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Chubb (CB)Stock (Financial Services Industry, Property & Casualty Insurance Industry)
 Chubb’s subsidiary businesses are collectively known as the Chubb Group of Insurance Companies (the P&C Group). Chubb has operations in 28 countries worldwide with about 78% of business taking place in the U.S. It is the 11th largest U.S. property and casualty insurance provider.[3] [edit] Company OverviewThe P&C Group sells property and casualty insurance through three strategic business units: Chubb Commercial Insurance (CCI), Chubb Personal Insurance (CPI), and Chubb Specialty Insurance (CSI).[4] The Chubb Corporation also included a reinsurance business called Chubb Re, Inc. that was sold to Harbor Point Limited in December 2005.[5] In addition, Chubb has a small real estate operation through a subsidiary called Bellemead Development Corporation, which is involved in commercial development in New Jersey and residential development in central Florida. Chubb’s real estate operations are currently in run-off, meaning that the company is not currently undertaking any new business.[6] Finally, Chubb Financial Solutions sells customized financial products to corporate clients, dealing primarily in structured credit derivatives. Chubb Financial Solutions has been in run-off since April 2003.[7] Chubb outsources the distribution of its insurance products to independent agencies and brokers. In the U.S., Chubb sells its products through about 5,000 independent insurance agencies and regularly accepts business from about 500 insurance brokers. Furthermore, Chubb sells its products through about 3,000 insurance brokers outside the U.S. Chubb operates branch and service offices throughout the world to assist affiliated agencies and brokers in implementation and further development of policies.[8] [edit] Business and Financial Metrics The Chubb Corporation’s Revenue and Income.[9] [edit] Underwriting OperationsUnderwriting refers to identifying and accurately calculating the risk associated with covering a client and determining the appropriate premium the client will pay for coverage. Underwriting income was $2.1 billion in 2007, up from $1.9 billion in 2006 and $0.9 billion in 2005 due to fewer catastrophe losses and increases in the specialty insurance business.[12] The principle measurement of underwriting profitability is the combined loss and expense ratio, which measures the percent of each dollar earned that must be spent on claims and expenses. If the combined ratio is under 100%, underwriting has been profitable, with more being earned in premiums than paid out to clients.[13] Chubb’s underwriting results progressively increased from 2005 to 2007. Weaker profitability in 2005 is largely attributable the impact of Hurricane Katrina, which cost the company $462 million.[14] In the first two quarters of 2008, the combined ratio has increased to 86.2% due to catastrophe losses in the commercial property and marine areas.[15]
The expense ratio is the ratio of statutory underwriting expenses, which include salaries, commissions, and premium taxes, to premiums written (money that clients are required to pay for the insurance policy). It is a general measure of company efficiency. Chubb’s earnings ratio has worsened from 2005 to 2007. The increase in Chubb’s expense ratio in 2006 was due to increasing operating costs and higher commissions while the number of policies the company issued decreased.[18] Unpaid losses and loss expenses, Chubb’s biggest liability, increased by $617 million (3%) for 2007. [edit] InvestmentsThe Chubb Corporation also manages an investment portfolio, primarily comprised of tax-exempt bonds, in order to offset losses from underwriting operations. As insurance coverage is generally prepaid, an insurance company’s investment fund come primarily from paid premiums.[19] In 2007, as a result of increases in invested assets and the purchase of more taxable bonds such as corporate bonds, Chubb’s investment income rose to $1.59 billion. This marked an increase from the previous two years.[20]
[edit] Business Segments The Chubb Corporation’s Net Premuims Written (2007)[21]
[edit] Key Trends and Forces[edit] Catastrophe Claims on the RiseIn the insurance industry, a catastrophe is an extremely severe natural or man-made disaster for which claims exceed $25 million. Catastrophes include hurricanes, tornadoes, wildfires, and terrorists attacks. Six of the ten most costly catastrophes in U.S. history were hurricanes that took place in 2004-2005. Hurricane Katrina, for instance, was the most expensive catastrophe ever recorded, costing $41.1 billion from a total of 1.75 million claims. The September 11th terrorist attacks were the 3rd most costly catastrophe in U.S. history.[29] In response to 9/11, the Terrorism Risk Insurance Act of 2002 established that the federal government would share the risk of loss from terrorism with commercial insurance companies. Catastrophes can put unexpected strain on insurance companies. The frequency and severity of their occurrence has a dramatic impact on an insurance company’s performance. In 2005, 24 disasters resulted in losses totaling $61.2 billion.[30] Conversely, 2006 and 2007 were calmer with a 2007 total catastrophe loss of $6.5 billion. The second quarter of 2008 saw nearly twice as many catastrophes as in the first, costing the insurance industry $6.025 billion.[31] 2008 catastrophe costs are already higher than those in 2006 and 2007, due largely to rain and flooding in mid-western U.S. states. On a global scale, 2008 catastrophe losses total about $50 billion.[32] While catastrophe loss strained Chubb’s income and combined ratio in 2004-2005, the decrease in catastrophic occurrences in the U.S. in 2006-2007 caused a gradual increase in profitability as it continued to pay off claims from the previous two years. However, the high frequency of catastrophic occurrences in the U.S. in the first half of 2008 is again applying negative pressure on the Chubb’s underwriting income and combined ratio, which decreased 3.1% in the first six months of 2008.[33] [edit] Housing Bubble and Credit Crunch Spillover into Insurance IndustryThe housing bubble and credit crunch of 2007 have resulted in decreased underwriting profits for mortgage and financial guarantee insurers, pushing the industry-wide combined ratio to 99.9% from 95.6% in 2007.[34] A surge in mortgage defaults has triggered an increase in claims on providers of mortgage policies.[35] Additionally, there has been a proliferation of lawsuits against directors and officers who took charges against earnings and re-valued investment portfolios during the ensuing credit crunch.[36] Consequently, there has been an increase in directors & officers and errors & omissions claims, of which the P&C Group is a leading provider. However, after involvement in the Enron and WorldCom in 2004-2005, Chubb limited its coverage of major subprime mortgage companies, major investment banks, and got out of a program covering mortgage brokers.[37] [edit] Soft Market in Insurance Resulting in Increased Competition and Low Premium RatesThe insurance industry is highly cyclical, especially in the commercial sector, alternating between hard markets characterized by high premium rates, selective and scarce coverage, and high insurance company profits, and soft markets of readily available coverage and lower rates. A soft market in the insurance industry started in 2004. Soft markets mean intense competition between insurers seeking to increase their market share, leading to decreasing profits, and fewer net premiums written decrease.[38] Even without the adverse impact of mortgage and financial guarantee claims, the soft market condition resulted in a 1.1% increase in the industry-wide combined ratio. The automobile insurance industry, with increased pricing power in 2008, appears to be an exception to the soft market.[39] Chubb’s business results are generally inline with soft market conditions as net premiums written increased 1% in 2008, as opposed to the industry-wide slight decrease.[40]  Property and Casualty Insurance Cycle 1975-2007 (Growth in Net Premiums Written)[41]
[edit] Asbestos Claims are Chubb’s Biggest LiabilityAsbestos, a mineral causing a variety of diseases, was increasingly used in the manufacturing and construction industries in the 1940s/1950s. Although banned in the 1970s, asbestos related illness can take up to 40 years to manifest itself. A wave of lawsuits filed by employees exposed to asbestos began in the late 1960s and intensified throughout the 1980s resulting in wide-spread bankruptcy of companies who had exposed employees. Asbestos claims decreased in the in the 1990s but a wave of lawsuits began in 1999 primarily due to new laws that allowed people to file claims against companies less directly linked with asbestos exposure and for nonmalignant asbestos-related conditions. U.S. insurance companies paid out over $24 billion for asbestos claims between 1991 and 2004 with eventual claims estimated at $65 billion.[42] Asbestos claims are the Chubb Corporation’s and the insurance industry’s largest liability, costing more than 9/11 and Hurricane Andrew combined. Chubb’s asbestos related gross loss reserves were $8.38 billion in 2007.[43] [edit] Investigations of Insurance Industry’s Anti-Competitive BehaviorThe insurance industry is exempt from federal anti-trust laws and primarily regulated at the state-level. Recent catastrophes, such as Hurricane Katrina, have cause intense criticism of the lack of accountability and the anti-competitive behavior of U.S. insurers. The U.S. Securities and Exchange Commission and several Attorney Generals began investigations of the insurance industry practices.[44][45] Chubb’s practice of paying contingent commissions to partnering brokers was investigated as a policy that might induce anti-competitive behavior and create conflicts of interest. In addition, Chubb’s loss mitigation and reinsurance arrangements were questioned. In a December 2006settlement with the Attorney Generals of New York, Illinois, and Connecticut, Chubb agreed to discontinue paying these commissions. The Ohio Attorney General filed a similar suit against Chubb in August 2007 which is still pending.[46]
[edit] Competition[edit] Market ShareThe top 20 property and insurance companies for 2007 are ranked below. The Chubb Corporation is the 11th largest property and casualty insurer with 1.96% market chare.
 Chubb2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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