrophe exposure.
The fully collateralized four-year reinsurance coverage
purchased in 2007 for homeowners-related losses sustained from
qualifying hurricane loss events in the northeastern part of the
United States remains in effect and now provides coverage of
approximately 30% of covered losses between $1.35 billion
and $2.2 billion.
We have additional reinsurance from the Florida Hurricane
Catastrophe Fund, which is a state-mandated fund designed to
reimburse insurers for a portion of their residential
catastrophic hurricane
30
losses. Our participation in this program limits our initial
retention in Florida for homeowners-related losses to
approximately $185 million.
On our property catastrophe treaty for events outside the United
States, in 2008, we increased the reinsurance coverage in the
top layer of the treaty by $50 million and modestly
increased our participation in the program. The treaty now
provides coverage of approximately 85% of losses (net of
recoveries from other available reinsurance) between
$75 million and $325 million.
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.
We do not expect the changes we made to our reinsurance program
during 2007 and 2008 to have a material effect on the
Corporations results of operations, financial condition or
liquidity.
Most of our ceded reinsurance arrangements consist of excess of
loss and catastrophe contracts that protect against a specified
part or all of certain types of losses over stipulated amounts
arising from any one occurrence or event. Therefore, unless we
incur losses that exceed our initial retention under these
contracts, we do not receive any loss recoveries. As a result,
in certain years, we cede premiums to other insurance companies
and receive few, if any, loss recoveries. However, in a year in
which there is a significant catastrophic event or a series of
large individual losses, we may receive substantial loss
recoveries. The impact of ceded reinsurance on net premiums
written and earned and on net losses and loss expenses incurred
for the three years ended December 31, 2008 is presented in
Note (10) of the Notes to Consolidated Financial Statements.
Our property reinsurance treaties represent the most significant
component of our reinsurance program. Our major property
reinsurance treaties expire on April 1, 2009. While we
expect that reinsurance rates for property risks will increase
in 2009, the final structure of our program and amount of
coverage purchased will be determinants of our total reinsurance
costs in 2009.
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.
31
Underwriting results were highly profitable in each of the last
three years, but somewhat less so in 2008. The combined loss and
expense ratio for our overall property and casualty business was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loss ratio
|
|
|
58.5
|
%
|
|
|
52.8
|
%
|
|
|
55.2
|
%
|
Expense ratio
|
|
|
30.2
|
|
|
|
30.1
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined loss and expense ratio
|
|
|
88.7
|
%
|
|
|
82.9
|
%
|
|
|
84.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The relatively low loss ratio in each of the last three years
reflected the favorable loss experience which we believe
resulted from our disciplined underwriting in recent years.
Results in all three years, particularly 2008 and 2007,
benefited from favorable prior year loss development. For more
information on prior year loss development, see Property
and Casualty Insurance-Loss Reserves, Prior Year Loss
Development. The loss ratio was higher in 2008
compared to 2007 due to higher catastrophe losses as well as
declining earned premium rates and several large non-catastrophe
losses. The loss ratio improved in 2007 compared to 2006 due to
mild loss trends in certain classes of business.
In 2008, net catastrophe losses incurred were $607 million,
which represented 5.1 percentage points of the loss ratio.
About $310 million of the catastrophe losses in 2008
related to Hurricane Ike, including our estimated share of an
assessment from the Texas Windstorm Insurance Association, a
windstorm insurance entity created by the State of Texas. Net
catastrophe losses incurred were $363 million in 2007,
which represented 3.0 percentage points of the loss ratio.
Net catastrophe losses incurred in 2006 were $173 million,
which were offset in part by a $20 million reduction in
previously accrued reinsurance reinstatement premium costs
related to Hurricane Katrina. The net impact of catastrophes in
2006 accounted for 1.4 percentage points of the loss ratio.
We did not have any recoveries from our catastrophe reinsurance
treaties during the three year period ended December 31,
2008 because there was no individual catastrophe for which our
losses exceeded our retention under the treaties.
Our expense ratio was similar in 2008 and 2007, as an increase
in commissions was substantially offset by lower operating costs
related to the run-off of our reinsurance business. The increase
in commissions was largely the result of premium growth outside
the United States in countries where commission rates are higher
than in the United States as well as modestly higher commission
rates in the United States in certain classes of business. The
compensation and other operating cost component of our expense
ratio related to our ongoing businesses was identical in both
years. The expense ratio increased in 2007 compared to 2006 due
primarily to higher commissions, largely the result of premium
growth outside the United States in certain classes of business
with relatively higher commission rates.
In lieu of paying contingent commissions, beginning in 2007, we
implemented a new guaranteed supplemental compensation program
for agents and brokers in the United States with whom we
previously had contingent commission agreements. Under this
arrangement, agents and brokers are paid a percentage of written
premiums on eligible lines of business in a calendar year based
upon their prior performance. The change in our commission
arrangements created a difference in the timing of expense
recognition, which resulted in a one-time benefit to income
during the 2007 transition year. The impact of the change in
2007 was to increase deferred policy acquisition costs by
approximately $70 million. The change had no effect on the
expense ratio.
32
Review of
Underwriting Results by Business Unit
Personal
Insurance
Net premiums written from personal insurance, which represented
33% of our premiums written in 2008, increased by 3% in 2008 and
5% in 2007. Net premiums written for the classes of business
within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
2008
|
|
|
2008 vs. 2007
|
|
|
2007
|
|
|
2007 vs. 2006
|
|
|
2006
|
|
|
|
(dollars in millions)
|
|
|
Automobile
|
|
$
|
602
|
|
|
|
(3
|
)%
|
|
$
|
621
|
|
|
|
(7
|
)%
|
|
$
|
670
|
|
Homeowners
|
|
|
2,449
|
|
|
|
1
|
|
|
|
2,423
|
|
|
|
7
|
|
|
|
2,268
|
|
Other
|
|
|
775
|
|
|
|
17
|
|
|
|
665
|
|
|
|
15
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
$
|
3,826
|
|
|
|
3
|
|
|
$
|
3,709
|
|
|
|
5
|
|
|
$
|
3,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal automobile premiums decreased in 2008 and 2007 due to a
highly competitive U.S. marketplace. The termination of a
collector vehicle program also contributed to the decrease in
2007. Premium growth in our homeowners business was constrained
in 2008 due to an increasingly competitive market as well as the
slowdown in new housing construction as a result of the downturn
in the U.S. economy in the last half of the year. The
premium growth in 2007 was due primarily to increases in
coverage relative to increases in the replacement cost of
insured properties. The in-force policy count for this class of
business decreased slightly in 2008 and was relatively flat in
2007 compared to 2006. Our other personal business includes
insurance for excess liability, yacht and accident and health
coverages. The substantial growth in this business in 2008 and
2007 was due primarily to a significant increase in accident and
health premiums. Growth in accident and health business was
particularly strong outside the United States in both years;
growth was also strong in 2008 in the United States due in large
part to a select initiative. Excess liability premiums also grew
in both years, although more so in 2007, due in part to a modest
increase in rates.
Our personal insurance business produced highly profitable
underwriting results in each of the last three years, but less
so in each succeeding year. The combined loss and expense ratios
for the classes of business within the personal insurance
segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Automobile
|
|
|
87.6
|
%
|
|
|
89.8
|
%
|
|
|
90.4
|
%
|
Homeowners
|
|
|
83.7
|
|
|
|
80.2
|
|
|
|
74.6
|
|
Other
|
|
|
97.5
|
|
|
|
96.4
|
|
|
|
98.6
|
|
Total personal
|
|
|
87.1
|
|
|
|
84.8
|
|
|
|
81.7
|
|
Our personal automobile results were profitable in each of the
past three years. Results in all three years benefited from
lower claim frequency and modest favorable prior year loss
development.
Homeowners results were highly profitable in each of the last
three years. Results in 2008 were adversely impacted by the
higher severity of large non-catastrophe losses. Results in 2006
benefited from relatively low catastrophe losses. The impact of
catastrophes accounted for 7.8 percentage points of the
combined loss and expense ratio for this class in 2008 compared
with 9.6 percentage points in 2007 and 5.7 percentage
points in 2006.
Other personal business produced modestly profitable results in
each of the past three years. Our accident and health business
was profitable in 2008 compared with highly profitable results
in 2007 and 2006. Our yacht business was unprofitable in 2008
compared with profitable results in 2007 and 2006. Yacht results
in 2008 were adversely affected by several large non-catastrophe
losses as well as several losses related to Hurricane Ike. Our
excess liability business showed significant improvement in
2008,
33
producing near breakeven results. Results for this business were
unprofitable in 2007 and more so in 2006 due to inadequate
pricing and unfavorable prior year loss development.
Commercial
Insurance
Net premiums written from commercial insurance, which
represented 42% of our premiums written in 2008, decreased by 2%
in 2008 and 1% in 2007. Net premiums written for the classes of
business within the commercial insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
2008
|
|
|
2008 vs. 2007
|
|
|
2007
|
|
|
2007 vs. 2006
|
|
|
2006
|
|
|
|
(dollars in millions)
|
|
|
Multiple peril
|
|
$
|
1,210
|
|
|
|
(3
|
)%
|
|
$
|
1,252
|
|
|
|
(3
|
)%
|
|
$
|
1,290
|
|
Casualty
|
|
|
1,654
|
|
|
|
(4
|
)
|
|
|
1,726
|
|
|
|
|
|
|
|
1,731
|
|
Workers compensation
|
|
|
851
|
|
|
|
(4
|
)
|
|
|
890
|
|
|
|
(1
|
)
|
|
|
901
|
|
Property and marine
|
|
|
1,278
|
|
|
|
5
|
|
|
|
1,215
|
|
|
|
1
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
4,993
|
|
|
|
(2
|
)
|
|
$
|
5,083
|
|
|
|
(1
|
)
|
|
$
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in premiums in most of our commercial classes in
2008 and 2007 reflected the highly competitive marketplace,
particularly for new business. Growth in the property and marine
classes in 2008 was primarily from a syndicated large risks
program in both the U.S. and outside the U.S. and a
marine initiative. The competitive rate pressures in 2006 in
some of the commercial classes continued in 2007. These
pressures affected all classes of business in the second half of
2007 and throughout 2008, particularly for new business. This
resulted in modest decreases in renewal rates in most classes in
both years. Rate declines were more pronounced in certain
classes, such as workers compensation and large property
risks, and also varied by geographic area.
Retention levels of our existing customers remained steady over
the last three years. New business volume was slightly higher in
2007 but down in 2008 compared with the respective prior years.
The increase in 2007 was due to a few large accounts written in
the first half of the year. New business volume in the second
half of 2007 and throughout 2008 was down as it became more
difficult to find new opportunities at acceptable rates.
We have continued to maintain our underwriting discipline in the
highly competitive market, renewing business and writing new
business only where we believe we are securing acceptable rates
and appropriate terms and conditions for the exposures.
Our commercial insurance business produced less profitable
underwriting results in 2008 than in 2007 and 2006. The less
profitable results in 2008 were largely due to substantially
higher catastrophe losses in the multiple peril and property and
marine classes, primarily from Hurricane Ike. The impact of
catastrophes accounted for 8.1 percentage points of the
combined loss and expense ratio for our commercial insurance
business in 2008, whereas such impact was 2.6 percentage
points in 2007 and negligible in 2006. Results in all three
years benefited from favorable loss experience, disciplined risk
selection and appropriate terms and conditions in recent years.
34
The combined loss and expense ratios for the classes of business
within commercial insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Multiple peril
|
|
|
85.3
|
%
|
|
|
80.8
|
%
|
|
|
75.8
|
%
|
Casualty
|
|
|
95.0
|
|
|
|
94.6
|
|
|
|
96.8
|
|
Workers compensation
|
|
|
82.1
|
|
|
|
77.6
|
|
|
|
80.4
|
|
Property and marine
|
|
|
108.8
|
|
|
|
84.3
|
|
|
|
72.5
|
|
Total commercial
|
|
|
93.9
|
|
|
|
85.8
|
|
|
|
83.1
|
|
Multiple peril results were highly profitable in each of the
past three years. The less profitable results in 2008 were in
the property component of this business largely due to higher
catastrophe losses. The impact of catastrophes accounted for
8.5 percentage points of the combined loss and expense
ratio for this class in 2008 compared with 1.7 percentage
points in 2007 and 2.9 percentage points in 2006. The
property component benefited from low non-catastrophe losses in
all three years, particularly outside the United States in 2008.
Results in the liability component were highly profitable in all
three years.
Results for our casualty business were similarly profitable in
each of the past three years. The automobile component of our
casualty business was highly profitable in each of the past
three years, but more so in 2006. Results in the primary
liability component were profitable in each of the past three
years. Results in the excess liability component were profitable
in 2008 and, to a lesser extent, in 2007, compared with
unprofitable results in 2006. Excess liability results in 2008
and 2007 benefited from favorable prior year loss development,
whereas results in 2006 were adversely affected by unfavorable
loss development. Casualty results in 2008 and 2007 were
adversely affected by incurred losses related to asbestos and
toxic waste claims. Our analysis of these exposures resulted in
increases in the estimate of our ultimate liabilities. Such
losses represented 5.9 percentage points of the combined
loss and expense ratio for this class in 2008 and
5.3 percentage points in 2007. The impact of such losses
was not significant in 2006.
Workers compensation results were highly profitable in
each of the past three years. Results in all three years
benefited from our disciplined risk selection during the past
several years as well as favorable claim cost trends, resulting
in part from the positive effect of reforms in California. The
modestly less profitable results in 2008 were primarily due to
lower earned premiums, which were due to rate reductions
associated with state reforms and increased competition.
Property and marine results were unprofitable in 2008 compared
with highly profitable results in 2007 and 2006. The
deterioration in 2008 results was due primarily to higher
catastrophe losses, and to a lesser extent, an increase in the
frequency and severity of large non-catastrophe losses.
Catastrophe losses accounted for 22.1 percentage points of
the combined loss and expense ratio in 2008 and
8.2 percentage points in 2007. The impact of catastrophes
was negligible in 2006. Excluding the impact of catastrophes,
the combined ratio was 86.7%, 76.1% and 73.4% in 2008, 2007 and
2006, respectively.
35
Specialty
Insurance
Net premiums written from specialty insurance, which represented
25% of our premiums written in 2008, decreased by 2% in 2008 and
were flat in 2007 compared with the respective prior years. Net
premiums written for the classes of business within the
specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
2008
|
|
|
2008 vs. 2007
|
|
|
2007
|
|
|
2007 vs. 2006
|
|
|
2006
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Professional liability
|
|
$
|
2,546
|
|
|
|
(2
|
)%
|
|
$
|
2,605
|
|
|
|
(1
|
)%
|
|
$
|
2,641
|
|
Surety
|
|
|
353
|
|
|
|
4
|
|
|
|
339
|
|
|
|
13
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
$
|
2,899
|
|
|
|
(2
|
)
|
|
$
|
2,944
|
|
|
|
|
|
|
$
|
2,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in premiums in 2008 and 2007 for the professional
liability classes of business was due to the highly competitive
rate environment, particularly in the directors and officers
liability component, and our commitment to maintain underwriting
discipline in this environment.
Renewal rates for the professional liability classes declined in
2007 compared to 2006. This downward trend continued in 2008 in
most classes of business although it slowed as the year
progressed, with overall rates for the professional liability
classes being flat in the fourth quarter of 2008. Rates for
directors and officers liability and errors and omissions
liability insurance for financial institutions, however,
increased throughout 2008, particularly for those companies
implicated in the crisis in the financial markets. Retention
levels in the professional liability classes remained strong
over the last three years. New business volume declined modestly
in each of the past two years due to the aggressive competition
in the marketplace. Consistent with our strategy in recent
years, we continued to direct our focus on small and middle
market publicly traded and privately held companies. We
continued to get what we believe are acceptable rates and
appropriate terms and conditions on both new business and
renewals.
The substantial growth in net premiums written for our surety
business in 2007 was due primarily to strong public sector
construction. Growth slowed in 2008 due to a more competitive
environment and the impact of the weaker economy on the
construction business. We expect these conditions will persist
into 2009.
Our specialty insurance business produced profitable
underwriting results in each of the last three years. The
combined loss and expense ratios for the classes of business
within specialty insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Professional liability
|
|
|
85.0
|
%
|
|
|
82.4
|
%
|
|
|
91.8
|
%
|
Surety
|
|
|
69.9
|
|
|
|
35.4
|
|
|
|
44.2
|
|
Total specialty
|
|
|
83.3
|
|
|
|
77.4
|
|
|
|
87.5
|
|
Our professional liability business produced highly profitable
results in 2008 and 2007 compared with profitable results in
2006. The profitability of our professional liability business
was particularly strong outside the United States in 2008 and
2007. The employment practices liability and fiduciary liability
classes each produced highly profitable results in 2008 and
2007, compared to profitable results in 2006. The directors and
officers liability class was profitable in all three years,
particularly in 2007. Our errors and omissions liability
business produced near breakeven results in 2008 and 2007
compared with highly unprofitable results in 2006. The fidelity
class was highly profitable in each of the past three years.
36
Collectively, the results for the professional liability classes
benefited from favorable prior year loss development in 2008 and
in 2007 and, to a much lesser extent, in 2006, due to the
recognition of the positive loss trends we have been
experiencing related to accident years 2005 and prior. These
trends were largely the result of a favorable business climate,
lower policy limits and better terms and conditions. The
expected loss ratio for the 2008 accident year in our
professional liability business is above breakeven, and higher
than the prior two years, due in part to the uncertainty
surrounding the ongoing crisis in the financial markets.
Our surety business produced highly profitable results in each
of the past three years due to favorable loss experience.
Results in 2008 were less profitable than results in 2007 and
2006 due to the adverse impact of one large loss. Our surety
business tends to be characterized by infrequent but potentially
high severity losses. When losses occur, they are mitigated, at
times, by recovery rights to the customers assets,
contract payments, collateral and bankruptcy recoveries.
The majority of our surety obligations are intended to be
performance-based guarantees. We manage our exposure on an
absolute basis and by specific bond type. We have substantial
commercial and construction surety exposure for current and
prior customers, including exposures related to surety bonds
issued on behalf of companies that have experienced
deterioration in creditworthiness since we issued bonds to them.
We therefore may experience an increase in filed claims and may
incur high severity losses, especially in light of the ongoing
economic downturn. Such losses would be recognized if and when
claims are filed and determined to be valid, and could have a
material adverse effect on the Corporations results of
operations.
Reinsurance
Assumed
In December 2005, we completed a transaction involving a new
Bermuda-based reinsurance company, Harbor Point Limited. As part
of the transaction, we transferred our ongoing reinsurance
assumed business and certain related assets, including renewal
rights, to Harbor Point. Harbor Point generally did not assume
our reinsurance liabilities relating to reinsurance contracts
incepting prior to December 31, 2005. We retained those
liabilities and the related assets.
For a transition period of about two years, Harbor Point
underwrote specific reinsurance business on our behalf. We
retained a portion of this business and ceded the balance to
Harbor Point in return for a fronting commission. We received
additional payments based on the amount of business renewed by
Harbor Point. These amounts were recognized in income as earned.
Net premiums written from our reinsurance assumed business,
which is in run-off, decreased by 53% in 2008 and 65% in 2007.
The significant decrease in premiums in both years was expected
in light of the sale of our ongoing reinsurance assumed business
to Harbor Point.
Reinsurance assumed results were profitable in each of the past
three years. While the volume of business declined substantially
in each of the past three years, results in all three years,
particularly in 2007, benefited from significant 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
and from man-made catastrophic events such as terrorism. The
frequency and severity of catastrophes are inherently
unpredictable.
37
Natural
Catastrophes
The extent of losses from a natural catastrophe is a function of
both the total amount of insured exposure in an area affected by
the event and the severity of the event. We regularly assess our
concentration of risk exposures in catastrophe exposed areas
globally and have strategies and underwriting standards to
manage this exposure through individual risk selection, subject
to regulatory constraints, and through the purchase of
catastrophe reinsurance. We have invested in modeling
technologies and a risk concentration management tool that allow
us to monitor and control our accumulations of potential losses
in catastrophe exposed areas in the United States, such as
California and the gulf and east coasts, as well as in such
areas in other countries. Actual results may differ materially
from those suggested by the model. We also continue to actively
explore and analyze credible scientific evidence, including the
impact of global climate change, that may affect our ability to
manage exposure under the insurance policies we issue.
Despite these efforts, the occurrence of one or more severe
natural catastrophic events in heavily populated areas could
have a material adverse effect on the Corporations results
of operations, financial condition or liquidity.
Terrorism
Risk and Legislation
The September 11, 2001 attack changed the way the property
and casualty insurance industry views catastrophic risk. That
tragic event demonstrated that numerous classes of business we
write are subject to terrorism related catastrophic risks in
addition to the catastrophic risks related to natural
occurrences. This, together with the limited availability of
terrorism reinsurance, has required us to change how we identify
and evaluate risk accumulations. We have licensed a terrorism
model that provides loss estimates under numerous event
scenarios. Also, the above noted risk concentration management
tool enables us to identify locations and geographic areas that
are exposed to risk accumulations. The information provided by
the model and the tracking tool has resulted in our non-renewing
some accounts and has restricted us from writing others. Actual
results may differ materially from those suggested by the model.
The Terrorism Risk Insurance Act of 2002 (TRIA) established a
temporary program under which the federal government will share
the risk of loss arising from certain acts of foreign terrorism
with the insurance industry. The program, which was applicable
to most lines of commercial business, was scheduled to terminate
on December 31, 2005. In December 2005, TRIA was extended
through December 31, 2007. Certain lines of business
previously subject to the provisions of TRIA, including
commercial automobile, surety and professional liability
insurance, other than directors and officers liability, were
excluded from the program. In December 2007, TRIA was extended
through December 31, 2014. The amended law eliminated the
distinction between foreign and domestic acts of terrorism, now
providing protection from all acts of terrorism. Otherwise,
there were no significant changes to the key features of the
program.
As a precondition to recovery under TRIA, insurance companies
with direct commercial insurance exposure in the United States
for TRIA lines of business are required to make insurance for
covered acts of terrorism available under their policies. Each
insurer has a separate deductible that it must meet in the event
of an act of terrorism before federal assistance becomes
available. The deductible is based on a percentage of direct
U.S. earned premiums for the covered lines of business in
the previous calendar year. For 2009, that deductible is 20% of
direct premiums earned in 2008 for these lines of business. For
losses above the deductible, the federal government will pay for
85% of covered losses, while the insurer retains 15%. There is a
combined annual aggregate limit for the federal government and
all insurers of $100 billion. If acts of terrorism result
in covered losses exceeding the $100 billion annual limit,
insurers are not liable for additional losses. While the
provisions of TRIA will serve to mitigate our exposure in the
event of a large-scale terrorist attack, our deductible is
substantial, approximating $1 billion in 2009.
38
For certain classes of business, such as workers
compensation, terrorism insurance is mandatory. For those
classes of business where it is not mandatory, policyholders may
choose not to accept terrorism insurance, which would, subject
to other statutory or regulatory restrictions, reduce our
exposure.
We will continue to manage this type of catastrophic risk by
monitoring terrorism risk aggregations. Nevertheless, given the
unpredictability of the targets, frequency and severity of
potential terrorist events as well as the very limited terrorism
reinsurance coverage available in the market, the occurrence of
any such events could have a material adverse effect on the
Corporations results of operations, financial condition or
liquidity.
We also have exposure outside the United States to risk of loss
from acts of terrorism. In some jurisdictions, we have access to
government mechanisms that would mitigate our exposure.
Loss
Reserves
Unpaid losses and loss expenses, also referred to as loss
reserves, are the largest liability of our property and casualty
subsidiaries.
Our loss reserves include case estimates for claims that have
been reported and estimates for claims that have been incurred
but not reported at the balance sheet date as well as estimates
of the expenses associated with processing and settling all
reported and unreported claims, less estimates of anticipated
salvage and subrogation recoveries. Estimates are based upon
past loss experience modified for current trends as well as
prevailing economic, legal and social conditions. Our loss
reserves are not discounted to present value.
We regularly review our loss reserves using a variety of
actuarial techniques. We update the reserve estimates as
historical loss experience develops, additional claims are
reported
and/or
settled and new information becomes available. Any changes in
estimates are reflected in operating results in the period in
which the estimates are changed.
Incurred but not reported (IBNR) reserve estimates are generally
calculated by first projecting the ultimate cost of all claims
that have occurred and then subtracting reported losses and loss
expenses. Reported losses include cumulative paid losses and
loss expenses plus case reserves. The IBNR reserve includes a
provision for claims that have occurred but have not yet been
reported to us, some of which are not yet known to the insured,
as well as a provision for future development on reported
claims. A relatively large proportion of our net loss reserves,
particularly for long tail liability classes, are reserves for
IBNR losses. In fact, more than 70% of our aggregate net loss
reserves at December 31, 2008 were for IBNR losses.
39
Our gross case and IBNR loss reserves and related reinsurance
recoverable by class of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross Loss Reserves
|
|
|
Reinsurance
|
|
|
Loss
|
|
December 31, 2008
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Recoverable
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
210
|
|
|
$
|
195
|
|
|
$
|
405
|
|
|
$
|
14
|
|
|
$
|
391
|
|
Homeowners
|
|
|
434
|
|
|
|
310
|
|
|
|
744
|
|
|
|
29
|
|
|
|
715
|
|
Other
|
|
|
382
|
|
|
|
608
|
|
|
|
990
|
|
|
|
175
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
1,026
|
|
|
|
1,113
|
|
|
|
2,139
|
|
|
|
218
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
589
|
|
|
|
1,034
|
|
|
|
1,623
|
|
|
|
37
|
|
|
|
1,586
|
|
Casualty
|
|
|
1,431
|
|
|
|
4,621
|
|
|
|
6,052
|
|
|
|
392
|
|
|
|
5,660
|
|
Workers compensation
|
|
|
832
|
|
|
|
1,377
|
|
|
|
2,209
|
|
|
|
227
|
|
|
|
1,982
|
|
Property and marine
|
|
|
889
|
|
|
|
449
|
|
|
|
1,338
|
|
|
|
499
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,741
|
|
|
|
7,481
|
|
|
|
11,222
|
|
|
|
1,155
|
|
|
|
10,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
1,690
|
|
|
|
5,959
|
|
|
|
7,649
|
|
|
|
474
|
|
|
|
7,175
|
|
Surety
|
|
|
28
|
|
|
|
51
|
|
|
|
79
|
|
|
|
11
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,718
|
|
|
|
6,010
|
|
|
|
7,728
|
|
|
|
485
|
|
|
|
7,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
6,485
|
|
|
|
14,604
|
|
|
|
21,089
|
|
|
|
1,858
|
|
|
|
19,231
|
|
Reinsurance assumed
|
|
|
370
|
|
|
|
908
|
|
|
|
1,278
|
|
|
|
354
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,855
|
|
|
$
|
15,512
|
|
|
$
|
22,367
|
|
|
$
|
2,212
|
|
|
$
|
20,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross Loss Reserves
|
|
|
Reinsurance
|
|
|
Loss
|
|
December 31, 2007
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Recoverable
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Personal insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
226
|
|
|
$
|
200
|
|
|
$
|
426
|
|
|
$
|
15
|
|
|
$
|
411
|
|
Homeowners
|
|
|
432
|
|
|
|
305
|
|
|
|
737
|
|
|
|
32
|
|
|
|
705
|
|
Other
|
|
|
452
|
|
|
|
526
|
|
|
|
978
|
|
|
|
230
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
1,110
|
|
|
|
1,031
|
|
|
|
2,141
|
|
|
|
277
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril
|
|
|
646
|
|
|
|
1,010
|
|
|
|
1,656
|
|
|
|
37
|
|
|
|
1,619
|
|
Casualty
|
|
|
1,640
|
|
|
|
4,302
|
|
|
|
5,942
|
|
|
|
402
|
|
|
|
5,540
|
|
Workers compensation
|
|
|
842
|
|
|
|
1,323
|
|
|
|
2,165
|
|
|
|
255
|
|
|
|
1,910
|
|
Property and marine
|
|
|
814
|
|
|
|
395
|
|
|
|
1,209
|
|
|
|
532
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,942
|
|
|
|
7,030
|
|
|
|
10,972
|
|
|
|
1,226
|
|
|
|
9,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability
|
|
|
2,079
|
|
|
|
5,999
|
|
|
|
8,078
|
|
|
|
552
|
|
|
|
7,526
|
|
Surety
|
|
|
33
|
|
|
|
52
|
|
|
|
85
|
|
|
|
14
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
2,112
|
|
|
|
6,051
|
|
|
|
8,163
|
|
|
|
566
|
|
|
|
7,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
7,164
|
|
|
|
14,112
|
|
|
|
21,276
|
|
|
|
2,069
|
|
|
|
19,207
|
|
Reinsurance assumed
|
|
|
400
|
|
|
|
947
|
|
|
|
1,347
|
|
|
|
238
|
|
|
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,564
|
|
|
$
|
15,059
|
|
|
$
|
22,623
|
|
|
$
|
2,307
|
|
|
$
|
20,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Loss reserves, net of reinsurance recoverable, decreased by
$161 million or 1% in 2008. Loss reserves related to our
insurance business increased by $24 million, which reflects
a decrease of approximately $550 million related to
currency fluctuation due to the strength of the U.S. dollar
at December 31, 2008 compared with December 31, 2007.
Loss reserves related to our reinsurance assumed business, which
is in run-off, decreased by $185 million.
Gross case reserves for our professional liability classes
decreased by $389 million in 2008 due primarily to
generally low reported loss activity as well as settlements
related to previously established case reserves and, to a lesser
extent, the impact of currency fluctuation. The significant
increase in gross loss reserves for the commercial property and
marine business was due to losses related to Hurricane Ike as
well as several large non-catastrophe losses incurred during the
year that remained unpaid as of December 31, 2008.
In establishing the loss reserves of our property and casualty
subsidiaries, we consider facts currently known and the present
state of the law and coverage litigation. Based on all
information currently available, we believe that the aggregate
loss reserves at December 31, 2008 were adequate to cover
claims for losses that had occurred as of that date, including
both those known to us and those yet to be reported. However, as
described below, there are significant uncertainties inherent in
the loss reserving process. It is therefore possible that
managements estimate of the ultimate liability for losses
that had occurred as of December 31, 2008 may change,
which could have a material effect on the Corporations
results of operations and financial condition.
Estimates
and Uncertainties
The process of establishing loss reserves is complex and
imprecise as it must take into consideration many variables that
are subject to the outcome of future events. As a result,
informed subjective estimates and judgments as to our ultimate
exposure to losses are an integral component of our loss
reserving process.
Given the inherent complexity of the loss reserving process and
the potential variability of the assumptions used, the actual
emergence of losses could vary, perhaps substantially, from the
estimate of losses included in our financial statements,
particularly in those instances where settlements do not occur
until well into the future. Our net loss reserves at
December 31, 2008 were $20.2 billion. Therefore, a
relatively small percentage change in the estimate of net loss
reserves would have a material effect on the Corporations
results of operations.
Reserves Other than Those Relating to
Asbestos and Toxic Waste Claims. Our loss
reserves include amounts related to short tail and long tail
classes of business. Tail refers to the time period
between the occurrence of a loss and the settlement of the
claim. The longer the time span between the incidence of a loss
and the settlement of the claim, the more the ultimate
settlement amount can vary.
Short tail classes consist principally of homeowners, commercial
property and marine business. For these classes, claims are
generally reported and settled shortly after the loss occurs and
the claims relate to tangible property. Consequently, the
estimation of loss reserves for these classes is less complex.
Most of our loss reserves relate to long tail liability classes
of business. Long tail classes include directors and officers
liability, errors and omissions liability and other professional
liability coverages, commercial primary and excess liability,
workers compensation and other liability coverages. For
many liability claims significant periods of time, ranging up to
several years or more, may elapse between the occurrence of the
loss, the reporting of the loss to us and the settlement of the
claim. As a result, loss experience in the more recent accident
years for the long tail liability classes has limited
statistical credibility because a relatively small proportion of
losses in these accident years are reported claims and an even
smaller proportion are paid losses. An accident year is the
calendar year in which a loss is incurred or, in the case of
claims-made policies, the calendar year in which a loss is
reported. Liability claims are also more susceptible to
litigation and can be significantly affected by changing
contract interpretations and the legal environment.
Consequently, the estimation of loss reserves for these classes
41
is more complex and typically subject to a higher degree of
variability than for short tail classes. As a result, the role
of judgment is much greater for these reserve estimates.
Most of our reinsurance assumed business is long tail casualty
reinsurance. Reserve estimates for this business are therefore
subject to the variability caused by extended loss emergence
periods. The estimation of loss reserves for this business is
further complicated by delays between the time the claim is
reported to the ceding insurer and when it is reported by the
ceding insurer to us and by our dependence on the quality and
consistency of the loss reporting by the ceding company.
Our actuaries perform a comprehensive review of loss reserves
for each of the numerous classes of business we write at least
once a year. The timing of such review varies by class of
business and by jurisdiction. The review process takes into
consideration the variety of trends that impact the ultimate
settlement of claims in each particular class of business.
Additionally, each quarter our actuaries review the emergence of
paid and reported losses relative to expectations and, as
necessary, conduct reserve reviews for particular classes of
business.
The loss reserve estimation process relies on the basic
assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis
for predicting future outcomes. As part of that process, our
actuaries use a variety of actuarial methods that analyze
experience, trends and other relevant factors. The principal
standard actuarial methods used by our actuaries in the loss
reserve reviews include loss development factor methods,
expected loss ratio methods, Bornheutter-Ferguson methods and
frequency/severity methods.
Loss development factor methods generally assume that the losses
yet to emerge for an accident year are proportional to the paid
or reported loss amount observed so far. Historical patterns of
the development of paid and reported losses by accident year can
be predictive of the expected future patterns that are applied
to current paid and reported losses to generate estimated
ultimate losses by accident year.
Expected loss ratio methods use loss ratios for prior accident
years, adjusted to reflect our evaluation of recent loss trends,
the current risk environment, changes in our book of business
and changes in our pricing and underwriting, to determine the
appropriate expected loss ratio for a given accident year. The
expected loss ratio for each accident year is multiplied by the
earned premiums for that year to calculate estimated ultimate
losses.
Bornheutter-Ferguson methods are combinations of an expected
loss ratio method and a loss development factor method, where
the loss development factor method is given more weight as an
accident year matures.
Frequency/severity methods first project ultimate claim counts
(using one or more of the other methods described above) and
then multiply those counts by an estimated average claim cost to
calculate estimated ultimate losses. The average claim costs are
often estimated by fitting historical severity data to an
observed trend. Generally, these methods work best for high
frequency, low severity classes of business.
In completing their loss reserve analysis, our actuaries are
required to determine the most appropriate actuarial methods to
employ for each class of business. Within each class, the
business is further segregated by accident year and where
appropriate by jurisdiction. Each estimation method has its own
pattern, parameter
and/or
judgmental dependencies, with no estimation method being better
than the others in all situations. The relative strengths and
weaknesses of the various estimation methods when applied to a
particular class of business can also change over time,
depending on the underlying circumstances. In many cases,
multiple estimation methods will be valid for the particular
facts and circumstances of the relevant class of business. The
manner of application and the degree of reliance on a given
method will vary by class of business, by accident year and by
jurisdiction based on our actuaries evaluation of the
above dependencies and the potential volatility of the loss
frequency and severity patterns. The estimation methods selected
or given weight by our actuaries at a particular valuation date
are those that are believed to produce the most reliable
indication for the loss reserves being evaluated.
42
These selections incorporate input from claims personnel,
pricing actuaries and underwriting management on loss cost
trends and other factors that could affect the reserve estimates.
For short tail classes, the emergence of paid and incurred
losses generally exhibits a reasonably stable pattern of loss
development from one accident year to the next. Thus, for these
classes, the loss development factor method is generally
relatively straightforward to apply and usually requires only
modest extrapolation. For long tail classes, applying the loss
development factor method often requires more judgment in
selecting development factors as well as more significant
extrapolation. For those long tail classes with high frequency
and relatively low per-loss severity (e.g., workers
compensation), volatility will often be sufficiently modest for
the loss development factor method to be given significant
weight, except in the most recent accident years.
For certain long tail classes of business, however, anticipated
loss experience is less predictable because of the small number
of claims and erratic claim severity patterns. These classes
include directors and officers liability, errors and omissions
liability and commercial excess liability, among others. For
these classes, the loss development factor methods may not
produce a reliable estimate of ultimate losses in the most
recent accident years since many claims either have not yet been
reported to us or are only in the early stages of the settlement
process. Therefore, the actuarial estimates for these accident
years are based on less extrapolatory methods, such as expected
loss ratio and Bornheutter-Ferguson methods. Over time, as a
greater number of claims are reported and the statistical
credibility of loss experience increases, loss development
factor methods are given increasingly more weight.
Using all the available data, our actuaries select an indicated
loss reserve amount for each class of business based on the
various assumptions, projections and methods. The total
indicated reserve amount determined by our actuaries is an
aggregate of the indicated reserve amounts for the individual
classes of business. The ultimate outcome is likely to fall
within a range of potential outcomes around this indicated
amount, but the indicated amount is not expected to be precisely
the ultimate liability.
Senior management meets with our actuaries at the end of each
quarter to review the results of the latest loss reserve
analysis. Based on this review, management determines the
carried reserve for each class of business. In making the
determination, management considers numerous factors, such as
changes in actuarial indications in the period, the maturity of
the accident year, trends observed over the recent past and the
level of volatility within a particular class of business. In
doing so, management must evaluate whether a change in the data
represents credible actionable information or an anomaly. Such
an assessment requires considerable judgment. Even if a change
is determined to be permanent, it is not always possible to
determine the extent of the change until sometime later. As a
result, there can be a time lag between the emergence of a
change and a determination that the change should be reflected
in the carried loss reserves. In general, changes are made more
quickly to more mature accident years and less volatile classes
of business.
Among the numerous factors that contribute to the inherent
uncertainty in the process of establishing loss reserves are the
following:
|
|
|
|
|
changes in the inflation rate for goods and services related to
covered damages such as medical care and home repair costs,
|
|
|
|
changes in the judicial interpretation of policy provisions
relating to the determination of coverage,
|
|
|
|
changes in the general attitude of juries in the determination
of liability and damages,
|
|
|
|
legislative actions,
|
|
|
|
changes in the medical condition of claimants,
|
|
|
|
changes in our estimates of the number
and/or
severity of claims that have been incurred but not reported as
of the date of the financial statements,
|
|
|
|
changes in our book of business,
|
43
|
|
|
|
|
changes in our underwriting standards, and
|
|
|
|
changes in our claim handling procedures.
|
In addition, we must consider the uncertain effects of emerging
or potential claims and coverage issues that arise as legal,
judicial and social conditions change. These issues have had,
and may continue to have, a negative effect on our loss reserves
by either extending coverage beyond the original underwriting
intent or by increasing the number or size of claims. Recent
examples of such issues include the number of directors and
officers liability and errors and omissions liability claims
arising out of the ongoing crisis in the financial markets, the
number of directors and officers liability claims arising out of
stock option backdating practices by certain public
companies, the number and size of directors and officers
liability and errors and omissions liability claims arising out
of investment banking practices and accounting and other
corporate malfeasance, and exposure to claims asserted for
bodily injury as a result of long-term exposure to harmful
products or substances. As a result of issues such as these, the
uncertainties inherent in estimating ultimate claim costs on the
basis of past experience have grown, further complicating the
already complex loss reserving process.
As part of our loss reserving analysis, we take into
consideration the various factors that contribute to the
uncertainty in the loss reserving process. Those factors that
could materially affect our loss reserve estimates include loss
development patterns and loss cost trends, rate and exposure
level changes, the effects of changes in coverage and policy
limits, business mix shifts, the effects of regulatory and
legislative developments, the effects of changes in judicial
interpretations, the effects of emerging claims and coverage
issues and the effects of changes in claim handling practices.
In making estimates of reserves, however, we do not necessarily
make an explicit assumption for each of these factors. Moreover,
all estimation methods do not utilize the same assumptions and
typically no single method is determinative in the reserve
analysis for a class of business. Consequently, changes in our
loss reserve estimates generally are not the result of changes
in any one assumption. Instead, the variability will be affected
by the interplay of changes in numerous assumptions, many of
which are implicit to the approaches used.
For each class of business, we regularly adjust the assumptions
and actuarial methods used in the estimation of loss reserves in
response to our actual loss experience as well as our judgments
regarding changes in trends
and/or
emerging patterns. In those instances where we primarily utilize
analyses of historical patterns of the development of paid and
reported losses, this may be reflected, for example, in the
selection of revised loss development factors. In those long
tail classes of business that comprise a majority of our loss
reserves and for which loss experience is less predictable due
to potential changes in judicial interpretations, potential
legislative actions and potential claims issues, this may be
reflected in a judgmental change in our estimate of ultimate
losses for particular accident years.
The future impact of the various factors that contribute to the
uncertainty in the loss reserving process is extremely difficult
to predict. There is potential for significant variation in the
development of loss reserves, particularly for long tail classes
of business. We do not derive statistical loss distributions or
outcome confidence levels around our loss reserve estimate.
Actuarial ranges of reasonable estimates are not a true
reflection of the potential volatility between carried loss
reserves and the ultimate settlement amount of losses incurred
prior to the balance sheet date. This is due, among other
reasons, to the fact that actuarial ranges are developed based
on known events as of the valuation date whereas the ultimate
disposition of losses is subject to the outcome of events and
circumstances that were unknown as of the valuation date.
The following discussion includes disclosure of possible
variation from current estimates of loss reserves due to a
change in certain key assumptions for particular classes of
business. These impacts are estimated individually, without
consideration for any correlation among such assumptions or
among lines of business. Therefore, it would be inappropriate to
take the amounts and add them together in an attempt to estimate
volatility for our loss reserves in total. We believe that the
estimated variation in reserves detailed below is a reasonable
estimate of the possible variation that may occur in the future.
However, if such variation did occur, it would likely occur over
a period of several years and therefore its
44
impact on the Corporations results of operations would be
spread over the same period. It is important to note, however,
that there is the potential for future variation greater than
the amounts discussed below.
Two of the larger components of our loss reserves relate to the
professional liability classes other than fidelity and to
commercial excess liability. The respective reported loss
development patterns are key assumptions in estimating loss
reserves for these classes of business, both as applied directly
to more mature accident years and as applied indirectly (e.g.,
via Bornheutter-Ferguson methods) to less mature accident years.
Reserves for the professional liability classes other than
fidelity were $6.8 billion, net of reinsurance, at
December 31, 2008. Based on a review of our loss
experience, if the loss development factor for each accident
year changed such that the cumulative loss development factor
for the most recent accident year changed by 10%, we estimate
that the net reserves for professional liability classes other
than fidelity would change by approximately $675 million,
in either direction. This degree of change in the reported loss
development pattern is within the historical variation around
the averages in our data.
Reserves for commercial excess liability (excluding asbestos and
toxic waste claims) were $2.9 billion, net of reinsurance,
at December 31, 2008. These reserves are included within
commercial casualty. Based on a review of our loss experience,
if the loss development factor for each accident year changed
such that the cumulative loss development factor for the most
recent accident year changed by 15%, we estimate that the net
reserves for commercial excess liability would change by
approximately $275 million, in either direction. This
degree of change in the reported loss development pattern is
within the historical variation around the averages in our data.
Reserves Relating to Asbestos and Toxic Waste
Claims. The estimation of loss reserves
relating to asbestos and toxic waste claims on insurance
policies written many years ago is subject to greater
uncertainty than other types of claims due to inconsistent court
decisions as well as judicial interpretations and legislative
actions that in some cases have tended to broaden coverage
beyond the original intent of such policies and in others have
expanded theories of liability. The insurance industry as a
whole is engaged in extensive litigation over coverage and
liability issues and is thus confronted with a continuing
uncertainty in its efforts to quantify these exposures.
Reserves for asbestos and toxic waste claims cannot be estimated
with traditional actuarial loss reserving techniques that rely
on historical accident year loss development factors. Instead,
we rely on an exposure-based analysis that involves a detailed
review of individual policy terms and exposures. Because each
policyholder presents different liability and coverage issues,
we generally evaluate our exposure on a
policyholder-by-policyholder
basis, considering a variety of factors that are unique to each
policyholder. Quantitative techniques have to be supplemented by
subjective considerations including managements judgment.
We establish case reserves and expense reserves for costs of
related litigation where sufficient information has been
developed to indicate the involvement of a specific insurance
policy. In addition, IBNR reserves are established to cover
additional exposures on both known and unasserted claims.
We believe that the loss reserves carried at December 31,
2008 for asbestos and toxic waste claims were adequate. However,
given the judicial decisions and legislative actions that have
broadened the scope of coverage and expanded theories of
liability in the past and the possibilities of similar
interpretations in the future, it is possible that our estimate
of loss reserves relating to these exposures may increase in
future periods as new information becomes available and as
claims develop.
Asbestos
Reserves. Asbestos remains the most
significant and difficult mass tort for the insurance industry
in terms of claims volume and dollar exposure. Asbestos claims
relate primarily to bodily injuries asserted by those who came
in contact with asbestos or products containing asbestos. Tort
theory affecting asbestos litigation has evolved over the years.
Early court cases established the continuous trigger
theory with respect to insurance coverage. Under this theory,
insurance coverage is deemed to be triggered from the time a
claimant is first exposed to asbestos until the manifestation of
any disease. This interpretation of a policy trigger can involve
insurance policies over many years and increases
45
insurance companies exposure to liability. Until recently,
judicial interpretations and legislative actions attempted to
maximize insurance availability from both a coverage and
liability standpoint.
New asbestos claims and new exposures on existing claims have
continued despite the fact that usage of asbestos has declined
since the mid-1970s. Many claimants were exposed to
multiple asbestos products over an extended period of time. As a
result, claim filings typically name dozens of defendants. The
plaintiffs bar has solicited new claimants through
extensive advertising and through asbestos medical screenings. A
vast majority of asbestos bodily injury claims have been filed
by claimants who do not show any signs of asbestos related
disease. New asbestos cases are often filed in those
jurisdictions with a reputation for judges and juries that are
extremely sympathetic to plaintiffs.
Approximately 80 manufacturers and distributors of asbestos
products have filed for bankruptcy protection as a result of
asbestos related liabilities. A bankruptcy sometimes involves an
agreement to a plan between the debtor and its creditors,
including current and future asbestos claimants. Although the
debtor is negotiating in part with its insurers money,
insurers are generally given only limited opportunity to be
heard. In addition to contributing to the overall number of
claims, bankruptcy proceedings have also caused increased
settlement demands against remaining solvent defendants.
There have been some positive legislative and judicial
developments in the asbestos environment over the past several
years:
|
|
|
|
|
Various challenges to mass screening claimants have been
mounted, including a June 2005 U.S. District Court decision
in Texas. Many believe that this decision is leading to higher
medical evidentiary standards. For example, several asbestos
injury settlement trusts suspended their acceptance of claims
that were based on the diagnosis of physicians or screening
companies named in the case, citing concerns about their
reliability. Further investigations of the medical screening
process for asbestos claims are underway.
|
|
|
|
A number of states have implemented legislative and judicial
reforms that focus the courts resources on the claims of
the most seriously injured. Those who allege serious injury and
can present credible evidence of their injuries are receiving
priority trial settings in the courts, while those who have not
shown any credible disease manifestation are having their
hearing dates delayed or are placed on an inactive docket, which
preserves the right to pursue litigation in the future.
|
|
|
|
A number of key jurisdictions have adopted venue reform that
requires plaintiffs to have a connection to the jurisdiction in
order to file a complaint.
|
|
|
|
In recognition that many aspects of bankruptcy plans are unfair
to certain classes of claimants and to the insurance industry,
these plans are beginning to be closely scrutinized by the
courts and rejected when appropriate.
|
Our most significant individual asbestos exposures involve
products liability on the part of traditional
defendants who were engaged in the manufacture, distribution or
installation of asbestos products. We wrote excess liability
and/or
general liability coverages for these insureds. While these
insureds are relatively few in number, their exposure has become
substantial due to the increased volume of claims, the erosion
of the underlying limits and the bankruptcies of target
defendants.
Our other asbestos exposures involve products and non-products
liability on the part of peripheral defendants,
including a mix of manufacturers, distributors and installers of
certain products that contain asbestos in small quantities and
owners or operators of properties where asbestos was present.
Generally, these insureds are named defendants on a regional
rather than a nationwide basis. As the financial resources of
traditional asbestos defendants have been depleted, plaintiffs
are targeting these viable peripheral parties with greater
frequency and, in many cases, for large awards.
46
Asbestos claims against the major manufacturers, distributors or
installers of asbestos products were typically presented under
the products liability section of primary general liability
policies as well as under excess liability policies, both of
which typically had aggregate limits that capped an
insurers exposure. In recent years, a number of asbestos
claims by insureds are being presented as
non-products claims, such as those by installers of
asbestos products and by property owners or operators who
allegedly had asbestos on their property, under the premises or
operations section of primary general liability policies. Unlike
products exposures, these non-products exposures typically had
no aggregate limits on coverage, creating potentially greater
exposure. Further, in an effort to seek additional insurance
coverage, some insureds with installation activities who have
substantially eroded their products coverage are presenting new
asbestos claims as non-products operations claims or attempting
to reclassify previously settled products claims as non-products
claims to restore a portion of previously exhausted products
aggregate limits. It is difficult to predict whether insureds
will be successful in asserting claims under non-products
coverage or whether insurers will be successful in asserting
additional defenses. Accordingly, the ultimate cost to insurers
of the claims for coverage not subject to aggregate limits is
uncertain.
In establishing our asbestos reserves, we evaluate the exposure
presented by each insured. As part of this evaluation, we
consider a variety of factors including: the available insurance
coverage; limits and deductibles; the jurisdictions involved;
past settlement values of similar claims; the potential role of
other insurance, particularly underlying coverage below our
excess liability policies; potential bankruptcy impact; relevant
judicial interpretations; and applicable coverage defenses,
including asbestos exclusions.
We have assumed a continuation of the current legal environment
with no benefit from any federal asbestos reform legislation.
Various federal proposals to solve the ongoing asbestos
litigation crisis have been considered by the U.S. Congress
over the past few years, but none have yet been enacted. Thus,
the prospect of federal asbestos reform legislation remains
uncertain.
Our actuaries and claim personnel perform periodic analyses of
our asbestos related exposures. The analyses during 2006 noted
positive developments, including several settlements, related to
certain of our traditional asbestos defendants. At the same
time, the analyses indicated that our exposure to loss from
claims against our peripheral defendants was somewhat higher
than previously expected. The analyses during 2007 noted an
increase in our estimate of the ultimate liabilities related to
certain of our traditional asbestos defendants. Based on these
analyses, we increased our net asbestos loss reserves by
$18 million in 2006 and $75 million in 2007. The
analyses during 2008 noted no developments that would indicate
the need to change our estimate of ultimate liabilities related
to asbestos claims.
The following table presents a reconciliation of the beginning
and ending loss reserves related to asbestos claims.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Gross loss reserves, beginning of year
|
|
$
|
838
|
|
|
$
|
841
|
|
|
$
|
930
|
|
Reinsurance recoverable, beginning of year
|
|
|
45
|
|
|
|
52
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, beginning of year
|
|
|
793
|
|
|
|
789
|
|
|
|
880
|
|
Net incurred losses
|
|
|
|
|
|
|
75
|
|
|
|
18
|
|
Net losses paid
|
|
|
46
|
|
|
|
71
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
|
747
|
|
|
|
793
|
|
|
|
789
|
|
Reinsurance recoverable, end of year
|
|
|
47
|
|
|
|
45
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss reserves, end of year
|
|
$
|
794
|
|
|
$
|
838
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following table presents the number of policyholders for
whom we have open asbestos case reserves and the related net
loss reserves at December 31, 2008 as well as the net
losses paid during 2008 by component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Net Loss
|
|
|
Net Losses
|
|
|
|
Policyholders
|
|
|
Reserves
|
|
|
Paid
|
|
|
|
|
|
|
(in millions)
|
|
|
Traditional defendants
|
|
|
23
|
|
|
$
|
201
|
|
|
$
|
9
|
|
Peripheral defendants
|
|
|
372
|
|
|
|
393
|
|
|
|
37
|
|
Future claims from unknown policyholders
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
747
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant uncertainty remains as to our ultimate liability
related to asbestos related claims. This uncertainty is due to
several factors including:
|
|
|
|
|
the long latency period between asbestos exposure and disease
manifestation and the resulting potential for involvement of
multiple policy periods for individual claims;
|
|
|
|
plaintiffs expanding theories of liability and increased
focus on peripheral defendants;
|
|
|
|
the volume of claims by unimpaired plaintiffs and the extent to
which they can be precluded from making claims;
|
|
|
|
the efforts by insureds to claim the right to non-products
coverage not subject to aggregate limits;
|
|
|
|
the number of insureds seeking bankruptcy protection as a result
of asbestos related liabilities;
|
|
|
|
the ability of claimants to bring a claim in a state in which
they have no residency or exposure;
|
|
|
|
the impact of the exhaustion of primary limits and the resulting
increase in claims on excess liability policies we have issued;
|
|
|
|
inconsistent court decisions and diverging legal
interpretations; and
|
|
|
|
the possibility, however remote, of federal legislation that
would address the asbestos problem.
|
These significant uncertainties are not likely to be resolved in
the near future.
Toxic Waste
Reserves. Toxic waste claims relate
primarily to pollution and related cleanup costs. Our insureds
have two potential areas of exposure - hazardous waste dump
sites and pollution at the insured site primarily from
underground storage tanks and manufacturing processes.
The federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (Superfund) has been interpreted to
impose strict, retroactive and joint and several liability on
potentially responsible parties (PRPs) for the cost of
remediating hazardous waste sites. Most sites have multiple PRPs.
Most PRPs named to date are parties who have been generators,
transporters, past or present landowners or past or present site
operators. These PRPs had proper government authorization in
many instances. However, relative fault has not been a factor in
establishing liability. Insurance policies issued to PRPs were
not intended to cover claims arising from gradual pollution.
Since 1986, most policies have specifically excluded such
exposures.
Environmental remediation claims tendered by PRPs and others to
insurers have frequently resulted in disputes over
insurers contractual obligations with respect to pollution
claims. The resulting litigation against insurers extends to
issues of liability, coverage and other policy provisions.
48
There is substantial uncertainty involved in estimating our
liabilities related to these claims. First, the liabilities of
the claimants are extremely difficult to estimate. At any given
waste site, the allocation of remediation costs among
governmental authorities and the PRPs varies greatly depending
on a variety of factors. Second, different courts have addressed
liability and coverage issues regarding pollution claims and
have reached inconsistent conclusions in their interpretation of
several issues. These significant uncertainties are not likely
to be resolved definitively in the near future.
Uncertainties also remain as to the Superfund law itself.
Superfunds taxing authority expired on December 31,
1995 and has not been re-enacted. Federal legislation appears to
be at a standstill. At this time, it is not possible to predict
the direction that any reforms may take, when they may occur or
the effect that any changes may have on the insurance industry.
Without federal movement on Superfund reform, the enforcement of
Superfund liability has occasionally shifted to the states.
States are being forced to reconsider state-level cleanup
statutes and regulations. As individual states move forward, the
potential for conflicting state regulation becomes greater. In a
few states, we have seen cases brought against insureds or
directly against insurance companies for environmental pollution
and natural resources damages. To date, only a few natural
resource claims have been filed and they are being vigorously
defended. Significant uncertainty remains as to the cost of
remediating the state sites. Because of the large number of
state sites, such sites could prove even more costly in the
aggregate than Superfund sites.
In establishing our toxic waste reserves, we evaluate the
exposure presented by each insured. As part of this evaluation,
we consider a variety of factors including: the probable
liability, available insurance coverage, past settlement values
of similar claims, relevant judicial interpretations, applicable
coverage defenses as well as facts that are unique to each
insured.
During 2008, the analysis of our toxic waste exposures indicated
that some of our insureds had become responsible for the
remediation of additional polluted sites and that, as clean up
standards continue to evolve as a result of technology advances,
the estimated cost of remediation of certain sites had
increased. In addition, two claims were settled at substantially
higher amounts than expected. Based on these developments, we
increased our net toxic waste loss reserves by $85 million
in 2008.
The following table presents a reconciliation of our beginning
and ending loss reserves, net of reinsurance recoverable,
related to toxic waste claims. The reinsurance recoverable
related to these claims is minimal.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Reserves, beginning of year
|
|
$
|
154
|
|
|
$
|
169
|
|
|
$
|
191
|
|
Incurred losses
|
|
|
85
|
|
|
|
13
|
|
|
|
6
|
|
Losses paid
|
|
|
58
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, end of year
|
|
$
|
181
|
|
|
$
|
154
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the net toxic waste loss reserves at December 31, 2008,
$85 million was IBNR reserves.
Reinsurance
Recoverable. Reinsurance recoverable is
the estimated amount recoverable from reinsurers related to the
losses we have incurred. At December 31, 2008, reinsurance
recoverable included $215 million recoverable with respect
to paid losses and loss expenses, which is included in other
assets, and $2.2 billion recoverable on unpaid losses and
loss expenses.
Reinsurance recoverable on unpaid losses and loss expenses
represents an estimate of the portion of our gross loss reserves
that will be recovered from reinsurers. Such reinsurance
recoverable is estimated as part of our loss reserving process
using assumptions that are consistent with the assumptions used
in estimating the gross loss reserves. Consequently, the
estimation of reinsurance recoverable is subject to similar
judgments and uncertainties as the estimation of gross loss
reserves.
49
Ceded reinsurance contracts do not relieve our primary
obligation to our policyholders. Consequently, an exposure
exists with respect to reinsurance recoverable to the extent
that any reinsurer is unable to meet its obligations or disputes
the liabilities assumed under the reinsurance contracts. We are
selective in regard to our reinsurers, placing reinsurance with
only those reinsurers who we believe have strong balance sheets
and superior underwriting ability, and we monitor the financial
strength of our reinsurers on an ongoing basis. Nevertheless, in
recent years, certain of our reinsurers have experienced
financial difficulties or exited the reinsurance business. In
addition, we may become involved in coverage disputes with our
reinsurers. A provision for estimated uncollectible reinsurance
is recorded based on periodic evaluations of balances due from
reinsurers, the financial condition of the reinsurers, coverage
disputes and other relevant factors.
Prior
Year Loss Development
Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that
loss trends vary and time is required for changes in trends to
be recognized and confirmed. Reserve changes that increase
previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease previous estimates of ultimate
cost are referred to as favorable development or reserve
releases.
A reconciliation of our beginning and ending loss reserves, net
of reinsurance, for the three years ended December 31, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Net loss reserves, beginning of year
|
|
$
|
20,316
|
|
|
$
|
19,699
|
|
|
$
|
18,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred losses and loss expenses related to
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
7,771
|
|
|
|
6,996
|
|
|
|
6,870
|
|
Prior years
|
|
|
(873
|
)
|
|
|
(697
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,898
|
|
|
|
6,299
|
|
|
|
6,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments for losses and loss expenses related to
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
2,401
|
|
|
|
1,883
|
|
|
|
1,703
|
|
Prior years
|
|
|
4,108
|
|
|
|
4,066
|
|
|
|
4,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,509
|
|
|
|
5,949
|
|
|
|
5,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation effect
|
|
|
(550
|
)
|
|
|
267
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss reserves, end of year
|
|
$
|
20,155
|
|
|
$
|
20,316
|
|
|
$
|
19,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, we experienced overall favorable prior year
development of $873 million, which represented 4.3% of the
net loss reserves as of December 31, 2007. This compares
with favorable prior year development of $697 million
during 2007, which represented 3.5% of the net loss reserves at
December 31, 2006, and favorable prior year development of
$296 million during 2006, which represented 1.6% of the net
loss reserves at December 31, 2005. Such favorable
development was reflected in operating results in these
respective years.
50
The following table presents the overall prior year loss
development for the three years ended December 31, 2008 by
accident year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
|
|
(Favorable) Unfavorable Development
|
|
Accident Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
2007
|
|
$
|
(86
|
)
|
|
|
|
|
|
|
|
|
2006
|
|
|
(224
|
)
|
|
$
|
(141
|
)
|
|
|
|
|
2005
|
|
|
(364
|
)
|
|
|
(233
|
)
|
|
$
|
(372
|
)
|
2004
|
|
|
(272
|
)
|
|
|
(240
|
)
|
|
|
(276
|
)
|
2003
|
|
|
(84
|
)
|
|
|
(148
|
)
|
|
|
(83
|
)
|
2002
|
|
|
(25
|
)
|
|
|
(71
|
)
|
|
|
5
|
|
2001
|
|
|
31
|
|
|
|
53
|
|
|
|
99
|
|
2000
|
|
|
25
|
|
|
|
(17
|
)
|
|
|
102
|
|
1999
|
|
|
24
|
|
|
|
(10
|
)
|
|
|
24
|
|
1998 and prior
|
|
|
102
|
|
|
|
110
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(873
|
)
|
|
$
|
(697
|
)
|
|
$
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net favorable development of $873 million in 2008 was
due to various factors. The most significant factors were:
|
|
|
|
|
We experienced favorable development of about $390 million
in the professional liability classes other than fidelity,
including about $150 million outside the
U.S. Favorable development occurred in each of the primary
professional liability classes, including directors and officers
liability, errors and omissions liability, fiduciary liability
and employment practices liability. A majority of this favorable
development was in the 2004 and 2005 accident years. Reported
loss activity related to these accident years has been less than
expected due to a favorable business climate, lower policy
limits and better terms and conditions. As these years have
become increasingly mature, and as the reported loss experience
has emerged better than we expected, we have gradually decreased
the expected loss ratios for these accident years. This
favorable development was recognized as one among many factors
in the determination of loss reserves for more current accident
years. Our estimates of expected loss ratios for more recent
accident years, particularly 2007 and 2008, were more influenced
by the uncertainty surrounding the ongoing crisis in the
financial markets as well as the downward trend in prices in
recent years.
|
|
|
|
We experienced favorable development of about $170 million
in the homeowners and commercial property classes, primarily
related to the 2006 and 2007 accident years. The severity of
late reported property claims that emerged during 2008 was lower
than expected. Because the incidence of such property losses is
subject to a considerable element of fortuity, reserve estimates
for these classes are based on an analysis of past loss
experience on average over a period of years. As a result, the
favorable development in 2008 was recognized but had a
relatively modest effect on our determination of carried
property loss reserves at December 31, 2008.
|
|
|
|
We experienced favorable development of about $120 million
in the commercial liability classes. Favorable development,
particularly in excess liability and multiple peril liability
classes in accident years 2002 through 2006, more than offset
adverse development in accident years prior to 1998, which was
mostly due to $85 million of incurred losses related to
toxic waste claims. The severity of excess liability and
multiple peril liability claims has been generally lower than
expected and the effects of underwriting changes that affected
these years have been more positive than expected. These factors
were reflected in the determination of the carried loss reserves
for these classes at December 31, 2008.
|
51
|
|
|
|
|
We experienced favorable development of about $75 million
in the fidelity class due to lower than expected reported loss
emergence, particularly outside the U.S., mainly related to
recent accident years. Loss reserve estimates at the end of 2007
included an expectation of more late reported losses than
actually occurred in 2008, and this factor was reflected in the
determination of carried fidelity loss reserves at
December 31, 2008.
|
|
|
|
We experienced favorable development of about $60 million
in the run-off of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
|
|
|
We experienced favorable development of about $30 million
in the workers compensation class due in part to the
positive effects of reforms in California. This factor was
reflected in the determination of carried loss reserves for this
class at December 31, 2008.
|
|
|
|
We experienced favorable development of about $30 million
in the personal automobile business due primarily to lower than
expected severity. This factor was given only modest weight in
our determination of carried personal automobile loss reserves
at December 31, 2008.
|
The net favorable development of $697 million in 2007 was
also due to various factors. The most significant factors were:
|
|
|
|
|
We experienced favorable development of about $300 million
in the professional liability classes other than fidelity,
including about $100 million outside the U.S. A
majority of this favorable development was in the 2003 through
2005 accident years. Reported loss activity related to these
accident years was less than expected due to a favorable
business climate, lower policy limits and better terms and
conditions. While these accident years were still somewhat
immature, we concluded that there was sufficient evidence to
modestly decrease the expected loss ratios for these accident
years.
|
|
|
|
We experienced favorable development of about $180 million
in the homeowners and commercial property classes, primarily
related to the 2006 and 2005 accident years. This favorable
development arose from the lower than expected emergence of
actual losses during 2007 relative to expectations used to
establish our loss reserves at the end of 2006. The severity of
late reported property claims that emerged during 2007 was lower
than expected and case development, including salvage
recoveries, on previously reported claims was better than
expected.
|
|
|
|
We experienced favorable development of about $135 million
in the run-off of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
|
|
|
We experienced favorable development of about $40 million
in the fidelity class and $30 million in the surety class
due to lower than expected reported loss emergence, mainly
related to more recent accident years.
|
|
|
|
We experienced favorable development of about $30 million
in the personal automobile class. Case development during 2007
on previously reported claims was better than expected,
reflecting improved case management. Also, the number of late
reported claims was less than expected, reflecting a
continuation of recent generally favorable frequency trends.
|
|
|
|
We experienced adverse development of about $20 million in
the commercial liability classes. Adverse development in
accident years prior to 1997, mostly the $88 million
related to asbestos and toxic waste claims, was largely offset
by favorable development in these classes in the more recent
accident years.
|
The net favorable development of $296 million in 2006 was
also due to various factors. The most significant factors were:
|
|
|
|
|
We experienced favorable development of about $190 million
in the homeowners and commercial property classes, primarily
related to the 2005 accident year. This favorable development
arose from the lower than expected emergence of actual losses
during 2006 relative to expectations used to establish our loss
reserves at the end of 2005. The severity of late reported
property claims that
|
52
|
|
|
|
|
emerged during 2006 was lower than expected and case
development, including salvage recoveries, on previously
reported claims was better than expected.
|
|
|
|
|
|
We experienced favorable loss development of about
$70 million in the fidelity class due to lower than
expected reported loss emergence, mainly related to more recent
accident years.
|
|
|
|
We experienced favorable development of about $65 million
in the run-off of our reinsurance assumed business due primarily
to better than expected reported loss activity from cedants.
|
|
|
|
We experienced favorable development of about $45 million
in the professional liability classes other than fidelity.
Favorable development in the 2004 and 2005 accident years more
than offset continued unfavorable development in accident years
2000 through 2002. Reported loss activity related to accident
years 2004 and 2005 was less than expected due to a favorable
business climate, lower policy limits and better terms and
conditions. While these accident years were somewhat immature,
we concluded that there was sufficient evidence to modestly
decrease the expected loss ratios for these accident years. On
the other hand, we continued to experience higher than expected
reported loss activity related to the 2000 through 2002 accident
years, largely from claims related to corporate failures and
allegations of management misconduct and accounting
irregularities. As a result, we increased the expected loss
ratios for these accident years.
|
|
|
|
We experienced favorable development of about $25 million
in the personal automobile class. Case development during 2006
on previously reported claims was better than expected,
reflecting improved case management. The number of late reported
claims was also less than expected.
|
|
|
|
We experienced adverse development of about $100 million in
the commercial liability classes, including $24 million
related to asbestos and toxic waste claims. The adverse
development was primarily due to reported loss activity in
accident years prior to 1997 that was worse than expected,
primarily related to specific individual excess liability and
other liability claims.
|
In Item 1 of this report, we present an analysis of our
consolidated loss reserve development on a calendar year basis
for each of the ten years prior to 2008. The variability in
reserve development over the ten year period illustrates the
uncertainty of the loss reserving process. Conditions and trends
that have affected reserve development in the past will not
necessarily recur in the future. It is not appropriate to
extrapolate future favorable or unfavorable reserve development
based on amounts experienced in prior years.
Our U.S. property and casualty subsidiaries are required to
file annual statements with insurance regulatory authorities
prepared on an accounting basis prescribed or permitted by such
authorities. These annual statements include an analysis of loss
reserves, referred to as Schedule P, that presents accident
year loss development information by line of business for the
nine years prior to 2008. It is our intention to post the
Schedule P for our combined U.S. property and casualty
subsidiaries on our website as soon as it becomes available.
Investment
Results
Property and casualty investment income before taxes increased
by 2% in 2008 compared with 2007 and by 9% in 2007 compared with
2006. Growth in investment income in 2008 was due to an increase
in average invested assets compared with 2007. The growth in
investment income in 2008 was limited as average invested assets
increased only modestly during the year as a result of
substantial dividend distributions made by the property and
casualty subsidiaries to Chubb during 2008 and 2007. Growth in
2007 compared with 2006 was due to an increase in invested
assets, which reflected substantial cash flow from operations
over the period.
The effective tax rate on our investment income was 20.0% in
2008 compared with 19.9% in 2007 and 19.8% in 2006. While
similar in these years, the effective tax rate does fluctuate as
a result of our holding a different proportion of our investment
portfolio in tax exempt securities during different periods.
53
On an after-tax basis, property and casualty investment income
increased by 2% in 2008 and 9% in 2007. The after-tax annualized
yield on the investment portfolio that supports our property and
casualty insurance business was 3.49% in 2008 compared with
3.50% in 2007 and 3.48% in 2006. 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.
During the latter part of 2008, the U.S. dollar
strengthened compared to several of the foreign currencies in
which we hold invested assets and the yields on short term
investments in the U.S. were historically low. Assuming
investment yields and foreign exchange rates remain at current
levels, property and casualty investment income is expected to
decrease modestly in 2009 compared with 2008.
Other
Income
Other income, which includes miscellaneous income and expenses
of the property and casualty subsidiaries, was not significant
in the last three years.
CORPORATE
AND OTHER
Corporate and other comprises investment income earned on
corporate invested assets, interest expense and other expenses
not allocated to our operating subsidiaries and the results of
our non-insurance subsidiaries, including Chubb Financial
Solutions, which is in run-off.
Corporate and other produced a loss before taxes of
$214 million in 2008 compared with losses of
$149 million and $89 million in 2007 and 2006,
respectively. The higher loss in 2008 compared to 2007 was due
to higher interest expense and lower investment income. The
higher interest expense was due to higher average debt
outstanding in 2008 as a result of the issuance of additional
debt during 2007 and 2008. The lower investment income was
primarily the result of a decrease in the average yield on short
term investments. The higher loss in 2007 compared with 2006 was
due primarily to higher interest expense as a result of the
issuance of additional debt during the first half of 2007. The
higher interest expense in 2008 and 2007 was not offset by an
increase in investment income as the proceeds from the issuance
of the debt were used to repurchase Chubbs common stock.
Chubb
Financial Solutions
The business of Chubb Financial Solutions (CFS) was primarily
structured credit derivatives, principally as a counterparty in
portfolio credit default swap contracts. In 2003, the
Corporation announced its intention to exit CFSs business.
Since that date, CFS has terminated early or run-off nearly all
of its contractual obligations within its financial products
portfolio. As of December 31, 2008, no credit default swap
contracts remained outstanding.
CFSs aggregate exposure, or retained risk, from each of
its remaining in-force financial products contracts is referred
to as notional amount. Notional amounts are used to calculate
the exchange of contractual cash flows and are not necessarily
representative of the potential for gain or loss. The notional
amounts are not recorded on the balance sheet.
CFSs remaining financial products contracts at
December 31, 2008 included a derivative contract linked to
an equity market index that terminates in 2012 and a few other
insignificant transactions. We estimate that the notional amount
under the remaining contracts was about $340 million and
the fair value of our future obligations was $5 million at
December 31, 2008.
54
REALIZED
INVESTMENT GAINS AND LOSSES
Net realized investment gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
32
|
|
|
$
|
135
|
|
|
$
|
51
|
|
Fixed maturities
|
|
|
66
|
|
|
|
4
|
|
|
|
(2
|
)
|
Other invested assets
|
|
|
(56
|
)
|
|
|
344
|
|
|
|
209
|
|
Harbor Point
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
483
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
(335
|
)
|
|
|
(79
|
)
|
|
|
(10
|
)
|
Fixed maturities
|
|
|
(111
|
)
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
|
|
(109
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses) before tax
|
|
$
|
(371
|
)
|
|
$
|
374
|
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses) after tax
|
|
$
|
(241
|
)
|
|
$
|
243
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decisions to sell equity securities and fixed maturities are
governed principally by considerations of investment
opportunities and tax consequences. As a result, realized gains
and losses on the sale of these investments may vary
significantly from period to period. However, such gains and
losses generally have little, if any, impact on
shareholders equity as all of these investments are
carried at fair value, with the unrealized appreciation or
depreciation reflected in comprehensive income.
A primary reason for the sale of fixed maturities in each of the
last three years has been to improve our after-tax portfolio
return without sacrificing quality where market opportunities
have existed to do so.
The net realized gains and losses on other invested assets
represent the aggregate of distributions to us from the limited
partnerships in which we have an interest and changes in our
equity in the net assets of the partnerships based on valuations
provided to us by the manager of each partnership. Due to the
timing of our receipt of valuation data from the investment
managers, these investments are reported on a one quarter lag.
We have not yet received fourth quarter 2008 valuations from
many of the limited partnerships. Based on limited preliminary
information about the performance of the limited partnerships
during the fourth quarter, we expect to report a decline in our
equity in the net assets of these partnerships in our first
quarter 2009 results. We cannot precisely quantify the amount of
the loss that we will report; however, we currently expect that
the loss before tax will be about $300 million, but it is
possible the loss could exceed that amount.
In 2005, we transferred our ongoing reinsurance business and
certain related assets to Harbor Point Limited. In exchange, we
received from Harbor Point $200 million of 6% convertible
notes and warrants to purchase common stock of Harbor Point. The
transaction resulted in a pre-tax gain of $204 million, of
which $171 million was recognized in 2005. In 2008, the
notes were converted to 2,000,000 shares of common stock of
Harbor Point and we recognized the remaining $33 million
gain.
We regularly review those invested assets that have a fair value
that 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 a potential
other-than-temporary impairment.
The determination of whether a decline in value of any
investment is temporary or other-than- temporary requires the
judgment of management. In making the determination, we consider
various quantitative criteria and qualitative factors including
the length of time and the extent to which the fair
55
value has been less than the cost, the financial condition and
near term prospects of the issuer, whether the issuer is current
on contractually obligated interest and principal payments, our
intent and ability to hold the investment for a period of time
sufficient to allow us to recover our cost, general market
conditions and industry or sector specific factors. A fixed
maturity security is other-than-temporarily impaired if it
becomes likely that we will not be able to collect all amounts
due under the securitys contractual terms or if we cannot
assert that we will hold the security until we recover our cost.
An equity security is other-than-temporarily impaired if it
becomes likely that we will not recover our cost in the near
term. If a decline in the fair value of an individual security
is deemed to be other-than-temporary, the difference between
cost and fair value is charged to income as a realized
investment loss. The fair value of the investment becomes its
new cost basis. The decision to recognize a decline in the value
of a security carried at fair value as other-than-temporary
rather than temporary has no impact on shareholders equity.
As a result of significant financial market disruption during
2008, the fair value of many of our investments declined to a
level below our cost. The issuers of the equity securities
deemed to be other-than-temporarily impaired during 2008 were
among a range of industries and not concentrated within any
individual sector. About 75% of the fixed maturities deemed to
be other-than-temporarily impaired were corporate securities
within the financial services sector. Through December 31,
2008, we continued to receive contractual principal and interest
payments on nearly all of our other-than-temporarily impaired
fixed maturity securities.
If current conditions in the equity and fixed maturity markets
continue in 2009 or if conditions deteriorate, additional
securities may be deemed to be other-than-temporarily impaired.
Information related to investment securities in an unrealized
loss position at December 31, 2008 and 2007 is included in
Note (4)(b) of the Notes to Consolidated Financial Statements.
CAPITAL
RESOURCES AND LIQUIDITY
Capital resources and liquidity represent a companys
overall financial strength and its ability to generate cash
flows, borrow funds at competitive rates and raise new capital
to meet operating and growth needs.
Capital
Resources
Capital resources provide protection for policyholders, furnish
the financial strength to support the business of underwriting
insurance risks and facilitate continued business growth. At
December 31, 2008, the Corporation had shareholders
equity of $13.4 billion and total debt of $4.0 billion.
In April 2008, Chubb repaid $225 million of outstanding
3.95% notes when due.
In May 2008, Chubb issued $600 million of unsecured
5.75% senior notes due in 2018 and $600 million of
6.5% senior notes due in 2038.
In March 2007, Chubb issued $1.0 billion of unsecured
junior subordinated capital securities. The capital securities
will become due on April 15, 2037, the scheduled maturity
date, but only to the extent that Chubb has received sufficient
net proceeds from the sale of certain qualifying capital
securities. Chubb must use its commercially reasonable efforts,
subject to certain market disruption events, to sell enough
qualifying capital securities to permit repayment of the capital
securities on the scheduled maturity date or as soon thereafter
as possible. Any remaining outstanding principal amount will be
due on March 29, 2067, the final maturity date. The capital
securities bear interest at a fixed rate of 6.375% through
April 14, 2017. Thereafter, the capital securities will
bear interest at a rate equal to the three-month LIBOR rate plus
2.25%. Subject to certain conditions, Chubb has the right to
defer the payment of interest on the capital securities for a
period not exceeding ten consecutive years. During any such
period, interest will continue to accrue and Chubb generally may
not declare or pay any dividends on or purchase any shares of
its capital stock.
56
In connection with the issuance of the capital securities, Chubb
entered into a replacement capital covenant in which it agreed
that it will not repay, redeem or purchase the capital
securities before March 29, 2047, unless, subject to
certain limitations, it has received proceeds from the sale of
replacement capital securities, as defined. Subject to the
replacement capital covenant, the capital securities may be
redeemed, in whole or in part, at any time on or after
April 15, 2017 at a redemption price equal to the principal
amount plus any accrued interest or prior to April 15, 2017
at a redemption price equal to the greater of (i) the
principal amount or (ii) a make-whole amount, in each case
plus any accrued interest.
In 2003, Chubb issued $460 million of unsecured
2.25% senior notes due in 2008 and 18.4 million
purchase contracts to purchase its common stock. The notes and
purchase contracts were issued together in the form of 7% equity
units, each of which initially represented $25 principal amount
of notes and one purchase contract. In May 2006, the notes were
successfully remarketed as required by their terms. The interest
rate on the notes was reset to 5.472% from 2.25%, effective
May 16, 2006. Each purchase contract obligated the holder
to purchase, on or before August 16, 2006, for a settlement
price of $25, a variable number of shares of Chubbs common
stock. The number of shares purchased was determined based on a
formula that considered the market price of Chubbs common
stock immediately prior to the time of settlement in relation to
the $29.75 per share sale price of the common stock at the time
the equity units were offered. Upon settlement of the purchase
contracts in August 2006, Chubb issued 12,883,527 shares of
common stock and received proceeds of $460 million. In
August 2008, the $460 million of notes were paid when due.
Chubb also has outstanding $400 million of 6% notes
due in 2011, $275 million of 5.2% notes due in 2013,
$100 million of 6.6% debentures due in 2018,
$200 million of 6.8% debentures due in 2031 and
$800 million of 6% notes due in 2037, all of which are
unsecured.
Management regularly monitors the Corporations capital
resources. In connection with our long-term capital strategy,
Chubb from time to time contributes capital to its property and
casualty subsidiaries. In addition, in order to satisfy capital
needs as a result of any rating agency capital adequacy or other
future rating issues, or in the event we were to need additional
capital to make strategic investments in light of market
opportunities, we may take a variety of actions, which could
include the issuance of additional debt
and/or
equity securities. We believe that our strong financial position
and conservative debt level provide us with the flexibility and
capacity to obtain funds externally through debt or equity
financings on both a short term and long term basis.
In December 2005, the Board of Directors authorized the
repurchase of up to 28,000,000 shares of Chubbs
common stock. In December 2006, the Board of Directors
authorized the repurchase of up to an additional
20,000,000 shares of common stock. In March 2007, the Board
of Directors authorized an increase of 20,000,000 shares to
the December 2006 authorization. In December 2007, the Board of
Directors authorized the repurchase of up to an additional
28,000,000 shares of common stock. In December 2008, the
Board of Directors authorized the repurchase of up to an
additional 20,000,000 shares of common stock.
In 2006, we repurchased 25,366,262 shares of Chubbs
common stock through a combination of an accelerated stock
buyback program and open market transactions, at an aggregate
cost of $1,257 million. In 2007, we repurchased
41,733,268 shares of Chubbs common stock in open
market transactions at a cost of $2,184 million. In 2008,
we repurchased 26,328,770 shares of Chubbs common
stock in open market transactions at a cost of
$1,311 million. As of December 31, 2008,
19,783,900 shares remained under the December
2008 share repurchase authorization, which has no
expiration date. The number of shares we will repurchase in 2009
will depend on the state of the global capital markets and the
potential for profitable growth in the property and casualty
insurance market.
57
Ratings
Chubb and its insurance subsidiaries are rated by major rating
agencies. These ratings reflect the rating agencys opinion
of our financial strength, operating performance, strategic
position and ability to meet our obligations to policyholders.
Credit ratings assess a companys ability to make timely
payments of interest and principal on its debt. The following
table summarizes the Corporations credit ratings from the
major independent rating organizations as of February 26, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
|
Standard & Poors
|
|
|
Moodys
|
|
|
Fitch
|
|
|
Senior unsecured debt
|
|
|
aa−
|
|
|
|
A+
|
|
|
|
A2
|
|
|
|
A+
|
|
Junior subordinated capital securities
|
|
|
a
|
|
|
|
A−
|
|
|
|
A3
|
|
|
|
A
|
|
Commercial paper
|
|
|
AMB-1+
|
|
|
|
A-1
|
|
|
|
P-1
|
|
|
|
F1+
|
|
Financial strength ratings assess an insurers ability to
meet its financial obligations to policyholders. The following
table summarizes our property and casualty subsidiaries
financial strength ratings from the major independent rating
organizations as of February 26, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
|
Standard & Poors
|
|
|
Moodys
|
|
|
Fitch
|
|
|
Financial strength
|
|
|
A++
|
|
|
|
AA
|
|
|
|
Aa2
|
|
|
|
AA
|
|
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 from the maturity or sale of
marketable securities in our investment portfolio. The
Corporation also has the ability to borrow under its credit
facility and we believe we could issue debt or equity securities.
Our property and casualty operations provide liquidity in that
premiums are generally received months or even years before
losses are paid under the policies purchased by such premiums.
Historically, cash receipts from operations, consisting of
insurance premiums and investment income, have provided more
than sufficient funds to pay losses, operating expenses and
dividends to Chubb. After satisfying our cash requirements,
excess cash flows are used to build the investment portfolio and
thereby increase future investment income.
Our strong underwriting results continued to generate
substantial new cash in 2008. New cash from operations available
for investment by the property and casualty subsidiaries was
approximately $775 million in 2008 compared with
$1.6 billion in 2007 and $2.7 billion in 2006. New
cash available in 2008 was lower than in 2007 due to a
$450 million increase in dividends paid by the property and
casualty subsidiaries to Chubb and higher loss payments,
partially offset by lower income tax payments. New cash
available was lower in 2007 than in 2006 due to a
$900 million increase in dividends paid by the property and
casualty subsidiaries to Chubb and, to a lesser extent, higher
income tax payments.
58
Our property and casualty subsidiaries maintain substantial
investments in highly liquid, short term marketable securities.
Accordingly, we do not anticipate selling long term fixed
maturity investments to meet any liquidity needs.
Chubbs liquidity requirements primarily include the
payment of dividends to shareholders and interest and principal
on debt obligations. The declaration and payment of future
dividends to Chubbs shareholders will be at the discretion
of Chubbs Board of Directors and will depend upon many
factors, including our operating results, financial condition,
capital requirements and any regulatory constraints.
As a holding company, Chubbs ability to continue to pay
dividends to shareholders and to satisfy its debt obligations
relies on the availability of liquid assets, which is dependent
in large part on the dividend paying ability of its property and
casualty subsidiaries. Our property and casualty subsidiaries
are subject to laws and regulations in the jurisdictions in
which they operate that restrict the amount of dividends they
may pay without the prior approval of regulatory authorities.
The restrictions are generally based on net income and on
certain levels of policyholders surplus as determined in
accordance with statutory accounting practices. Dividends in
excess of such thresholds are considered
extraordinary and require prior regulatory approval.
During 2008, 2007 and 2006, these subsidiaries paid dividends to
Chubb of $2,000 million, $1,550 million and
$650 million, respectively. The maximum dividend
distribution that may be made by the property and casualty
subsidiaries to Chubb during 2009 without prior approval is
approximately $1.2 billion.
Chubb has a revolving credit agreement with a group of banks
that provides for up to $500 million of unsecured
borrowings. There have been no borrowings under this agreement.
Various interest rate options are available to Chubb, all of
which are based on market interest rates. The agreement contains
customary restrictive covenants including a covenant to maintain
a minimum consolidated shareholders equity, as adjusted.
At December 31, 2008, Chubb was in compliance with all such
covenants. The revolving credit facility is available for
general corporate purposes and to support our commercial paper
borrowing arrangement. This agreement has a termination date of
October 19, 2012. In August 2008, the agreement was amended
to allow Chubb to request on two occasions at any time during
the remaining term of the agreement an extension of the maturity
date for an additional one year period. On the termination date
of the agreement, any borrowings then outstanding become payable.
Contractual
Obligations and Off-Balance Sheet Arrangements
The following table provides our future payments due by period
under contractual obligations as of December 31, 2008,
aggregated by type of obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
and
|
|
|
There-
|
|
|
|
|
|
|
2009
|
|
|
2011
|
|
|
2013
|
|
|
after
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Principal due under long term debt
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
275
|
|
|
$
|
3,300
|
|
|
$
|
3,975
|
|
Interest payments on long term debt(a)
|
|
|
244
|
|
|
|
487
|
|
|
|
432
|
|
|
|
3,475
|
|
|
|
4,638
|
|
Future minimum rental payments under operating leases
|
|
|
78
|
|
|
|
122
|
|
|
|
99
|
|
|
|
133
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322
|
|
|
|
1,009
|
|
|
|
806
|
|
|
|
6,908
|
|
|
|
9,045
|
|
Loss and loss expense reserves(b)
|
|
|
4,921
|
|
|
|
6,486
|
|
|
|
3,802
|
|
|
|
7,158
|
|
|
|
22,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,243
|
|
|
$
|
7,495
|
|
|
$
|
4,608
|
|
|
$
|
14,066
|
|
|
$
|
31,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Junior subordinated capital securities of $1 billion bear
interest at a fixed rate of 6.375% through April 14, 2017
and at a rate equal to the three-month LIBOR rate plus 2.25%
thereafter. For purposes of the above table, interest after
April 14, 2017 was calculated using the three-month LIBOR
rate as of December 31, 2008. The table includes future
interest payments through the scheduled maturity date,
April 15, 2037. Interest payments for the period from the
scheduled maturity date through the final maturity date,
March 29, 2067, would increase the contractual obligation
by $1.1 billion. It is |
59
|
|
|
|
|
our expectation that the capital securities will be redeemed at
the end of the fixed interest rate period. |
|
(b) |
|
There is typically no stated contractual commitment associated
with property and casualty insurance loss reserves. The
obligation to pay a claim arises only when a covered loss event
occurs and a settlement is reached. The vast majority of our
loss reserves relate to claims for which settlements have not
yet been reached. Our loss reserves therefore represent
estimates of future payments. These estimates are dependent on
the outcome of claim settlements that will occur over many
years. Accordingly, the payment of the loss reserves is not
fixed as to either amount or timing. The estimate of the timing
of future payments is based on our historical loss payment
patterns. The ultimate amount and timing of loss payments will
likely differ from our estimate and the differences could be
material. We expect that these loss payments will be funded, in
large part, by future cash receipts from operations. |
The above table excludes certain commitments totaling
$1.1 billion at December 31, 2008 to fund limited
partnership investments. These commitments can be called by the
partnerships (generally over a period of five years or less), if
and when needed by the partnerships to fund certain partnership
expenses or the purchase of investments. It is uncertain whether
and, if so, when we will be required to fund these commitments.
There is no predetermined payment schedule.
The Corporation does not have any off-balance sheet arrangements
that are reasonably likely to have a material effect on the
Corporations financial condition, results of operations,
liquidity or capital resources, other than as disclosed in
Note (14) of the Notes to Consolidated Financial Statements.
INVESTED
ASSETS
The main objectives in managing our investment portfolios are to
maximize after-tax investment income and total investment
returns while minimizing credit risks in order to 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 is primarily comprised of high quality
bonds, principally tax exempt securities, mortgage-backed
securities, corporate issues and U.S. Treasury securities,
as well as foreign government and corporate bonds that support
our operations outside the United States. The portfolio also
includes equity securities, primarily publicly traded common
stocks, and other invested assets, primarily private equity
limited partnerships, all of which are held with the primary
objective of capital appreciation.
Limited partnership investments by their nature are less liquid
and involve more risk than other investments. We actively manage
our risk through type of asset class and domestic and
international diversification. At December 31, 2008, we had
investments in about 95 separate partnerships. We review the
performance of these investments on a quarterly basis and we
obtain audited financial statements annually.
In our U.S. operations, during 2008, we invested new cash
in tax exempt bonds and taxable bonds. The taxable bonds we
invested in were corporate bonds while we reduced our holdings
of
mortgage-backed
securities. In 2007, we invested new cash in tax exempt bonds
and, to a lesser extent, taxable bonds, equity securities and
limited partnerships. The taxable bonds we invested in were
corporate bonds and mortgage-backed securities while we reduced
our holdings of U.S. Treasury securities. In 2006, we
invested new cash in tax exempt bonds and, to a lesser extent,
equity securities and limited partnerships, whereas we decreased
our holdings of taxable bonds, principally U.S. Treasury
securities. Our objective is to achieve the appropriate mix of
taxable and tax exempt securities in our portfolio to balance
both investment and tax strategies. At December 31, 2008,
69% of our U.S. fixed
60
maturity portfolio was invested in tax exempt bonds compared
with 67% at December 31, 2007 and 66% at December 31,
2006.
We classify our fixed maturity securities, which may be sold
prior to maturity to support our investment strategies, such as
in response to changes in interest rates and the yield curve or
to maximize after-tax returns, as available-for-sale. Fixed
maturities classified as available-for-sale are carried at fair
value.
Changes in the general interest rate environment affect the
returns available on new fixed maturity investments. While a
rising interest rate environment enhances the returns available
on new investments, it reduces the fair value of existing fixed
maturity investments and thus the availability of gains on
disposition. A decline in interest rates reduces the returns
available on new investments but increases the fair value of
existing investments, creating the opportunity for realized
investment gains on disposition.
The net unrealized depreciation before tax of our fixed
maturities and equity securities carried at fair value was
$220 million at December 31, 2008 compared with net
unrealized appreciation of $810 million at
December 31, 2007 and net unrealized appreciation of
$603 million at December 31, 2006. Such unrealized
appreciation and depreciation is reflected in comprehensive
income, net of applicable deferred income tax.
Credit spreads, which refer to the difference between a
risk-free yield (the yield on U.S. Treasury securities) and
the actual yields on all other fixed maturity investments,
increased significantly during 2008 due to the declines in the
financial markets. This resulted in a decline in the fair value
of many of our fixed maturity investments.
PENSION
AND OTHER POSTRETIREMENT BENEFITS
As a result of the turmoil in the financial markets during 2008,
the fair value of the assets in our pension and other
postretirement benefit plans decreased significantly. As a
result, the funded status of these plans deteriorated. Due
primarily to this decline, postretirement benefit costs not yet
recognized in net income increased by $437 million, which
was reflected in comprehensive income, net of applicable
deferred income taxes.
The increase in the amortization of net losses resulting from
the decrease in value of these assets will not have a material
adverse effect on results of operations in 2009.
Employee benefits are discussed further in Note (13) of the
Notes to Consolidated Financial Statements.
CONTINGENCIES
For a discussion regarding contingencies related to regulatory
developments and legal proceedings, see Note (14) of the
Notes to Consolidated Financial Statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments. Our primary
exposure to market risks relates to our investment portfolio,
which is sensitive to changes in interest rates and, to a lesser
extent, credit quality, prepayment, foreign currency exchange
rates and equity prices. We also have exposure to market risks
through our debt obligations. Analytical tools and monitoring
systems are in place to assess each of these elements of market
risk.
Investment
Portfolio
Interest rate risk is the price sensitivity of a security that
promises a fixed return to changes in interest rates. When
market interest rates rise, the fair value of our fixed income
securities decreases. We view the potential changes in price of
our fixed income investments within the overall context of asset
and liability management. Our actuaries estimate the payout
pattern of our liabilities, primarily our
61
property and casualty loss reserves, to determine their
duration. Expressed in years, duration is the weighted average
payment period of cash flows, where the weighting is based on
the present value of the cash flows. We set duration targets for
our fixed income investment portfolios after consideration of
the estimated duration of these liabilities and other factors,
which allows us to prudently manage the overall effect of
interest rate risk for the Corporation.
The following table provides information about our fixed
maturity investments, which are sensitive to changes in interest
rates. The table presents cash flows of principal amounts and
related weighted average interest rates by expected maturity
dates at December 31, 2008 and 2007. The cash flows are
based on the earlier of the call date or the maturity date or,
for mortgage-backed securities, expected payment patterns.
Actual cash flows could differ from the expected amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Tax exempt
|
|
$
|
1,102
|
|
|
$
|
874
|
|
|
$
|
1,385
|
|
|
$
|
1,641
|
|
|
$
|
2,717
|
|
|
$
|
10,580
|
|
|
$
|
18,299
|
|
|
$
|
18,345
|
|
Average interest rate
|
|
|
5.1
|
%
|
|
|
4.7
|
%
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
Taxable other than mortgage-backed securities
|
|
|
768
|
|
|
|
1,101
|
|
|
|
1,225
|
|
|
|
1,429
|
|
|
|
1,560
|
|
|
|
4,329
|
|
|
|
10,412
|
|
|
|
10,645
|
|
Average interest rate
|
|
|
5.2
|
%
|
|
|
4.9
|
%
|
|
|
4.9
|
%
|
|
|
5.1
|
%
|
|
|
4.5
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
580
|
|
|
|
551
|
|
|
|
669
|
|
|
|
702
|
|
|
|
738
|
|
|
|
940
|
|
|
|
4,180
|
|
|
|
3,765
|
|
Average interest rate
|
|
|
4.7
|
%
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
|
|
5.4
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,450
|
|
|
$
|
2,526
|
|
|
$
|
3,279
|
|
|
$
|
3,772
|
|
|
$
|
5,015
|
|
|
$
|
15,849
|
|
|
$
|
32,891
|
|
|
$
|
32,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Tax exempt
|
|
$
|
1,179
|
|
|
$
|
891
|
|
|
$
|
1,047
|
|
|
$
|
1,421
|
|
|
$
|
1,766
|
|
|
$
|
11,904
|
|
|
$
|
18,208
|
|
|
$
|
18,559
|
|
Average interest rate
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
|
4.7
|
%
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
Taxable other than mortgage-backed securities
|
|
|
808
|
|
|
|
1,125
|
|
|
|
1,388
|
|
|
|
1,196
|
|
|
|
1,494
|
|
|
|
4,494
|
|
|
|
10,505
|
|
|
|
10,562
|
|
Average interest rate
|
|
|
5.6
|
%
|
|
|
4.8
|
%
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
|
|
5.2
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
623
|
|
|
|
580
|
|
|
|
556
|
|
|
|
529
|
|
|
|
694
|
|
|
|
1,779
|
|
|
|
4,761
|
|
|
|
4,750
|
|
Average interest rate
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
|
|
4.7
|
%
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,610
|
|
|
$
|
2,596
|
|
|
$
|
2,991
|
|
|
$
|
3,146
|
|
|
$
|
3,954
|
|
|
$
|
18,177
|
|
|
$
|
33,474
|
|
|
$
|
33,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk is the potential loss resulting from adverse changes
in the issuers ability to repay the debt obligation. We
have consistently invested in high quality marketable
securities. Only about 1% of our bond portfolio is below
investment grade. Our investment portfolio does not have any
direct exposure to either sub-prime mortgages or collateralized
debt obligations. Our tax exempt bonds mature on average in nine
years, while our taxable bonds have an average maturity of five
years.
About 80% of our tax exempt bonds are rated AA or better by
Moodys or Standard and Poors with about 25% rated
AAA. The average rating of our tax exempt bonds is AA. While
about 40% of our tax exempt bonds are insured, the effect of
insurance on the average credit rating of these bonds is
insignificant. The insured tax exempt bonds in our portfolio
have been selected based on the quality of the underlying credit
and not the value of the credit insurance enhancement.
About 75% of the taxable bonds, other than mortgage-backed
securities, in our portfolio are issued by the
U.S. Treasury or U.S. government agencies or by
foreign governments or are rated AA or better.
62
Mortgage-backed securities comprised 26% of our taxable bond
portfolio at year-end 2008. About 98% of the mortgage-backed
securities are rated AAA and the remaining 2% are all investment
grade. Of the AAA rated securities, about 65% 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 other 35% of the AAA rated
securities are call protected, commercial mortgage-backed
securities (CMBS). About 85% 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.
Prepayment risk refers to the changes in prepayment patterns
related to decreases and increases in interest rates that can
either shorten or lengthen the expected timing of the principal
repayments and thus the average life of a security, potentially
reducing or increasing its effective yield. Such risk exists
primarily within our portfolio of residential mortgage-backed
securities. We monitor such risk regularly.
Foreign currency risk is the sensitivity to foreign exchange
rate fluctuations of the fair value and investment income
related to foreign currency denominated financial instruments.
The functional currency of our foreign operations is generally
the currency of the local operating environment since business
is primarily transacted in such local currency. We seek to
mitigate the risks relating to currency fluctuations by
generally maintaining investments in those foreign currencies in
which our property and casualty subsidiaries have loss reserves
and other liabilities, thereby limiting exchange rate risk to
the net assets denominated in foreign currencies.
At December 31, 2008, the property and casualty
subsidiaries held foreign currency denominated investments of
$6.5 billion supporting their international operations. The
principal currencies creating foreign exchange rate risk for the
property and casualty subsidiaries are the euro, the Canadian
dollar and the British pound sterling. The following table
provides information about those fixed maturity investments that
are denominated in these currencies. The table presents cash
flows of principal amounts in U.S. dollar equivalents by
expected maturity dates at December 31, 2008. Actual cash
flows could differ from the expected amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
after
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
36
|
|
|
$
|
125
|
|
|
$
|
142
|
|
|
$
|
173
|
|
|
$
|
301
|
|
|
$
|
776
|
|
|
$
|
1,553
|
|
|
$
|
1,634
|
|
Canadian dollar
|
|
|
83
|
|
|
|
162
|
|
|
|
283
|
|
|
|
205
|
|
|
|
146
|
|
|
|
644
|
|
|
|
1,523
|
|
|
|
1,641
|
|
British pound sterling
|
|
|
33
|
|
|
|
106
|
|
|
|
162
|
|
|
|
143
|
|
|
|
189
|
|
|
|
670
|
|
|
|
1,303
|
|
|
|
1,397
|
|
Equity price risk is the potential loss in fair value of our
equity securities resulting from adverse changes in stock
prices. In general, equities have more year-to-year price
variability than intermediate term high grade bonds. However,
returns over longer time frames have been consistently higher.
Our publicly traded equity securities are high quality,
diversified across industries and readily marketable. A
hypothetical decrease of 10% in the market price of each of the
equity securities held at December 31, 2008 and 2007 would
have resulted in a decrease of $148 million and
$232 million, respectively, in the fair value of the equity
securities portfolio.
All of the above risks are monitored on an ongoing basis. A
combination of in-house systems and proprietary models and
externally licensed software are used to analyze individual
securities as well as each portfolio. These tools provide the
portfolio managers with information to assist them in the
evaluation of the market risks of the portfolio.
63
Debt
We also have interest rate risk on our debt obligations. The
following table presents expected cash flow of principal amounts
and related weighted average interest rates by maturity date of
our long term debt obligations at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
|
|
|
Fair
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
after
|
|
|
Total
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Expected cash flows of principal amounts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
|
|
|
$
|
275
|
|
|
$
|
3,300
|
|
|
$
|
3,975
|
|
|
$
|
3,493
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
5.2
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Consolidated financial statements of the Corporation at December
31, 2008 and 2007 and for each of the three years in the period
ended December 31, 2008 and the report thereon of our
independent registered public accounting firm, and the
Corporations unaudited quarterly financial data for the
two-year period ended December 31, 2008 are listed in Item
15(a) of this report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
As of December 31, 2008, an evaluation of the effectiveness
of the design and operation of the Corporations disclosure
controls and procedures (as such term is defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934) was performed under
the supervision and with the participation of the
Corporations management, including Chubbs chief
executive officer and chief financial officer. Based on that
evaluation, the chief executive officer and chief financial
officer concluded that the Corporations disclosure
controls and procedures were effective as of December 31,
2008.
During the three month period ended December 31, 2008,
there were no changes in internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, the Corporations internal
control over financial reporting.
64
Managements
Report on Internal Control over Financial Reporting
Management of the Corporation is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934. The Corporations internal
control over financial reporting was designed under the
supervision of and with the participation of the
Corporations management, including Chubbs chief
executive officer and chief financial officer, to provide
reasonable assurance regarding the reliability of the
Corporations financial reporting and the preparation and
fair presentation of published financial statements in
accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management conducted an assessment of the effectiveness of the
Corporations internal control over financial reporting as
of December 31, 2008. In making this assessment, management
used the framework set forth in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, management has determined that, as of
December 31, 2008, the Corporations internal control
over financial reporting is effective.
The Corporations internal control over financial reporting
as of December 31, 2008 has been audited by
Ernst & Young LLP, the independent registered public
accounting firm who also audited the Corporations
consolidated financial statements. Their attestation report on
the Corporations internal control over financial reporting
is shown on page 66.
Item 9B. Other
Information
None.
65
Report of
Independent Registered Public Accounting Firm
Ernst & Young LLP
5 Times Square
New York, New York 10036
The Board of Directors and Shareholders
The Chubb Corporation
We have audited The Chubb Corporations internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The Chubb
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Corporations internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, The Chubb Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The Chubb Corporation as of
December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders equity, cash flows and
comprehensive income for each of the three years in the period
ended December 31, 2008, and our report dated
February 26, 2009 expressed an unqualified opinion thereon.
February 26, 2009
66
PART
III.
Item 10. Directors
and Executive Officers of the Registrant
Information regarding Chubbs directors is incorporated by
reference from Chubbs definitive Proxy Statement for the
2009 Annual Meeting of Shareholders under the caption Our
Board of Directors. Information regarding Chubbs
executive officers is included in Part I of this report under
the caption Executive Officers of the Registrant.
Information regarding Section 16 reporting compliance of
Chubbs directors, executive officers and 10% beneficial
owners is incorporated by reference from Chubbs definitive
Proxy Statement for the 2009 Annual Meeting of Shareholders
under the caption Section 16(a) Beneficial Ownership
Reporting Compliance. Information regarding Chubbs
Code of Ethics for CEO and Senior Financial Officers is included
in Item 1 of this report under the caption
Business General. Information regarding
the Audit Committee of Chubbs Board of Directors and its
Audit Committee financial experts is incorporated by reference
from Chubbs definitive Proxy Statement for the 2009 Annual
Meeting of Shareholders under the captions Corporate
Governance Audit Committee and Committee
Assignments.
Item 11. Executive
Compensation
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders, under the
captions Corporate Governance Directors
Compensation, Compensation Discussion and
Analysis and Executive Compensation.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders, under the
captions Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information.
Item 13. Certain
Relationships and Related Transactions
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders, under the
caption Certain Transactions and Other Matters.
Item 14. Principal
Accountant Fees and Services
Incorporated by reference from Chubbs definitive Proxy
Statement for the 2009 Annual Meeting of Shareholders, under the
caption Proposal 3: Ratification of Appointment of
Independent Auditor.
PART
IV.
Item 15. Exhibits,
Financial Statements and Schedules
The financial statements and schedules listed in the
accompanying index to financial statements and financial
statement schedules are filed as part of this report.
The exhibits listed in the accompanying index to exhibits are
filed as part of this report.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The Chubb Corporation
(Registrant)
February 26, 2009
(John D. Finnegan Chairman,
President and
Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John
D. Finnegan
(John
D. Finnegan)
|
|
Chairman, President, Chief
Executive Officer and
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Zoë
Baird
(Zoë
Baird)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Sheila
P. Burke
(Sheila
P. Burke)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James
I. Cash, Jr.
(James
I. Cash, Jr.)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Joel
J. Cohen
(Joel
J. Cohen)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Klaus
J. Mangold
(Klaus
J. Mangold)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Martin
G. McGuinn
(Martin
G. McGuinn)
|
|
Director
|
|
February 26, 2009
|
68
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Lawrence
M. Small
(Lawrence
M. Small)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Jess
Søderberg
(Jess
Søderberg)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Daniel
E. Somers
(Daniel
E. Somers)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Karen
Hastie Williams
(Karen
Hastie Williams)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ James
M. Zimmerman
(James
M. Zimmerman)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Alfred
W. Zollar
(Alfred
W. Zollar)
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Richard
G. Spiro
(Richard
G. Spiro)
|
|
Executive Vice President and
Chief Financial Officer
|
|
February 26, 2009
|
|
|
|
|
|
/s/ John
J. Kennedy
(John
J. Kennedy)
|
|
Senior Vice President and
Chief Accounting Officer
|
|
February 26, 2009
|
69
THE CHUBB
CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
(Item 15(a))
|
|
|
|
|
|
|
|
|
|
|
Form 10-K
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-5
|
|
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information
required is included in the financial statements and notes
thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
5 Times Square
New York, New York 10036
The Board of Directors and
Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of
The Chubb Corporation as of December 31, 2008 and 2007, and
the related consolidated statements of income,
shareholders equity, cash flows and comprehensive income
for each of the three years in the period ended
December 31, 2008. Our audits also included the financial
statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility
of the Corporations management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of The Chubb Corporation at December 31,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), The
Chubb Corporations internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 26, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
February 26,
2009
F-2
THE CHUBB CORPORATION
Consolidated Statements of
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions,
|
|
|
|
Except For Per Share Amounts
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
$
|
11,828
|
|
|
|
$
|
11,946
|
|
|
|
$
|
11,958
|
|
Investment Income
|
|
|
1,732
|
|
|
|
|
1,738
|
|
|
|
|
1,580
|
|
Other Revenues
|
|
|
32
|
|
|
|
|
49
|
|
|
|
|
220
|
|
Realized Investment Gains (Losses), Net
|
|
|
(371
|
)
|
|
|
|
374
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
13,221
|
|
|
|
|
14,107
|
|
|
|
|
14,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss Expenses
|
|
|
6,898
|
|
|
|
|
6,299
|
|
|
|
|
6,574
|
|
Amortization of Deferred Policy Acquisition Costs
|
|
|
3,123
|
|
|
|
|
3,092
|
|
|
|
|
2,919
|
|
Other Insurance Operating Costs and Expenses
|
|
|
441
|
|
|
|
|
444
|
|
|
|
|
550
|
|
Investment Expenses
|
|
|
32
|
|
|
|
|
35
|
|
|
|
|
34
|
|
Other Expenses
|
|
|
36
|
|
|
|
|
48
|
|
|
|
|
207
|
|
Corporate Expenses
|
|
|
284
|
|
|
|
|
252
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LOSSES AND EXPENSES
|
|
|
10,814
|
|
|
|
|
10,170
|
|
|
|
|
10,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX
|
|
|
2,407
|
|
|
|
|
3,937
|
|
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and Foreign Income Tax
|
|
|
603
|
|
|
|
|
1,130
|
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,804
|
|
|
|
$
|
2,807
|
|
|
|
$
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.00
|
|
|
|
$
|
7.13
|
|
|
|
$
|
6.13
|
|
Diluted
|
|
|
4.92
|
|
|
|
|
7.01
|
|
|
|
|
5.98
|
|
See accompanying notes.
F-3
THE CHUBB CORPORATION
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
In Millions
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Invested Assets
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
$
|
2,478
|
|
|
|
$
|
1,839
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
Tax Exempt (cost $18,299 and $18,208)
|
|
|
18,345
|
|
|
|
|
18,559
|
|
Taxable (cost $14,592 and $15,266)
|
|
|
14,410
|
|
|
|
|
15,312
|
|
Equity Securities (cost $1,563 and $1,907)
|
|
|
1,479
|
|
|
|
|
2,320
|
|
Other Invested Assets
|
|
|
2,026
|
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTED ASSETS
|
|
|
38,738
|
|
|
|
|
40,081
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
56
|
|
|
|
|
49
|
|
Securities Lending Collateral
|
|
|
|
|
|
|
|
1,247
|
|
Accrued Investment Income
|
|
|
435
|
|
|
|
|
440
|
|
Premiums Receivable
|
|
|
2,201
|
|
|
|
|
2,227
|
|
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
|
|
|
2,212
|
|
|
|
|
2,307
|
|
|