The Chubb Corporation (NYSE: CB) is a U.S. property and casualty insurance that provides commercial insurance products to businesses, specialized liability coverage to companies, institutions, and organizations as well as tailored insurance policies for affluent individuals seeking to cover homes and other valuable possessions. Chubb sells almost every type of property and casualty insurance and specializes in customized insurance policies for unusual risks such as wineries, kidnap/ransom & extortion, and cultural institutions. It provides tailored insurance plans by industry as well as professional and management liability coverage. Chubb is a leading dealer of directors & officers (D&O) liability and errors & missions (E&O) liability. Chubb has operations in Commercial, Personal, and Surety insurance, providing an array of specialized policies within each line. Within Commercial Insurance, Chubb focuses on underwriting the middle market, diversifying to avoid the vulnerability of covering large-scale endeavors. Chubb’s Commercial line sells businesses and organizations multiple peril insurance for their property (from multiple risks including flood, fire, and wind), casualty coverage for accidents including automobile and marine insurance, as well as workers’ compensation insurance for employees’ on-the-job injuries. In their Personal Insurance line, Chubb focuses on underwriting the homes, automobiles, and other possessions of wealthier clientele. The Specialty line provides surety insurance coverage on the fulfillment of contracts and professional liability coverage for the officers and management of businesses and organizations.
Chubb’s subsidiary businesses are collectively known as the Chubb Group of Insurance Companies (the P&C Group). Chubb has operations in 28 countries worldwide with about 78% of business taking place in the U.S. It is the 11th largest U.S. property and casualty insurance provider.
The P&C Group sells property and casualty insurance through three strategic business units: Chubb Commercial Insurance (CCI), Chubb Personal Insurance (CPI), and Chubb Specialty Insurance (CSI).
In addition, Chubb has a small real estate operation through a subsidiary called Bellemead Development Corporation, which is involved in commercial development in New Jersey and residential development in central Florida. Chubb’s real estate operations are currently in run-off, meaning that the company is not currently undertaking any new business.
Finally, Chubb Financial Solutions sells customized financial products to corporate clients, dealing primarily in structured credit derivatives. Chubb Financial Solutions has been in run-off since April 2003. Chubb outsources the distribution of its insurance products to independent agencies and brokers. In the U.S., Chubb sells its products through about 5,000 independent insurance agencies and regularly accepts business from about 500 insurance brokers. Furthermore, Chubb sells its products through about 3,000 insurance brokers outside the U.S. Chubb operates branch and service offices throughout the world to assist affiliated agencies and brokers in implementation and further development of policies.
Chubb’s net income was $2.18 billion in 2009, up from $1.80 billion in 2008 as a result of to increased underwriting income. This represents a 21.0% increase in net income on a 1.6% decrease in total revenues from 2008 to 2009. The overall profitability of the Chubb’s property and casualty insurance business is determined both by underwriting operations and investment operations, which are managed independently.
Underwriting refers to identifying and accurately calculating the risk associated with covering a client and determining the appropriate premium the client will pay for coverage. The principal measurement of underwriting profitability is the combined loss and expense ratio, which measures the percent of each dollar earned that must be spent on claims and expenses. If the combined ratio is under 100%, underwriting has been profitable, with more being earned in premiums than paid out to clients.
The loss ratio is the ratio of losses and loss expenses to premiums earned (money collected by the company from clients for providing for a select period). It is a measure of underwriting skill and ability to accurately price risk.
The expense ratio is the ratio of statutory underwriting expenses, which include salaries, commissions, and premium taxes, to premiums written (money that clients are required to pay for the insurance policy). It is a general measure of company efficiency.
The Chubb Corporation operates with three reportable business segments:
In the insurance industry, a catastrophe is an extremely severe natural or man-made disaster for which claims exceed $25 million. Catastrophes include hurricanes, tornadoes, wildfires, and terrorists attacks. Six of the ten most costly catastrophes in U.S. history were hurricanes that took place in 2004-2005. Hurricane Katrina, for instance, was the most expensive catastrophe ever recorded, costing $41.1 billion from a total of 1.75 million claims. The September 11th terrorist attacks were the 3rd most costly catastrophe in U.S. history. In response to 9/11, the Terrorism Risk Insurance Act of 2002 established that the federal government would share the risk of loss from terrorism with commercial insurance companies. Catastrophes can put unexpected strain on insurance companies. The frequency and severity of their occurrence has a dramatic impact on an insurance company’s performance. In 2005, 24 disasters resulted in losses totaling $61.2 billion.
The housing bubble and credit crunch of 2007 have resulted in decreased underwriting profits for mortgage and financial guarantee insurers. A surge in mortgage defaults has triggered an increase in claims on providers of mortgage policies. Additionally, there has been a proliferation of lawsuits against directors and officers who took charges against earnings and re-valued investment portfolios during the ensuing credit crunch. Consequently, there has been an increase in directors & officers and errors & omissions claims, of which the P&C Group is a leading provider.
Asbestos, a mineral causing a variety of diseases, was increasingly used in the manufacturing and construction industries in the 1940s/1950s. Although banned in the 1970s, asbestos related illness can take up to 40 years to manifest itself. A wave of lawsuits filed by employees exposed to asbestos began in the late 1960s and intensified throughout the 1980s resulting in wide-spread bankruptcy of companies who had exposed employees. Asbestos claims decreased in the in the 1990s but a wave of lawsuits began in 1999 primarily due to new laws that allowed people to file claims against companies less directly linked with asbestos exposure and for nonmalignant asbestos-related conditions.