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Chubb 10-K 2010 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(908) 903-2000
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
[ü]
No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes [ ] No
[ü]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[ü]
No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and
post such files). Yes
[ü]
No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant’s
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):
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 $13,920,104,349 as of
June 30, 2009, computed on the basis of the closing sale
price of the common stock on that date.
328,574,448
Number of shares of common stock
outstanding as of February 12, 2010
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the 2010 Annual
Meeting of Shareholders are incorporated by reference in
Part III of this Form 10-K.
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PART
I.
Item 1. Business
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
2008 net written premiums.
At December 31, 2009, the Corporation had total assets of
$50 billion and shareholders’ equity of
$16 billion. Revenues, income before income tax and assets
for each operating segment for the three years ended
December 31, 2009 are included in Note (11) of the
Notes to Consolidated Financial Statements. The Corporation
employed approximately 10,200 persons worldwide on
December 31, 2009.
The Corporation’s principal executive offices are located
at 15 Mountain View Road, Warren, New Jersey 07059, and our
telephone number is (908) 903-2000.
The Corporation’s Internet address is www.chubb.com. The
Corporation’s 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.
Chubb’s 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 Corporation’s website or by writing
to the Corporation’s 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 coverage of fine homes, automobiles and other
personal possessions along with options for high limits of
personal liability coverage. Chubb Personal Insurance also
provides supplemental accident and health insurance in niche
markets.
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, 2009 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 Canada, Chubb Insurance
Company of Europe SE, Chubb Insurance Company of Australia
Limited,
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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.
A summary of the P&C Group’s premiums written during
the past three years is shown in the following table:
(a) Intercompany items eliminated.
The net premiums written during the last three years for major
classes of the P&C Group’s business are included in
the Property and Casualty Insurance — Underwriting
Results section of Management’s 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 2009, approximately 77% of the
P&C Group’s direct business was produced in the
United States, where the P&C Group’s businesses enjoy
broad geographic distribution with a particularly strong market
presence in the Northeast. The five states accounting for the
largest amounts of direct premiums written were New York with
12%, California with 9%, Texas with 5%, Florida with 4% and New
Jersey with 4%. Approximately 11% of the P&C Group’s
direct premiums written was produced in Europe and 5% was
produced in Canada.
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 Group’s business are included in the Property
and Casualty Insurance — Underwriting Operations
section of MD&A.
Another frequently used measurement in the property and casualty
insurance industry is the ratio of statutory net premiums
written to policyholders’ surplus. At December 31,
2009 and 2008, the ratio for the P&C Group was 0.76 and
0.96, respectively.
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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 Group’s branch and
service offices assist these agencies and brokers in producing
and servicing the P&C Group’s 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.
In accordance with the normal practice of the insurance
industry, the P&C Group cedes reinsurance to reinsurance
companies. Reinsurance is ceded to provide greater
diversification of risk and to limit the P&C Group’s
maximum net loss arising from large risks or from catastrophic
events.
A large portion of the P&C Group’s ceded reinsurance
is effected under contracts known as treaties under which all
risks meeting prescribed criteria are automatically covered.
Most of the P&C Group’s 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 Group’s capacity to underwrite risks changes.
For a discussion of the P&C Group’s 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.
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.
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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 2009 was approximately 3% lower than the
number at year-end 2008. The number of new arising claims during
2009 was approximately 8% lower than in the prior year.
Additional information related to the P&C Group’s
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 2009.
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, 2009. 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 2009 relating to losses incurred prior
to December 31, 1999 would be included in the cumulative
deficiency amount for each year in the period 1999 through 2008.
Yet, the deficiency would be reflected in operating results only
in 2009. 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.
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ANALYSIS
OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
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The subsequent development of the net liability for unpaid
losses and loss adjustment expenses as of year-ends 1999 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 year 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, to a
lesser extent, commercial casualty and workers’
compensation classes. For the years 2004 through 2008, there was
significant favorable development, primarily in the professional
liability classes and more recently in the commercial casualty
classes due to favorable loss trends in recent years and in the
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 1999
column, as of December 31, 2009 the P&C Group had paid
$8,944 million of the currently estimated
$11,011 million of net losses and loss adjustment
expenses that were unpaid at the end of 1999; thus, an estimated
$2,067 million of net losses incurred on or before
December 31, 1999 remain unpaid as of December 31, 2009,
approximately 44% 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, 2009.
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:
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.
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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 Corporation’s 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.
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 Group’s
products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization
that is of value to the insured. The P&C Group continues to
work closely with its distribution network of agents and brokers
as well as customers and to reinforce with them the stability,
expertise and added value the P&C Group’s products
provide.
There are approximately 2,400 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.
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 company system and, in addition, certain
of such transactions cannot be consummated without the
commissioners’ prior approval.
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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
company’s actual policyholders’ surplus to its minimum
capital requirement will determine whether any state regulatory
action is required. At December 31, 2009, 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
Group’s 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 Group’s
ability to charge adequate rates.
Subject to legislative and regulatory requirements, the P&C
Group’s 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 surcharges. In
2009, assessments of the members of the P&C Group were
insignificant. The amount of future assessments cannot be
reasonably estimated.
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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 company’s 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 Group’s business and the
market as a whole include federal terrorism insurance, systemic
risk regulation, 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.
The Corporation’s 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 (CFS) provided customized financial
products, primarily derivative financial instruments, to
corporate clients. 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 CFS’s operations is
included in the Corporate and Other — Chubb Financial
Solutions section of MD&A.
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The Corporation’s business is subject to a number of risks,
including those described below, that could have a material
effect on the Corporation’s 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.
The process of establishing loss reserves is complex and
imprecise because it must take into consideration many variables
that are subject to the outcome of future events. As a result,
informed subjective estimates and judgments as to our ultimate
exposure to losses are an integral component of our loss
reserving process. Variations between our loss reserve estimates
and the actual emergence of losses could be material and could
have a material adverse effect on our results of operations or
financial condition.
A further discussion of the risk factors related to our property
and casualty loss reserves is presented in the Property and
Casualty Insurance — Loss Reserves section of
MD&A.
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.
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. 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.
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We cannot
predict the impact that changing climate conditions, including
legal, regulatory and social responses thereto, may have on our
business.
Various scientists, environmentalists, international
organizations, regulators and other commentators believe that
global climate change has added, and will continue to add, to
the unpredictability, frequency and severity of natural
disasters (including, but not limited to, hurricanes, tornadoes,
freezes, other storms and fires) in certain parts of the world.
In response to this belief, a number of legal and regulatory
measures as well as social initiatives have been introduced in
an effort to reduce greenhouse gas and other carbon emissions
which may be chief contributors to global climate change.
We cannot predict the impact that changing climate conditions,
if any, will have on our results of operations or our financial
condition. Moreover, we cannot predict how legal, regulatory and
social responses to concerns about global climate change will
impact our business.
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, 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.
We are exposed to credit risk in several areas of our business
operations, including, without limitation, credit risk relating
to reinsurance, co-sureties on surety bonds, policyholders of
certain of our insurance products, independent agents and
brokers, issuers of securities, insurers of certain securities
and certain other counterparties relating to our investment
portfolio.
With respect to reinsurance coverages that we have purchased,
our ability to recover amounts due from reinsurers may be
affected by the creditworthiness and willingness to pay of the
reinsurers. Although certain reinsurance we have purchased is
collateralized, the collateral is exposed to credit risk of the
counterparty that has guaranteed an investment return on such
collateral.
It is customary practice in the surety business for multiple
insurers to participate as co-sureties on large surety bonds,
meaning that each insurer (each referred to as a co-surety)
assumes its proportionate share of the risk and receives a
corresponding percentage of the bond premium. Under these
arrangements, the co-sureties’ obligations are joint and
several. Consequently, if a co-surety defaults on its
obligations, the remaining co-surety or co-sureties are
obligated to make up the shortfall to the beneficiary of the
surety bond even though the non-defaulting co-sureties did not
receive the premium for that portion of the risk. Therefore, we
are subject to credit risk with respect to the insurers with
whom we are co-sureties on surety bonds.
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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 issuer’s
obligations. Defaults by the issuer and, where applicable, an
issuer’s 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.
We utilize a number of strategies to mitigate our risk exposure,
such as:
However, there are inherent limitations in all of these tactics
and no assurance can be given that an event or series of events
will not result in loss levels in excess of our probable maximum
loss models, which could have a material adverse effect on our
financial condition or results of operations. It is also
possible that losses could manifest themselves in ways that we
do not anticipate and that our risk mitigation strategies are
not designed to address. Such a manifestation of losses could
have a material adverse effect on our financial condition or
results of operations.
These risks may be heightened during difficult economic
conditions such as those currently being experienced in the
United States and elsewhere.
The availability and cost of reinsurance are subject to
prevailing market conditions that are beyond our control. No
assurances can be made that reinsurance will remain continuously
available to us in amounts that we consider sufficient and at
rates that we consider acceptable, which would cause us to
increase the amount of risk we retain, reduce the amount of
business we underwrite or look for alternatives to reinsurance.
This, in turn, could have a material adverse effect on our
financial condition or results of operations.
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.
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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
industry’s profitability. These factors include:
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.
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 customer’s 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.
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.
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 Chubb’s insurance
subsidiaries’ ability to provide Chubb with dividends.
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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
company’s business.
Virtually all states in which we operate require us, together
with other insurers licensed to do business in that state, to
bear a portion of the loss suffered by some insureds as the
result of impaired or insolvent insurance companies. In
addition, in various states, our insurance subsidiaries must
participate in mandatory arrangements to provide various types
of insurance coverage to individuals or other entities that
otherwise are unable to purchase that coverage from private
insurers. A few states require us to purchase reinsurance from a
mandatory reinsurance fund. Such reinsurance funds can create a
credit risk for insurers if not adequately funded by the state
and, in some cases, the existence of a reinsurance fund could
affect the prices charged for our policies. The effect of these
and similar arrangements could reduce our profitability in any
given period or limit our ability to grow our business.
In recent years, the state insurance regulatory framework has
come under increased scrutiny, including scrutiny by federal
officials, and some state legislatures have considered or
enacted laws that may alter or increase state authority to
regulate insurance companies and insurance holding companies.
Further, the NAIC and state insurance regulators are continually
reexamining existing laws and regulations, specifically focusing
on modifications to statutory accounting principles,
interpretations of existing laws and the development of new laws
and regulations. Any proposed or future legislation or NAIC
initiatives, if adopted, may be more restrictive on our ability
to conduct business than current regulatory requirements or may
result in higher costs.
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 Group’s business and the
market as a whole include federal terrorism insurance, systemic
risk regulation, tort reform, natural catastrophes, corporate
governance, ergonomics, health care reform including 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.
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.
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
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framework, which may make it difficult to do business and comply
with local laws and regulations in such jurisdictions. Failure
to comply with local laws in a particular jurisdiction or doing
business in a country that becomes increasingly unstable could
have a significant adverse effect on our business and operations
in that market as well as on our reputation generally.
As part of our international operations, we engage in
transactions denominated in 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.
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.
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.
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 might be unable
to perform their duties for an extended period of time if our
computer, information technology or telecommunication systems
were disabled or destroyed. Our systems could also be subject to
physical break-ins, electronic hacking, and subject to similar
disruptions from unauthorized tampering. This may impede or
interrupt our business operations, which could have a material
adverse effect on our results of operations or financial
condition.
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Item 1B. Unresolved
Staff Comments
None.
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.
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 General’s 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 were
the focus of the business practice investigations.
The Attorney General of Ohio on August 24, 2007 filed an
action in the Court of Common Pleas in Cuyahoga County, Ohio,
against Chubb and certain of its subsidiaries, as well as
several other insurers and one broker, as a result of the Ohio
Attorney General’s business practices investigation. This
action alleges violations of Ohio’s antitrust laws. In July
2008, the court denied the Corporation’s and the other
defendants’ motions to dismiss the Attorney General’s
complaint. In August 2008, the Corporation and the other
defendants filed answers to the complaint and discovery is
proceeding.
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 (N.J. District Court). This action, brought
against several brokers and insurers on behalf of a class of
persons who purchased insurance through the broker defendants,
asserts claims under the Sherman Act and state law and the
Racketeer Influenced and Corrupt Organizations Act (RICO)
arising from the alleged unlawful use of contingent commission
agreements. On September 28, 2007, the N.J. District Court
dismissed the second amended complaint filed by the plaintiffs
in the 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.
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As previously disclosed, Chubb and certain of its subsidiaries
also have been named as defendants in other putative class
actions relating or similar to the In re Insurance Brokerage
Antitrust Litigation that have been filed in various state
courts or in U.S. district courts between 2005 and 2007.
These actions have been subsequently removed and ultimately
transferred to the N.J. District Court for consolidation with
the In re Insurance Brokerage Antitrust Litigation. These
actions are currently stayed.
In the various actions described above, the plaintiffs generally
allege that the defendants unlawfully used contingent commission
agreements and conspired to reduce competition in the insurance
markets. The actions seek treble damages, injunctive and
declaratory relief, and attorneys’ fees. The Corporation
believes it has substantial defenses to all of the
aforementioned legal proceedings and intends to defend the
actions vigorously.
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 Corporation’s results of
operations or financial condition.
No matters were submitted to a vote of the shareholders during
the quarter ended December 31, 2009.
(a) Ages listed above are as of April 28, 2010.
(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 Citigroup’s financial
institutions investment banking group.
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PART
II.
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 2009 and 2008.
At February 12, 2010, there were approximately
8,700 common shareholders of record.
The declaration and payment of future dividends to Chubb’s
shareholders will be at the discretion of Chubb’s Board of
Directors and will depend upon many factors, including the
Corporation’s operating results, financial condition and
capital requirements, and the impact of regulatory constraints
discussed in Note (18)(e) 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, 2009.
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The following performance graph compares the performance of
Chubb’s common stock during the five-year period from
December 31, 2004 through December 31, 2009 with the
performance of the Standard & Poor’s 500 Index
and the Standard & Poor’s 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.
Based upon an initial investment of $100 on December 31,
2004
with dividends reinvested 
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.
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Item 6. Selected
Financial Data
22
Management’s Discussion and Analysis of Financial Condition
and Results of Operations addresses the financial condition of
the Corporation as of December 31, 2009 compared with
December 31, 2008 and the results of operations for each of
the three years in the period ended December 31, 2009. This
discussion should be read in conjunction with the consolidated
financial statements and related notes and the other information
contained in this report.
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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; the impact of changes to our
reinsurance program in 2009 and the cost of reinsurance in 2010;
the adequacy of the rates at which we renewed and wrote new
business; premium volume and competition in 2010; property and
casualty investment income during 2010; cash flows generated by
our fixed income investments; currency rate fluctuations;
estimates with respect to our credit derivatives exposure; the
repurchase of common stock under our share repurchase program;
our capital adequacy and funding of liquidity needs; the funding
and timing of loss payments; and the redemption of our capital
securities. Forward-looking statements are made based upon
management’s 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:
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Chubb assumes no obligation to update any forward-looking
information set forth in this document, which speak as of the
date hereof.
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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.
The following highlights do not address all of the matters
covered in the other sections of Management’s Discussion
and Analysis of Financial Condition and Results of Operations or
contain all of the information that may be important to
Chubb’s shareholders or the investing public. This overview
should be read in conjunction with the other sections of
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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A summary of our consolidated net income is as follows:
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PROPERTY
AND CASUALTY INSURANCE
A summary of the results of operations of our property and
casualty insurance business is as follows:
Property and casualty income before tax in 2009 was higher than
in 2008 due to higher underwriting income, offset in part by
lower investment income. The increase in underwriting income in
2009 was primarily due to substantially lower catastrophe
losses, offset in part by a lower amount of favorable prior year
loss development and a slight reduction in underwriting
profitability excluding catastrophes in the current accident
year. The decrease in investment income in 2009 was due to lower
yields, particularly on short term investments, as well as the
effects of currency fluctuation on income from our
non-U.S. investments.
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 the rate
reductions in the commercial and specialty insurance businesses
over the past several years.
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
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 amounted to $11.1 billion in 2009, a
decrease of 6% compared with 2008. Net premiums written in 2008
decreased by 1% compared with 2007.
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Net premiums written by business unit were as follows:
Net premiums written decreased by 6% in 2009 compared with 2008
and 1% in 2008 compared with 2007. Premiums in the United
States, which represent about 75% of our total net premiums,
decreased by 6% in 2009 and 2% in 2008. Premiums outside the
U.S., expressed in U.S. dollars, decreased by 6% in 2009
and increased by 6% in 2008. In 2009, the decrease in net
premiums written outside the U.S. was attributable to the
impact of currency fluctuation due to the strengthening of the
U.S. dollar. Conversely, in 2008, approximately half of the
premium growth outside the U.S. was due to the impact of
currency fluctuation due to the weakness of the
U.S. dollar. In 2009 and 2008, net premiums written outside
the U.S. grew modestly when measured in local currencies.
Premium growth was adversely impacted in 2009 and 2008, but more
so in 2009, by the general downturn in the economy which began
in 2008 and continued throughout 2009. The amounts of coverage
purchased or the insured exposures, both of which are bases upon
which we calculate the premiums we charge, were down in 2009 in
many classes of our business. Also, in both years, our ability
to grow premiums was constrained by our continued emphasis on
underwriting discipline in a highly competitive market
environment. During 2008, rates were under competitive pressure
and generally decreased, with variation by class of business and
geographic area. In 2009, competitive pressures continued but
rates in the commercial and professional liability businesses
increased slightly overall.
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 found
opportunities to write new business at acceptable rates, we
continued to be disciplined and the number of such opportunities
declined throughout 2008 and 2009. 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, resulting in opportunities
for us to write new business. During 2009, we were able to write
some new business due to this dislocation in the insurance
markets. The modestly positive effect of this was offset by the
decrease in demand in nearly all classes of our insurance
business caused by the general downturn in the economy.
The highly competitive market is likely to continue in 2010.
Although there have been some signs that an economic recovery
may be underway, it remains uncertain if such recovery will
occur and whether it will be sustained. Even if an economic
recovery does occur, premium growth will lag any recovery that
takes place. We expect net written premiums, excluding the
impact of currency fluctuation, will be modestly lower in 2010
compared with 2009. If the average foreign currency to
U.S. dollar exchange rates in 2010 are similar to
2009 year-end levels, we expect net premiums written will
be flat to modestly lower in 2010 compared to 2009.
Reinsurance assumed net premiums written decreased by 67% in
2009 and 53% in 2008. The significant premium decline reflects
the sale of our ongoing reinsurance assumed business in December
2005, which is discussed below.
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which renews annually, expires June 1, 2010. Our
participation in this program currently limits our initial
retention in Florida for homeowners-related losses to
approximately $190 million and provides coverage of 90% of
covered losses between approximately $190 million and
$700 million. Additionally, the catastrophe bond coverage
we established in 2009 provides coverage of 50% of
homeowners-related hurricane losses between $850 million
and $1.15 billion.
For any catastrophe losses, we are subject to certain
coinsurance requirements that affect the interaction of some
elements of our catastrophe reinsurance program.
Our property catastrophe treaty for events outside the United
States was renewed in 2009 with only modest changes in coverage.
We increased both our initial retention and the reinsurance
coverage in the top layer of the treaty by $25 million and
increased our participation in the program. The treaty provides
coverage of approximately 75% of losses (net of recoveries from
other available reinsurance) between $100 million and
$350 million.
In addition to our catastrophe treaties, we also have a
commercial property per risk treaty which was renewed in 2009
with only slight changes in coverage. This treaty currently
provides up to approximately $800 million (depending upon
the currency in which the insurance policy was issued) of
coverage per risk in excess of our initial retention, which is
generally between $25 million and $35 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.
After declining modestly in 2008, reinsurance rates for property
risks increased somewhat in 2009 as there were capacity
restrictions for certain coverages in the market. Consequently,
the overall cost of our catastrophe reinsurance program was
modestly higher in 2009 than that in 2008. We do not expect the
changes we made to our reinsurance program during 2009 to have a
material effect on the Corporation’s results of operations,
financial condition or liquidity.
Our major property reinsurance treaties expire on April 1,
2010. Due to a lower than average impact from catastrophes on
the industry during 2009, we currently expect that reinsurance
rates for property risks will decrease in 2010. The final
structure of our program and amount of coverage purchased will
be determinants of our total reinsurance costs in 2010.
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.
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Underwriting results were highly profitable in each of the last
three years. The combined loss and expense ratio for our overall
property and casualty business was as follows:
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 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 lower in 2009 compared to 2008 due to lower
catastrophe losses, offset in part by a lower amount of
favorable prior year loss development and a slight increase in
the current accident year loss ratio excluding catastrophes. The
loss ratio was higher in 2008 compared to 2007 due to higher
catastrophe losses as well as the impact of rate reductions and
several large non-catastrophe losses.
In 2009, net catastrophe losses incurred were $91 million,
which represented 0.8 percentage points of the loss ratio.
Net catastrophe losses incurred were $607 million in 2008,
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 in 2007 were $363 million,
which represented 3.0 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,
2009 because there was no individual catastrophe for which our
losses exceeded our retention under the treaties.
Our expense ratio was higher in 2009 compared with 2008. The
increase was due primarily to an increase in commission rates in
certain classes of business in the United States and, to a
lesser extent, a decline in premiums written at a rate that
exceeded the rate of reduction in our overhead expenses. 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 in 2008 compared with 2007 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 overhead expense component of our
expense ratio related to our ongoing businesses was similar in
2008 and 2007.
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.
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Review of
Underwriting Results by Business Unit
Net premiums written from personal insurance, which represented
33% of our premiums written in 2009, decreased by 4% in 2009 and
increased by 3% in 2008. Net premiums written for the classes of
business within the personal insurance segment were as follows:
Personal automobile premiums decreased in 2009 and 2008 due to a
highly competitive U.S. marketplace. The decrease in 2009
was also attributable to the impact of currency fluctuation on
business written outside the United States. Premium growth in
our homeowners business was constrained in both 2009 and 2008
due to the downturn in the U.S. economy that began in 2008,
which resulted in a slowdown in new housing construction as well
as lower demand for jewelry and fine arts policy endorsements.
The in-force policy count for this class of business decreased
modestly in 2009 and 2008. Premiums from our other personal
business, which includes insurance for accident and health,
excess liability and yacht coverages, decreased in 2009 after a
substantial increase in 2008. The decrease in 2009 was driven by
our accident and health business, due primarily to the effect of
currency fluctuation on the
non-U.S. component
of this business. The adverse impact of currency fluctuation was
offset in part by growth in the U.S. component of this
business, due primarily to a select initiative. The substantial
growth in our other personal business in 2008 was due primarily
to a significant increase in accident and health premiums, which
had strong growth both in the United States as well as outside
the United States. Excess liability premiums were flat in 2009,
after growing modestly in 2008.
Our personal insurance business produced highly profitable
underwriting results in each of the last three years. The
combined loss and expense ratios for the classes of business
within the personal insurance segment were as follows:
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. The impact of catastrophes accounted for
1.5 percentage points of the combined loss and expense
ratio for this class in 2009 compared with 7.8 percentage
points in 2008 and 9.6 percentage points in 2007. Results
in 2009 and 2008 were adversely impacted by the higher frequency
and severity of large non-catastrophe losses.
Other personal business produced profitable results in each of
the past three years. Results for our excess liability business
were highly profitable in 2009 compared with near breakeven
results in 2008 and unprofitable results in 2007. Results in
2009 benefited from favorable prior year loss development. Prior
year loss development for our excess liability business was not
significant in 2008 compared with
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unfavorable prior year loss development in 2007. Our yacht
business was highly profitable in 2009 compared with
unprofitable results in 2008 and profitable results in 2007.
Yacht results in 2008 were adversely affected by several large
non-catastrophe losses as well as several losses related to
Hurricane Ike. Our accident and health business produced
breakeven results in 2009 compared with profitable results in
2008 and highly profitable results in 2007.
Commercial
Insurance
Net premiums written from commercial insurance, which
represented 42% of our premiums written in 2009, decreased by 7%
in 2009 and 2% in 2008. Net premiums written for the classes of
business within the commercial insurance segment were as follows:
The decrease in premiums in our commercial insurance business in
2009 was primarily attributable to the adverse effects of the
economic downturn, and to a lesser extent, the impact of
currency fluctuation on business written outside the United
States. The decline in premiums in most of our commercial
classes in 2009 and 2008 also reflected the highly competitive
marketplace, particularly for new business. The decrease in
workers’ compensation premiums in 2009 reflected reduced
exposures, due to lower amounts of covered payroll of our
insureds, largely as a result of the downturn in the
U.S. economy. U.S. renewal rates were up slightly in
2009, both in workers’ compensation and for commercial
insurance overall. In 2008, we experienced modest decreases in
renewal rates in the U.S., which were more pronounced in certain
classes, such as workers’ compensation and large property
risks, and also varied by geographic area. 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.
Retention levels of our existing customers have remained strong
over the last three years. New business volume was down in 2009
and 2008 compared with the respective prior years. While we did
obtain some new business in 2009, including as a result of the
dislocation in the insurance markets caused by the impact of the
financial market crisis on some of our competitors, the overall
volume of new business was down from 2008 levels. This decline
was due to continued competitive conditions and the general
reduction in insurance demand due to the effects of the economic
downturn. New business volume was down in 2008 compared with
2007 as it was 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 profitable
underwriting results in each of the past three years. Results in
all three years benefited from favorable loss experience,
disciplined risk selection and appropriate terms and conditions
in recent years. The results in 2008 were less profitable
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
1.2 percentage points of the combined loss and expense
ratio for our commercial insurance business in 2009, compared
with 8.1 percentage points in 2008 and 2.6 percentage
points in 2007. Excluding the effect of catastrophe losses,
results for our
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commercial insurance business were modestly less profitable in
each succeeding year, due in large part to the cumulative impact
of rate reductions experienced over the past several years.
The combined loss and expense ratios for the classes of business
within commercial insurance were as follows:
Multiple peril results were highly profitable in each of the
past three years. Substantial improvement in the property
component of this business in 2009 compared with 2008, due to
lower catastrophe losses, was offset by less profitable results
in the liability component, due in large part to a lower amount
of favorable prior year loss development. The less profitable
results in 2008 compared with those in 2007 were driven by the
property component of this business, largely due to higher
catastrophe losses. The impact of catastrophes accounted for
1.6 percentage points of the combined loss and expense
ratio for this class in 2009 compared with 8.5 percentage
points in 2008 and 1.7 percentage points in 2007. The
property component benefited from low non-catastrophe losses in
all three years, particularly outside the United States in 2008.
Results for our casualty business were profitable in each of the
past three years. The automobile component of our casualty
business was modestly profitable in 2009 compared with highly
profitable results in 2008 and 2007. Results in the primary
liability component were profitable in each of the past three
years, but less so in each succeeding year. Results in the
excess liability component were profitable in each of the past
three years, but more so in 2008. Excess liability results in
all three years benefited from favorable prior year loss
development. Casualty results in all three years 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 3.2 percentage points of the combined loss and
expense ratio for this class in 2009, 5.9 percentage points
in 2008 and 5.3 percentage points in 2007.
Workers’ compensation results were profitable in 2009
compared with highly profitable results in 2008 and 2007.
Results in these years benefited from our disciplined risk
selection during the past several years as well as relatively
favorable claim frequencies. Results in 2009 and 2008 were less
profitable than the respective prior years due in part to lower
rate levels associated with state reforms and increased
competition. Results in 2009 were adversely impacted by
increased large loss activity and modest unfavorable prior year
loss development compared with favorable prior year loss
development in 2008 and 2007.
Property and marine results were highly profitable in 2009
compared with unprofitable results in 2008 and highly profitable
results in 2007. The unprofitable results in 2008 were 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
1.5 percentage points of the combined loss and expense
ratio in 2009 compared with 22.1 percentage points in 2008
and 8.2 percentage points in 2007. Excluding the impact of
catastrophes, the combined ratio was 81.8%, 86.7% and 76.1% in
2009, 2008 and 2007, respectively.
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Net premiums written from specialty insurance, which represented
25% of our premiums written in 2009, decreased by 6% in 2009 and
2% in 2008 compared with the respective prior years. Net
premiums written for the classes of business within the
specialty insurance segment were as follows:
The decrease in net premiums written in our professional
liability classes of business in 2009 was due to several
factors. The continuation of the adverse effects of the economic
downturn and a highly competitive marketplace resulted in fewer
nonrecurring and merger and acquisition related coverage
opportunities, a modest decrease in retention levels and fewer
new business opportunities. In addition, the impact of currency
fluctuation on business written outside the United States
contributed to the decline in premiums in 2009. The decline in
premiums in 2008 for these classes of business was due to the
highly competitive environment, particularly in the directors
and officers liability component.
Overall renewal rates in our professional liability business in
the U.S. increased slightly in 2009. This reversed a
downward trend in renewal rates for the professional liability
classes that had begun several years earlier and had continued
in 2008 in most classes of business, although it had slowed as
the year progressed. Rates for directors and officers liability
and errors and omissions liability insurance for financial
institutions, however, increased in both 2009 and 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
in each of the past two years, but more so in 2009, due in
varying degrees to the competition in the marketplace as well as
the effects of the economic downturn. While we obtained new
business in 2009, including some as a result of the market
dislocation in the insurance industry, the overall volume of new
business was down from 2008. This decline was due to the
decrease in the demand for insurance resulting from the economic
downturn. We maintained our focus on small and middle market
publicly traded and privately held companies and our commitment
to maintaining underwriting discipline in this environment. We
continued to obtain what we believe are acceptable rates and
appropriate terms and conditions on both new business and
renewals.
Premium growth in our surety business began to slow in the
latter half of 2008 due to a more competitive environment and
the impact of the weaker economy on the construction business.
This trend generally continued in 2009.
Our specialty insurance business produced highly profitable
underwriting results in each of the last three years. The
combined loss and expense ratios for the classes of business
within specialty insurance were as follows:
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Our professional liability business produced highly profitable
results in each of the past three years but somewhat less so in
each succeeding year. The profitability of our professional
liability business was particularly strong outside the United
States in all three years. The employment practices liability
and fiduciary liability classes each produced highly profitable
results in each of the three past years. The directors and
officers liability class was profitable in all three years,
particularly in 2007. Our errors and omissions liability
business produced highly unprofitable results in 2009 compared
with near breakeven results in 2008 and 2007. The fidelity class
was highly profitable in each of the past three years, but less
so in 2009 due to several large losses.
Collectively, the results for the professional liability classes
benefited from favorable prior year loss development in each of
the past three years, due primarily to the recognition of the
positive loss trends we have been experiencing related to
accident years 2003 through 2006. These trends were largely the
result of a favorable business climate, lower policy limits and
better terms and conditions. The combined ratio for the 2009
accident year in our professional liability business is modestly
above breakeven, due in part to the uncertainty surrounding the
crisis in the financial markets that began in 2008 and continued
in 2009.
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 those in 2009 and 2007
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 customer’s 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 Corporation’s results of
operations.
In December 2005, we completed a transaction involving a new
Bermuda-based reinsurance company, Harbor Point Limited. As part
of the transaction, we transferred our ongoing reinsurance
assumed business and certain related assets, including renewal
rights, to Harbor Point. Harbor Point generally did not assume
our reinsurance liabilities relating to reinsurance contracts
incepting prior to December 31, 2005. We retained those
liabilities and the related assets.
For a transition period of about two years, Harbor Point
underwrote specific reinsurance business on our behalf. We
retained a portion of this business and ceded the balance to
Harbor Point in return for a fronting commission. We 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 67% in 2009 and 53% in 2008.
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.
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-
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made catastrophic events such as terrorism. The frequency and
severity of catastrophes are inherently unpredictable.
The extent of losses from a natural catastrophe is a function of
both the total amount of insured exposure in an area affected by
the event and the severity of the event. We regularly assess our
concentration of risk exposures in natural catastrophe exposed
areas 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 use catastrophe modeling and a risk
concentration management tool to monitor and control our
accumulations of potential losses in natural catastrophe exposed
areas in the United States, such as California and the gulf and
east coasts, as well as in natural catastrophe exposed areas in
other countries. The information provided by the catastrophe
modeling and the risk concentration management tool has resulted
in our non-renewing some accounts and has restricted us from
writing others. Actual results may differ materially from those
suggested by the model. We also continue to actively explore and
analyze credible scientific evidence, including the potential
impact of global climate change, that may affect our ability to
manage exposure under the insurance policies we issue as well as
the impact that laws and regulations intended to combat climate
change may have on us.
Despite these efforts, the occurrence of one or more severe
natural catastrophic events in heavily populated areas could
have a material adverse effect on the Corporation’s results
of operations, financial condition or liquidity.
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. Actual results may differ materially from those
suggested by the model. Also, the risk concentration management
tool referred to above enables us to identify locations and
geographic areas that are exposed to risk accumulations. The
information provided by the terrorism model and the risk
concentration management tool has resulted in our non-renewing
some accounts and has restricted us from writing others.
The Terrorism Risk Insurance Act of 2002 and more recently, the
Terrorism Risk Insurance Program Reauthorization Act of 2007
(collectively TRIA), are limited duration programs under which
the U.S. federal government has agreed to share the risk of
loss arising from certain acts of terrorism with the insurance
industry. The current program, which will terminate on
December 31, 2014, is applicable to many lines of
commercial business but excludes, among others, commercial
automobile, surety and professional liability insurance, other
than directors and officers liability. The current program
provides protection from all foreign and domestic acts of
terrorism.
As a precondition to recovery under TRIA, insurance companies
with direct commercial insurance exposure in the United States
for TRIA lines of business are required to make insurance for
covered acts of terrorism available under their policies. 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 2010, that deductible is 20% of
direct premiums earned in 2009 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
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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 $950 million in 2010.
For certain classes of business, such as workers’
compensation, terrorism coverage is mandatory. For those classes
of business where it is not mandatory, policyholders may choose
not to accept terrorism coverage, which would, subject to other
statutory or regulatory restrictions, reduce our exposure.
We also have exposure outside the United States to risk of loss
from acts of terrorism. In some jurisdictions, we have access to
government mechanisms that would mitigate our exposure.
We will continue to manage this type of catastrophic risk by
monitoring terrorism risk aggregations. Nevertheless, given the
unpredictability of the targets, frequency and severity of
potential terrorist events as well as the very limited terrorism
reinsurance coverage available in the market and the limitations
of existing government programs and uncertainty regarding their
availability in the future, the occurrence of a terrorist event
could have a material adverse effect on the Corporation’s
results of operations, financial condition or liquidity.
Loss
Reserves
Unpaid losses and loss expenses, also referred to as loss
reserves, are the largest liability of our property and casualty
subsidiaries.
Our loss reserves include case estimates for claims that have
been reported and estimates for claims that have been incurred
but not reported at the balance sheet date as well as estimates
of the expenses associated with processing and settling all
reported and unreported claims, less estimates of anticipated
salvage and subrogation recoveries. Estimates are based upon
past loss experience modified for current trends as well as
prevailing economic, legal and social conditions. Our loss
reserves are not discounted to present value.
We regularly review our loss reserves using a variety of
actuarial techniques. We update the reserve estimates as
historical loss experience develops, additional claims are
reported
and/or
settled and new information becomes available. Any changes in
estimates are reflected in operating results in the period in
which the estimates are changed.
Incurred but not reported (IBNR) reserve estimates are generally
calculated by first projecting the ultimate cost of all claims
that have occurred and then subtracting reported losses and loss
expenses. Reported losses include cumulative paid losses and
loss expenses plus case reserves. The IBNR reserve includes a
provision for claims that have occurred but have not yet been
reported to us, some of which are not yet known to the insured,
as well as a provision for future development on reported
claims. A relatively large proportion of our net loss reserves,
particularly for long tail liability classes, are reserves for
IBNR losses. In fact, more than 70% of our aggregate net loss
reserves at December 31, 2009 were for IBNR losses.
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Our gross case and IBNR loss reserves and related reinsurance
recoverable by class of business were as follows:
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Loss reserves, net of reinsurance recoverable, increased by
$631 million or 3% in 2009. Loss reserves related to our
insurance business increased by $815 million, including
approximately $370 million related to currency fluctuation
due to the weaker U.S. dollar at December 31, 2009
compared with December 31, 2008. Loss reserves related to
our reinsurance assumed business, which is in run-off, decreased
by $184 million.
Total gross case reserves related to our insurance business
decreased by $131 million in 2009. The significant decrease
in gross loss reserves for the commercial property and marine
business was primarily due to the settlement in 2009 of losses
related to catastrophes, including Hurricane Ike, as well as
several large non-catastrophe losses that were 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, 2009 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
management’s estimate of the ultimate liability for losses
that had occurred as of December 31, 2009 may change,
which could have a material effect on the Corporation’s
results of operations and financial condition.
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, 2009 were $20.8 billion. Therefore, a
relatively small percentage change in the estimate of net loss
reserves would have a material effect on the Corporation’s
results of operations.
Reserves Other than Those Relating to
Asbestos and Toxic Waste Claims. Our loss
reserves include amounts related to short tail and long tail
classes of business. “Tail” refers to the time period
between the occurrence of a loss and the settlement of the
claim. The longer the time span between the incidence of a loss
and the settlement of the claim, the more the ultimate
settlement amount can vary.
Short tail classes consist principally of homeowners, commercial
property and marine business. For these classes, claims are
generally reported and settled shortly after the loss occurs and
the claims relate to tangible property. Consequently, the
estimation of loss reserves for these classes is less complex.
Most of our loss reserves relate to long tail liability classes
of business. Long tail classes include directors and officers
liability, errors and omissions liability and other professional
liability coverages, commercial primary and excess liability,
workers’ compensation and other liability coverages. For
many liability claims significant periods of time, ranging up to
several years or more, may elapse between the occurrence of the
loss, the reporting of the loss to us and the settlement of the
claim. As a result, loss experience in the more recent accident
years for the long tail liability classes has limited
statistical credibility because a relatively small proportion of
losses in these accident years are reported claims and an even
smaller proportion are paid losses. An accident year is the
calendar year in which a loss is incurred or, in the case of
claims-made policies, the calendar year in which a loss is
reported. Liability claims are also more susceptible to
litigation and can be significantly affected by changing
contract interpretations and the legal environment.
Consequently, the estimation of loss reserves for these classes
is more complex and typically subject to a higher degree of
variability than for short tail classes. As a result, the role
of judgment is much greater for these reserve estimates.
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Most of our reinsurance assumed business is long tail casualty
reinsurance. Reserve estimates for this business are therefore
subject to the variability caused by extended loss emergence
periods. The estimation of loss reserves for this business is
further complicated by delays between the time the claim is
reported to the ceding insurer and when it is reported by the
ceding insurer to us and by our dependence on the quality and
consistency of the loss reporting by the ceding company.
Our actuaries perform a comprehensive review of loss reserves
for each of the numerous classes of business we write at least
once a year. The timing of such review varies by class of
business and, for some classes, the jurisdiction in which the
policy was written. The review process takes into consideration
the variety of trends that impact the ultimate settlement of
claims in each particular class of business. Additionally, each
quarter our actuaries review the emergence of paid and reported
losses relative to expectations and, as necessary, conduct
reserve reviews for particular classes of business.
The loss reserve estimation process relies on the basic
assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis
for predicting future outcomes. As part of that process, our
actuaries use a variety of actuarial methods that analyze
experience, trends and other relevant factors. The principal
standard actuarial methods used by our actuaries in the loss
reserve reviews include loss development factor methods,
expected loss ratio methods, Bornheutter-Ferguson methods and
frequency/severity methods.
Loss development factor methods generally assume that the losses
yet to emerge for an accident year are proportional to the paid
or reported loss 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 through a regression analysis of historical
severity data. 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. 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.
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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:
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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 impact on the
Corporation’s 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.
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Two of the larger components of our loss reserves relate to the
professional liability classes other than fidelity and to
commercial excess liability. The respective reported loss
development patterns are key assumptions in estimating loss
reserves for these classes of business, both as applied directly
to more mature accident years and as applied indirectly (e.g.,
via Bornheutter-Ferguson methods) to less mature accident years.
Reserves for the professional liability classes other than
fidelity were $7.2 billion, net of reinsurance, at
December 31, 2009. 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 $3.1 billion, net of reinsurance,
at December 31, 2009. 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 $300 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 management’s 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,
2009 for asbestos and toxic waste claims were adequate. However,
given the judicial decisions and legislative actions that have
broadened the scope of coverage and expanded theories of
liability in the past and the possibilities of similar
interpretations in the future, it is possible that our estimate
of loss reserves relating to these exposures may increase in
future periods as new information becomes available and as
claims develop.
Asbestos
Reserves. Asbestos remains the most
significant and difficult mass tort for the insurance industry
in terms of claims volume and dollar exposure. Asbestos claims
relate primarily to bodily injuries asserted by those who came
in contact with asbestos or products containing asbestos. Tort
theory affecting asbestos litigation has evolved over the years.
Early court cases established the “continuous trigger”
theory with respect to insurance coverage. Under this theory,
insurance coverage is deemed to be triggered from the time a
claimant is first exposed to asbestos until the manifestation of
any disease. This interpretation of a policy trigger can involve
insurance policies over many years and increases insurance
companies’ exposure to liability. Until recently, judicial
interpretations and legislative actions attempted to maximize
insurance availability from both a coverage and liability
standpoint.
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New asbestos claims and new exposures on existing claims have
continued despite the fact that usage of asbestos has declined
since the mid-1970’s. 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:
Our most significant individual asbestos exposures involve
products liability on the part of “traditional”
defendants who were engaged in the manufacture, distribution or
installation of asbestos products. We wrote excess liability
and/or
general liability coverages for these insureds. While these
insureds are relatively few in number, their exposure has become
substantial due to the increased volume of claims, the erosion
of the underlying limits and the bankruptcies of target
defendants.
Our other asbestos exposures involve products and non-products
liability on the part of “peripheral” defendants,
including a mix of manufacturers, distributors and installers of
certain products that contain asbestos in small quantities and
owners or operators of properties where asbestos was present.
Generally, these insureds are named defendants on a regional
rather than a nationwide basis. As the financial resources of
traditional asbestos defendants have been depleted, plaintiffs
are targeting these viable peripheral parties with greater
frequency and, in many cases, for large awards.
Asbestos claims against the major manufacturers, distributors or
installers of asbestos products were typically presented under
the products liability section of primary general liability
policies as well as under excess liability policies, both of
which typically had aggregate limits that capped an
insurer’s 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
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liability policies. Unlike products exposures, these
non-products exposures typically had no aggregate limits on
coverage, creating potentially greater exposure. Further, in an
effort to seek additional insurance coverage, some insureds with
installation activities who have substantially eroded their
products coverage are presenting new asbestos claims as
non-products operations claims or attempting to reclassify
previously settled products claims as non-products claims to
restore a portion of previously exhausted products aggregate
limits. It is difficult to predict whether insureds will be
successful in asserting claims under non-products coverage or
whether insurers will be successful in asserting additional
defenses. Accordingly, the ultimate cost to insurers of the
claims for coverage not subject to aggregate limits is uncertain.
In establishing our asbestos reserves, we evaluate the exposure
presented by each insured. As part of this evaluation, we
consider a variety of factors including: the available insurance
coverage; limits and deductibles; the jurisdictions involved;
past settlement values of similar claims; the potential role of
other insurance, particularly underlying coverage below our
excess liability policies; potential bankruptcy impact; relevant
judicial interpretations; and applicable coverage defenses,
including asbestos exclusions.
Various U.S. federal proposals to solve the ongoing
asbestos litigation crisis have been considered by the
U.S. Congress over the past few years, but none have yet
been enacted. The prospect of federal asbestos reform
legislation remains uncertain. As a result, we have assumed a
continuation of the current legal environment with no benefit
from any federal asbestos reform legislation.
Our actuaries and claim personnel perform periodic analyses of
our asbestos related exposures. The analyses during 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
$75 million in 2007. The analyses during 2008 and 2009
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.
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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, 2009 as well as the net
losses paid during 2009 by component.
Significant uncertainty remains as to our ultimate liability
related to asbestos related claims. This uncertainty is due to
several factors including:
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 U.S. federal Comprehensive Environmental Response
Compensation and Liability Act of 1980 (Superfund) has been
interpreted to impose strict, retroactive and joint and several
liability on potentially responsible parties (PRPs) for the cost
of remediating hazardous waste sites. Most sites have multiple
PRPs.
Most PRPs named to date are parties who have been generators,
transporters, past or present landowners or past or present site
operators. These PRPs had proper government authorization in
many instances. However, relative fault has not been a factor in
establishing liability. Insurance policies issued to PRPs were
not intended to cover claims arising from gradual pollution.
Since 1986, most policies have specifically excluded such
exposures.
Environmental remediation claims tendered by PRPs and others to
insurers have frequently resulted in disputes over
insurers’ contractual obligations with respect to pollution
claims. The resulting litigation against insurers extends to
issues of liability, coverage and other policy provisions.
There is substantial uncertainty involved in estimating our
liabilities related to these claims. First, the liabilities of
the claimants are extremely difficult to estimate. At any given
waste site, the allocation of remediation costs among
governmental authorities and the PRPs varies greatly depending
on a variety of factors. Second, different courts have addressed
liability and coverage issues regarding pollution claims
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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.
Superfund’s 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.
During 2009, the analysis of our toxic waste exposures indicated
higher than expected development driven by a relatively small
number of exposures. Based on these developments, as well as the
increased cost to remediate certain sites, we increased our net
toxic waste loss reserves by $90 million in 2009.
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.
At December 31, 2009, $142 million of the net toxic
waste loss reserves were IBNR reserves.
Reinsurance
Recoverable. Reinsurance recoverable is
the estimated amount recoverable from reinsurers related to the
losses we have incurred. At December 31, 2009, reinsurance
recoverable included $209 million recoverable with respect
to paid losses and loss expenses, which is included in other
assets, and $2.1 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.
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Ceded reinsurance contracts do not relieve us of our primary
obligation to our policyholders. Consequently, an exposure
exists with respect to reinsurance recoverable to the extent
that any reinsurer is unable to meet its obligations or disputes
the liabilities we believe it has assumed under the reinsurance
contracts. We are selective in regard to our reinsurers, placing
reinsurance with only those reinsurers who we believe have
strong balance sheets and superior underwriting ability, and we
monitor the financial strength of our reinsurers on an ongoing
basis. Nevertheless, in recent years, certain of our reinsurers
have experienced financial difficulties or exited the
reinsurance business. In addition, we may become involved in
coverage disputes with our reinsurers. A provision for estimated
uncollectible reinsurance is recorded based on periodic
evaluations of balances due from reinsurers, the financial
condition of the reinsurers, coverage disputes and other
relevant factors.
Prior
Year Loss Development
Changes in loss reserve estimates are unavoidable because such
estimates are subject to the outcome of future events. Loss
trends vary and time is required for changes in trends to be
recognized and confirmed. Reserve changes that increase previous
estimates of ultimate cost are referred to as unfavorable or
adverse development or reserve strengthening. Reserve changes
that decrease previous estimates of ultimate cost are referred
to as favorable development or reserve releases.
A reconciliation of our beginning and ending loss reserves, net
of reinsurance, for the three years ended December 31, 2009
is as follows:
During 2009, we experienced overall favorable prior year
development of $762 million, which represented 3.8% of the
net loss reserves as of December 31, 2008. This compares
with favorable prior year development of $873 million
during 2008, which represented 4.3% of the net loss reserves at
December 31, 2007, and favorable prior year development of
$697 million during 2007, which represented 3.5% of the net
loss reserves at December 31, 2006. Such favorable
development was reflected in operating results in these
respective years.
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The following table presents the overall prior year loss
development for the three years ended December 31, 2009 by
accident year.
The net favorable development of $762 million in 2009 was
due to various factors. The most significant factors were:
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The net favorable development of $873 million in 2008 was
also due to various factors. The most significant factors were:
The net favorable development of $697 million in 2007 was
also due to various factors. The most significant factors were:
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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 2009. 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 2009. 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.
Property and casualty investment income before taxes decreased
by 5% in 2009 compared with 2008 and increased by 2% in 2008
compared with 2007. Lower yields, primarily on short term
investments, contributed to the decrease in investment income in
2009. In addition, almost half of the decline in 2009 was
related to currency fluctuation on income from our
non-U.S. investments.
Growth in investment income in 2008 was due to an increase in
average invested assets compared with 2007. The growth in
investment income in 2009 and 2008 was limited as average
invested assets increased only modestly in each year as a result
of substantial dividend distributions made by the property and
casualty subsidiaries to Chubb during 2009, 2008 and 2007.
The effective tax rate on our investment income was 19.2% in
2009 compared with 20.0% in 2008 and 19.9% in 2007. The
effective tax rate fluctuates as a result of our holding a
different proportion of our investment portfolio in tax exempt
securities during different periods.
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On an after-tax basis, property and casualty investment income
decreased by 3% in 2009 and increased by 2% in 2008. The
after-tax annualized yield on the investment portfolio that
supports our property and casualty insurance business was 3.39%
in 2009 compared with 3.49% in 2008 and 3.50% in 2007.
If investment yields and average foreign currency to
U.S. dollar exchange rates in 2010 are similar to
2009 year-end levels, property and casualty investment
income for 2010 is expected to be about the same as in 2009.
Other income and charges, which includes miscellaneous income
and expenses of the property and casualty subsidiaries, was not
significant in the last three years.
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
$238 million in 2009 compared with losses of
$214 million and $149 million in 2008 and 2007,
respectively. The higher loss in 2009 and 2008 compared to the
respective prior year was due in both years to increasingly
higher interest expense and lower investment income. The higher
interest expense was primarily due to an increase in average
debt outstanding in both 2009 and 2008 as a result of the
issuance of additional debt during 2008 and 2007. The lower
investment income was primarily the result of a decrease in the
average yield on short term investments. The higher interest
expense in 2009 and 2008 was not offset by an increase in
investment income as the proceeds from the issuance of the debt
were used to repurchase Chubb’s common stock.
Chubb Financial Solutions (CFS) participated in derivative
financial instruments and 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.
CFS’s 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.
CFS’s remaining financial products contracts at
December 31, 2009 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 $4 million at
December 31, 2009.
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Net realized investment gains and losses were as follows:
Decisions to sell equity securities and fixed maturities are
governed principally by considerations of investment
opportunities and tax consequences. As a result, realized gains
and losses on the sale of these investments may vary
significantly from period to period. However, such gains and
losses generally have little, if any, impact on
shareholders’ equity as all of these investments are
carried at fair value, with the unrealized appreciation or
depreciation reflected in accumulated other comprehensive income.
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.
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 into 2,000,000 shares of common stock
of Harbor Point and we recognized the remaining $33 million
gain.
We regularly review those invested assets whose fair value is
less than cost to determine if an
other-than-temporary
decline in value has occurred. We have a monitoring process
overseen by a committee of investment and accounting
professionals that is responsible for identifying those
securities to be specifically evaluated for a potential
other-than-temporary
impairment.
The determination of whether a decline in value of any
investment is temporary or
other-than-temporary
requires the judgment of management. The assessment of
other-than-temporary
impairment of fixed maturities and equity securities is based on
both quantitative criteria and qualitative information and also
considers a number of factors including, but not limited to, the
length of time and the extent to which the fair value has been
less than the cost, the financial condition and near term
prospects of the issuer, whether the issuer is current on
contractually obligated interest and principal payments, general
market conditions and industry or sector specific factors. The
decision to recognize a decline in the value
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of a security carried at fair value as other than temporary
rather than temporary has no impact on shareholders’ equity.
For fixed maturities, prior to April 1, 2009, we considered
many factors including the intent and ability to hold a security
for a period of time sufficient to allow for the recovery of the
security’s cost. When an impairment was deemed other than
temporary, the security was written down to fair value and the
entire writedown was included in net income as a realized
investment loss. Effective April 1, 2009, the Corporation
adopted new guidance issued by the Financial Accounting
Standards Board (FASB) related to the recognition and
presentation of
other-than-temporary
impairments. The new guidance modified the previous guidance on
the recognition of
other-than-temporary
impairments of debt securities. Under the new guidance, we are
required to recognize an
other-than-temporary
impairment loss for a fixed maturity when we conclude that we
have the intent to sell or it is more likely than not that we
will be required to sell an impaired fixed maturity before the
security recovers to its amortized cost value or it is likely we
will not recover the entire amortized cost value of an impaired
security. If we have the intent to sell or it is more likely
than not we will be required to sell an impaired fixed maturity
before the security recovers to its amortized cost value, the
security is written down to fair value and the entire amount of
the writedown is included in net income as a realized investment
loss. For all other impaired fixed maturities, the impairment
loss is separated into the amount representing the credit loss
and the amount representing the loss related to all other
factors. The amount of the impairment loss that represents the
credit loss is included in net income as a realized investment
loss and the amount of the impairment loss that relates to all
other factors is included in other comprehensive income.
For equity securities, we consider our intent and ability to
hold a security for a period of time sufficient to allow us to
recover our cost. If a decline in the fair value of an equity
security is deemed to be other than temporary, the security is
written down to fair value and the amount of the writedown is
included in net income as a realized investment loss.
During each of the last three years, particularly during 2008 as
a result of the significant financial market disruption, the
fair value of some of our investments declined to a level below
our cost. Some of these investments were deemed to be
other-than-temporarily
impaired. The issuers of the equity securities deemed to be
other-than-temporarily
impaired in each of the last three years were not concentrated
within any individual industry or sector. About 75% of the fixed
maturities deemed to be
other-than-temporarily
impaired in 2008 were corporate securities within the financial
services sector.
Information related to investment securities in an unrealized
loss position at December 31, 2009 and 2008 is included in
Note (4)(b) of the Notes to Consolidated Financial Statements.
Capital resources and liquidity represent a company’s
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 provide protection for policyholders, furnish
the financial strength to support the business of underwriting
insurance risks and facilitate continued business growth. At
December 31, 2009, the Corporation had shareholders’
equity of $15.6 billion and total debt of $4.0 billion.
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%
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through April 14, 2017. Thereafter, the capital securities
will bear interest at a rate equal to the three-month LIBOR rate
plus 2.25%. Subject to certain conditions, Chubb has the right
to defer the payment of interest on the capital securities for a
period not exceeding ten consecutive years. During any such
period, interest will continue to accrue and Chubb generally may
not declare or pay any dividends on or purchase any shares of
its capital stock.
In connection with the issuance of the capital securities, Chubb
entered into a replacement capital covenant in which it agreed
that it will not repay, redeem or purchase the capital
securities before March 29, 2047, unless, subject to
certain limitations, it has received proceeds from the sale of
replacement capital securities, as defined. Subject to the
replacement capital covenant, the capital securities may be
redeemed, in whole or in part, at any time on or after
April 15, 2017 at a redemption price equal to the principal
amount plus any accrued interest on or prior to April 15,
2017 at a redemption price equal to the greater of (i) the
principal amount or (ii) a make-whole amount, in each case
plus any accrued interest.
Chubb also has outstanding $400 million of 6% notes
due in 2011, $275 million of 5.2% notes due in 2013,
$600 million of 5.75% notes and $100 million of
6.6% debentures due in 2018, $200 million of
6.8% debentures due in 2031, $800 million of
6% notes due in 2037 and $600 million of
6.5% notes due in 2038, all of which are unsecured.
Management regularly monitors the Corporation’s 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 2006, the Board of Directors authorized the
repurchase of up to 20,000,000 shares of Chubb’s
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 and December 2008, the Board of
Directors authorized the repurchase of up to an additional
28,000,000 shares and 20,000,000 shares, respectively,
of common stock. As of December 31, 2009, no shares
remained under these share repurchase authorizations. In
December 2009, the Board of Directors authorized the repurchase
of up to an additional 25,000,000 shares of common stock.
In 2007, we repurchased 41,733,268 shares of Chubb’s
common stock in open market transactions at a cost of
$2,184 million. In 2008, we repurchased
26,328,770 shares of Chubb’s common stock in open
market transactions at a cost of $1,311 million. In 2009,
we repurchased 22,623,775 shares of Chubb’s common
stock in open market transactions at a cost of
$1,065 million. As of December 31, 2009,
22,160,125 shares remained under the December
2009 share repurchase authorization, which has no
expiration date. Based on our outlook for 2010, we expect to
repurchase all of the shares remaining under the December 2009
authorization by the end of 2010, subject to market conditions.
Chubb and its insurance subsidiaries are rated by major rating
agencies. These ratings reflect the rating agency’s opinion
of our financial strength, operating performance, strategic
position and ability to meet our obligations to policyholders.
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Credit ratings assess a company’s ability to make timely
payments of interest and principal on its debt. The following
table summarizes the Corporation’s credit ratings from the
major independent rating organizations as of February 24,
2010.
Financial strength ratings assess an insurer’s 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 24, 2010.
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 is a measure of a company’s ability to generate
sufficient cash flows to meet the short and long term cash
requirements of its business operations.
The Corporation’s liquidity requirements in the past have
generally been met by funds from operations and we expect that
in the future funds from operations will continue to be
sufficient to meet such requirements. Liquidity requirements
could also be met by funds received upon the maturity or sale of
marketable securities in our investment portfolio. The
Corporation also has the ability to borrow under its 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 2009. New cash from operations available
for investment by the property and casualty subsidiaries was
approximately $1.3 billion in 2009 compared with
$775 million in 2008 and $1.6 billion in 2007. New
cash available in 2009 was higher than in 2008 due to an
$800 million decrease in dividends paid by the property and
casualty subsidiaries to Chubb and lower loss payments,
partially offset by lower premium collections and higher income
tax payments. 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.
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.
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Chubb’s 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 Chubb’s shareholders will be at the discretion
of Chubb’s 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, Chubb’s ability to continue to pay
dividends to shareholders and to satisfy its debt obligations
relies on the availability of liquid assets, which is dependent
in large part on the dividend paying ability of its property and
casualty subsidiaries. The timing and amount of dividends paid
by the property and casualty subsidiaries to Chubb may vary from
year to year. Our property and casualty subsidiaries are subject
to laws and regulations in the jurisdictions in which they
operate that restrict the amount 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 2009, 2008 and 2007, these subsidiaries paid dividends to
Chubb of $1.2 billion, $2.0 billion and
$1.55 billion, respectively. The maximum dividend
distribution that may be made by the property and casualty
subsidiaries to Chubb during 2010 without prior regulatory
approval is approximately $1.5 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, 2009, Chubb was in compliance with all such
covenants. The revolving credit facility is available for
general corporate purposes and to support our commercial paper
borrowing arrangement. The agreement has a termination date of
October 19, 2012. Under the agreement Chubb is permitted to
request on two occasions, at any time during the remaining term
of the agreement, an extension of the maturity date for an
additional one year period. On the termination date of the
agreement, any borrowings then outstanding become payable.
The following table provides our future payments due by period
under contractual obligations as of December 31, 2009,
aggregated by type of obligation.
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The above table excludes certain commitments totaling
$850 million at December 31, 2009 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
Corporation’s financial condition, results of operations,
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