UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 | |
| OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO | |
Commission File No. 1-8661 | ||
The Chubb Corporation
(Exact name of registrant as specified in its charter)
New Jersey | 13-2595722 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 15 Mountain View Road | ||
Warren, New Jersey | 07059 | |
| (Address of principal executive offices) | (Zip Code) |
(908) 903-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each class) | (Name of each exchange on which
registered) | |
| Common Stock, par value $1 per share | New York Stock Exchange | |
| Series B Participating Cumulative | New York Stock Exchange | |
| Preferred Stock Purchase Rights |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ü ] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ ü ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ü ] No [ ]
Indicate by check mark 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):
Large accelerated filer [ ü ] | Accelerated filer [ ] | |
| Non-accelerated filer
[ ] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ü ]
The aggregate market value of common stock held by non-affiliates of the registrant was $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.
CONTENTS
| ITEM | DESCRIPTION | PAGE | ||||||
PART I | 1 | Business | 3 | |||||
| 1A | Risk Factors | 12 | ||||||
| 1B | Unresolved Staff Comments | 18 | ||||||
| 2 | Properties | 18 | ||||||
| 3 | Legal Proceedings | 18 | ||||||
| 4 | Submission of Matters to a Vote of Security Holders | 19 | ||||||
PART II | 5 | Market for the Registrant's Common Stock
and Related Stockholder Matters | 20 | |||||
| 6 | Selected Financial Data | 22 | ||||||
| 7 | Management's Discussion and Analysis of
Financial Condition and Results of Operations | 23 | ||||||
| 7A | Quantitative and Qualitative Disclosures About Market Risk | 62 | ||||||
| 8 | Consolidated Financial Statements and Supplementary Data | 65 | ||||||
| 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 65 | ||||||
| 9A | Controls and Procedures | 65 | ||||||
| 9B | Other Information | 66 | ||||||
PART III | 10 | Directors and Executive Officers of the Registrant | 68 | |||||
| 11 | Executive Compensation | 68 | ||||||
| 12 | Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters | 68 | ||||||
| 13 | Certain Relationships and Related Transactions | 68 | ||||||
| 14 | Principal Accountant Fees and Services | 68 | ||||||
PART IV | 15 | Exhibits, Financial Statements and Schedules | 69 | |||||
Signatures | 70 | |||||||
Index to Financial Statements and Financial Statement Schedules | F-1 | |||||||
Exhibits Index | E-1 | |||||||
| EX-10.1 | ||||||||
| EX-10.6 | ||||||||
| EX-10.7 | ||||||||
| EX-10.8 | ||||||||
| EX-10.33 | ||||||||
| EX-12.1 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
2
PART I.
Item 1. Business
General
The Chubb Corporation (Chubb) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. Chubb and its subsidiaries are referred to collectively as the Corporation. Chubb is a holding company for a family of property and casualty insurance companies known informally as the Chubb Group of Insurance Companies (the P&C Group). Since 1882, the P&C Group has provided property and casualty insurance to businesses and individuals around the world. According to A.M. Best, the P&C Group is the 11th largest U.S. property and casualty insurance group based on 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,
3
Chubb Argentina de Seguros, S.A., Chubb Insurance (China) Company Ltd. and Chubb do Brasil Companhia de Seguros.
Federal is the manager of Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity, Chubb New Jersey, Executive Risk Indemnity and Executive Risk Specialty. Federal also provides certain services to other members of the P&C Group. Acting subject to the supervision and control of the boards of directors of the members of the P&C Group, Federal provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies.
Premiums Written
A summary of the P&C Group's premiums written during the past three years is shown in the following table:
| Direct | Reinsurance | Reinsurance | Net | |||||||||||||
| Premiums | Premiums | Premiums | Premiums | |||||||||||||
Year | Written | Assumed(a) | Ceded(a) | Written | ||||||||||||
| (in millions) | ||||||||||||||||
2007 | $ | 12,432 | $ | 775 | $ | 1,335 | $ | 11,872 | ||||||||
2008 | 12,443 | 549 | 1,210 | 11,782 | ||||||||||||
2009 | 11,813 | 370 | 1,106 | 11,077 | ||||||||||||
(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.
Underwriting Results
A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. The P&C Group uses the combined loss and expense ratio calculated in accordance with statutory accounting principles applicable to property and casualty insurance companies. This ratio is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio) plus the ratio of statutory underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income is not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on the results of both underwriting and investments operations.
The combined loss and expense ratios during the last three years in total and for the major classes of the P&C 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.
4
Producing and Servicing of Business
The P&C Group does not utilize a significant in-house distribution model for its products. Instead, in the United States, the P&C Group offers products through independent insurance agencies and accepts business on a regular basis from insurance brokers. In most instances, these agencies and brokers also offer products of other companies that compete with the P&C Group. The P&C 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.
Reinsurance Ceded
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.
Unpaid Losses and Loss Adjustment Expenses and Related Amounts Recoverable from Reinsurers
Insurance companies are required to establish a liability in their accounts for the ultimate costs (including loss adjustment expenses) of claims that have been reported but not settled and of claims that have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid losses and loss adjustment expenses is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.
5
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.
6
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
| December 31 | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Net Liability for Unpaid Losses and Loss Adjustment Expenses | $ | 9,749 | $ | 10,051 | $ | 11,010 | $ | 12,642 | $ | 14,521 | $ | 16,809 | $ | 18,713 | $ | 19,699 | $ | 20,316 | $ | 20,155 | $ | 20,786 | ||||||||||||||||||||||
Net Liability Reestimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 9,519 | 9,856 | 11,799 | 13,039 | 14,848 | 16,972 | 18,417 | 19,002 | 19,443 | 19,393 | ||||||||||||||||||||||||||||||||||
Two years later | 9,095 | 10,551 | 12,143 | 13,634 | 15,315 | 17,048 | 17,861 | 18,215 | 18,619 | |||||||||||||||||||||||||||||||||||
Three years later | 9,653 | 10,762 | 12,642 | 14,407 | 15,667 | 16,725 | 17,298 | 17,571 | ||||||||||||||||||||||||||||||||||||
Four years later | 9,740 | 11,150 | 13,246 | 14,842 | 15,584 | 16,526 | 16,884 | |||||||||||||||||||||||||||||||||||||
Five years later | 9,999 | 11,605 | 13,676 | 14,907 | 15,657 | 16,411 | ||||||||||||||||||||||||||||||||||||||
Six years later | 10,373 | 11,936 | 13,812 | 15,064 | 15,798 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 10,602 | 12,019 | 13,994 | 15,255 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 10,702 | 12,170 | 14,218 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 10,828 | 12,364 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 11,011 | |||||||||||||||||||||||||||||||||||||||||||
Total Cumulative Net Deficiency (Redundancy) | 1,262 | 2,313 | 3,208 | 2,613 | 1,277 | (398 | ) | (1,829 | ) | (2,128 | ) | (1,697 | ) | (762 | ) | |||||||||||||||||||||||||||||
Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims (Included in Above Total) | 1,480 | 1,449 | 1,388 | 647 | 397 | 322 | 287 | 263 | 175 | 90 | ||||||||||||||||||||||||||||||||||
Cumulative Amount of Net Liability Paid as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 2,483 | 2,794 | 3,135 | 3,550 | 3,478 | 3,932 | 4,118 | 4,066 | 4,108 | 4,063 | ||||||||||||||||||||||||||||||||||
Two years later | 4,079 | 4,699 | 5,499 | 5,911 | 6,161 | 6,616 | 6,896 | 6,789 | 6,565 | |||||||||||||||||||||||||||||||||||
Three years later | 5,306 | 6,070 | 7,133 | 7,945 | 8,192 | 8,612 | 8,850 | 8,554 | ||||||||||||||||||||||||||||||||||||
Four years later | 6,196 | 7,137 | 8,564 | 9,396 | 9,689 | 10,048 | 10,089 | |||||||||||||||||||||||||||||||||||||
Five years later | 6,909 | 8,002 | 9,588 | 10,543 | 10,794 | 10,977 | ||||||||||||||||||||||||||||||||||||||
Six years later | 7,453 | 8,765 | 10,366 | 11,353 | 11,530 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 8,009 | 9,305 | 10,950 | 11,915 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 8,402 | 9,714 | 11,390 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 8,697 | 10,046 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 8,944 | |||||||||||||||||||||||||||||||||||||||||||
Gross Liability, End of Year | $ | 11,435 | $ | 11,904 | $ | 15,515 | $ | 16,713 | $ | 17,948 | $ | 20,292 | $ | 22,482 | $ | 22,293 | $ | 22,623 | $ | 22,367 | $ | 22,839 | ||||||||||||||||||||||
Reinsurance Recoverable, End of Year | 1,686 | 1,853 | 4,505 | 4,071 | 3,427 | 3,483 | 3,769 | 2,594 | 2,307 | 2,212 | 2,053 | |||||||||||||||||||||||||||||||||
Net Liability, End of Year | $ | 9,749 | $ | 10,051 | $ | 11,010 | $ | 12,642 | $ | 14,521 | $ | 16,809 | $ | 18,713 | $ | 19,699 | $ | 20,316 | $ | 20,155 | $ | 20,786 | ||||||||||||||||||||||
Reestimated Gross Liability | $ | 13,455 | $ | 15,221 | $ | 19,697 | $ | 20,074 | $ | 19,580 | $ | 19,769 | $ | 20,335 | $ | 19,969 | $ | 20,735 | $ | 21,489 | ||||||||||||||||||||||||
Reestimated Reinsurance Recoverable | 2,444 | 2,857 | 5,479 | 4,819 | 3,782 | 3,358 | 3,451 | 2,398 | 2,116 | 2,096 | ||||||||||||||||||||||||||||||||||
Reestimated Net Liability | $ | 11,011 | $ | 12,364 | $ | 14,218 | $ | 15,255 | $ | 15,798 | $ | 16,411 | $ | 16,884 | $ | 17,571 | $ | 18,619 | $ | 19,393 | ||||||||||||||||||||||||
Cumulative Gross Deficiency (Redundancy) | $ | 2,020 | $ | 3,317 | $ | 4,182 | $ | 3,361 | $ | 1,632 | $ | (523 | ) | $ | (2,147 | ) | $ | (2,324 | ) | $ | (1,888 | ) | $ | (878 | ) | |||||||||||||||||||
7
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:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
U.S. subsidiaries | $ | 16,986 | $ | 16,871 | ||||
Foreign subsidiaries | 3,800 | 3,284 | ||||||
| $ | 20,786 | $ | 20,155 | |||||
Members of the P&C Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The difference between the liability for unpaid losses and loss expenses, net of reinsurance recoverable, reported in the statutory basis financial statements of the U.S. members of the P&C Group and such liability reported on a GAAP basis in the consolidated financial statements is not significant.
8
Investments
Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the respective boards of directors for each company in the P&C Group.
Additional information about the 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.
| Average | ||||||||||||||||
| Invested | Investment | Percent Earned | ||||||||||||||
Year | Assets(a) | Income(b) | Before Tax | After Tax | ||||||||||||
| (in millions) | ||||||||||||||||
2007 | $ | 36,406 | $ | 1,590 | 4.37 | % | 3.50 | % | ||||||||
2008 | 37,190 | 1,622 | 4.36 | 3.49 | ||||||||||||
2009 | 36,969 | 1,549 | 4.19 | 3.39 | ||||||||||||
| (a) | Average of amounts with fixed maturity securities at amortized cost, equity securities at fair value and other invested assets, which include private equity limited partnerships carried at the P&C Group's equity in the net assets of the partnerships. |
| (b) | Investment income after deduction of investment expenses, but before applicable income tax. |
Competition
The property and casualty insurance industry is highly competitive both as to price and service. Members of the P&C Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors produce their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform among insurers and vary according to the types of insurers, product coverage and methods of operation. The P&C Group competes for business not only on the basis of price, but also on the basis of financial strength, availability of coverage desired by customers and quality of service, including claim adjustment service. The P&C 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.
Regulation and Premium Rates
Chubb is a holding company with subsidiaries primarily engaged in the property and casualty insurance business and is therefore subject to regulation by certain states as an insurance holding company. All states have enacted legislation that regulates insurance holding company systems such as the Corporation. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding 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.
Real Estate
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
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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| Item 1A. | Risk Factors |
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.
If our property and casualty loss reserves are insufficient, our results could be adversely affected.
The process of establishing loss reserves is complex and imprecise 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.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social, environmental and other conditions change, unexpected or unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these issues may not become apparent for some time after we have written the insurance policies that are affected by such issues. As a result, the full extent of liability under our insurance policies may not be known for many years after the policies are issued. Emerging claim and coverage issues could have a material adverse effect on our results of operations or financial condition.
Catastrophe losses could materially and adversely affect our business.
As a property and casualty insurance holding company, our insurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various natural perils, including hurricanes and other windstorms, earthquakes, severe winter weather and brush fires. Catastrophes can also be man-made, such as a terrorist attack. The frequency and severity of catastrophes are inherently unpredictable. It is possible that both the frequency and severity of natural and man-made catastrophic events will increase.
The extent of losses from a catastrophe is a function of both the total amount of exposure under our insurance policies in the area affected by the event and the severity of the event. Most catastrophes are restricted to relatively small geographic areas; however, hurricanes and earthquakes may produce significant damage over larger areas, especially those that are heavily populated. Natural or man-made catastrophic events could cause claims under our insurance policies to be higher than we anticipated and could cause substantial volatility in our financial results for any fiscal quarter or year. Our ability to write new business could also be affected. 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.
We may experience reduced returns or losses on our investments especially during periods of heightened volatility, which could have a material adverse effect on our results of operations or financial condition.
The returns on our investment portfolio may be reduced or we may incur losses as a result of changes in general economic conditions, interest rates, real estate markets, fixed income markets, equity markets, alternative investment markets, credit markets, exchange rates, global capital market conditions and numerous other factors that are beyond our control.
The worldwide financial markets experience high levels of volatility during certain periods, 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 our business operations and in our investment portfolio.
We are exposed to credit risk in several areas of our business operations, including, without limitation, credit risk relating to reinsurance, co-sureties on surety bonds, policyholders of certain of our insurance products, independent agents and brokers, issuers of securities, insurers of certain securities and certain other counterparties relating to our investment portfolio.
With respect to reinsurance coverages that we have purchased, our ability to recover amounts due from reinsurers may be affected by the creditworthiness and willingness to pay of the reinsurers. Although certain reinsurance we have purchased is collateralized, the collateral is exposed to credit risk of the counterparty that has guaranteed 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.
The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.
We utilize a number of strategies to mitigate our risk exposure, such as:
| • | engaging in rigorous underwriting; | |
| • | carefully evaluating terms and conditions of our policies; | |
| • | focusing on our risk aggregations by geographic zones, industry type, credit exposure and other bases; and | |
| • | ceding reinsurance. |
However, there are inherent limitations in all of these tactics and no assurance can be given that an event or series of 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.
Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.
The availability and cost of reinsurance are subject to prevailing market conditions that are beyond our control. No assurances can be made that reinsurance will remain continuously available to us in amounts that we consider sufficient and at 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.
Cyclicality of the property and casualty insurance industry may cause fluctuations in our results.
The property and casualty insurance business historically has been cyclical, experiencing periods characterized by intense price competition, relatively low premium rates and less restrictive underwriting standards followed by periods of relatively low levels of competition, high premium rates and more selective underwriting standards. We expect this cyclicality to continue. The periods of intense price competition in the cycle could adversely affect our financial condition, profitability or cash flows.
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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:
| • | an apparent trend of courts to grant increasingly larger awards for certain damages; | |
| • | catastrophic hurricanes, windstorms, earthquakes and other natural disasters, as well as the occurrence of man-made disasters (e.g., a terrorist attack); | |
| • | availability, price and terms of reinsurance; | |
| • | fluctuations in interest rates; | |
| • | changes in the investment environment that affect market prices of and income and returns on investments; and | |
| • | inflationary pressures that may tend to affect the size of losses experienced by insurance companies. |
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.
Payment of obligations under surety bonds could adversely affect our future operating results.
The surety business tends to be characterized by infrequent but potentially high severity losses. The majority of our surety obligations are intended to be performance-based guarantees. When losses occur, they may be mitigated, at times, by recovery rights to the 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.
A downgrade in our credit ratings and financial strength ratings could adversely impact the competitive positions of our operating businesses.
Credit ratings and financial strength ratings can be important factors in establishing our competitive position in the insurance markets. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. If our credit ratings were downgraded in the future, we could incur higher borrowing costs and may have more limited means to access capital. In addition, a downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.
The inability of our insurance subsidiaries to pay dividends in sufficient amounts would harm our ability to meet our obligations and to pay future dividends.
As a holding company, Chubb relies primarily on dividends from its insurance subsidiaries to meet its obligations for payment of interest and principal on outstanding debt obligations and to pay dividends to shareholders. The ability of our insurance subsidiaries to pay dividends in the future will depend on their statutory surplus, on earnings and on regulatory restrictions. We are subject to regulation by some states as an insurance holding company system. Such regulation generally provides that transactions between companies within the holding company system must be fair and equitable. Transfers of assets among affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the system may be subject to prior notice to, or prior approval by, state regulatory authorities. The ability of our insurance subsidiaries to pay dividends is also restricted by regulations that set standards of solvency that must be met and maintained, that limit investments and that limit dividends to shareholders. These regulations may affect Chubb's insurance subsidiaries' ability to provide Chubb with dividends.
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Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they conduct business. This regulation is generally designed to protect the interests of policyholders, and not necessarily the interests of insurers, their shareholders or other investors. The regulation relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and nonfinancial components of an insurance 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.
Intense competition for our products could harm our ability to maintain or increase our profitability and premium volume.
The property and casualty insurance industry is highly competitive. We compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. We compete for business not only on the basis of price, but also on the basis of financial strength, availability of coverage desired by customers and quality of service, including claim adjustment service. We may have difficulty in continuing to compete successfully on any of these bases in the future.
If competition limits our ability to write new business at adequate rates, our results of operations could be adversely affected.
We are subject to a number of risks associated with our business outside the United States.
A significant portion of our business is conducted outside the United States, including in Asia, Australia, Canada, Europe and Latin America. By doing business outside the United States, we are subject to a number of risks, including without limitation, dealing with jurisdictions, especially in emerging markets, that may lack political, financial or social stability and/or a strong legal and regulatory
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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 are dependent on a distribution network comprised of independent insurance brokers and agents to distribute our products.
We generally do not use salaried employees to promote or distribute our insurance products. Instead, we rely on a large number of independent insurance brokers and agents. Accordingly, our business is dependent on the willingness of these brokers and agents to recommend our products to their customers. Deterioration in relationships with our broker and agent distribution network could materially and adversely affect our ability to sell our products, which, in turn, could have a material adverse effect on our results of operations or financial condition.
If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted.
We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of operations or financial condition.
The occurrence of certain catastrophic events could have a materially adverse effect on our systems and could impact our ability to conduct business effectively.
Our computer, information technology and telecommunications systems, which we use to conduct our business, interface with and rely upon third-party systems. Systems failures or outages could compromise our ability to perform business functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, our systems may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees or third party providers are able to report to work, they 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.
Item 2. Properties
The executive offices of the Corporation are in Warren, New Jersey. The administrative offices of the P&C Group are located in Warren and Whitehouse Station, New Jersey. The P&C Group maintains territory, branch and service offices in major cities throughout the United States and also has offices in Canada, Europe, Australia, Latin America and Asia. Office facilities are leased with the exception of buildings in Whitehouse Station, New Jersey and Simsbury, Connecticut. Management considers its office facilities suitable and adequate for the current level of operations.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders during the quarter ended December 31, 2009.
Executive Officers of the Registrant
| Year of | ||||||||
Age(a) | Election(b) | |||||||
John D. Finnegan, Chairman, President and Chief Executive Officer | 61 | 2002 | ||||||
W. Brian Barnes, Senior Vice President and Chief Actuary of Chubb & Son, a division of Federal | 47 | 2008 | ||||||
Maureen A. Brundage, Executive Vice President and General Counsel | 53 | 2005 | ||||||
Robert C. Cox, Executive Vice President of Chubb & Son, a division of Federal | 52 | 2003 | ||||||
John J. Degnan, Vice Chairman and Chief Operating Officer | 65 | 1994 | ||||||
John J. Kennedy, Senior Vice President and Chief Accounting Officer | 54 | 2008 | ||||||
Paul J. Krump, Executive Vice President and Chief Underwriting Officer of Chubb & Son, a division of Federal | 50 | 2001 | ||||||
Andrew A. McElwee, Jr., Executive Vice President of Chubb & Son, a division of Federal | 55 | 1997 | ||||||
Harold L. Morrison, Jr., Executive Vice President and Chief Global Field Officer of Chubb & Son, a division of Federal | 52 | 2008 | ||||||
Steven R. Pozzi, Executive Vice President of Chubb & Son, a division of Federal | 53 | 2009 | ||||||
Dino E. Robusto, Executive Vice President and Chief Administrative Officer of Chubb & Son, a division of Federal | 51 | 2006 | ||||||
Richard G. Spiro, Executive Vice President and Chief Financial Officer | 45 | 2008 | ||||||
(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.
19
PART II.
| Item 5. | Market for the Registrant's Common Stock and Related Stockholder Matters |
The common stock of Chubb is listed and principally traded on the New York Stock Exchange (NYSE) under the trading symbol "CB". The following are the high and low closing sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared per share for each quarter of 2009 and 2008.
| 2009 | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
Common stock prices | ||||||||||||||||
High | $ | 50.32 | $ | 44.04 | $ | 51.00 | $ | 53.79 | ||||||||
Low | 35.00 | 38.11 | 38.82 | 48.06 | ||||||||||||
Dividends declared | .35 | .35 | .35 | .35 | ||||||||||||
| 2008 | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
Common stock prices | ||||||||||||||||
High | $ | 54.38 | $ | 54.65 | $ | 64.50 | $ | 53.06 | ||||||||
Low | 48.02 | 49.01 | 45.61 | 38.75 | ||||||||||||
Dividends declared | .33 | .33 | .33 | .33 | ||||||||||||
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.
| Total Number of | Maximum Number of | |||||||||||||||
| Total | Shares Purchased as | Shares that May Yet Be | ||||||||||||||
| Number of | Part of Publicly | Purchased Under | ||||||||||||||
| Shares | Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Purchased(a) | Paid Per Share | Programs | Programs(b) | ||||||||||||
October 2009 | 3,678,000 | $ | 50.21 | 3,678,000 | 3,324,869 | |||||||||||
November 2009 | 3,211,100 | 49.92 | 3,211,100 | 113,769 | ||||||||||||
December 2009 | 2,953,644 | 48.66 | 2,953,644 | 22,160,125 | ||||||||||||
Total | 9,842,744 | 49.65 | 9,842,744 | |||||||||||||
| (a) | The stated amounts exclude 320 shares, 332 shares and 5,814 shares delivered to Chubb during the months of October 2009, November 2009 and December 2009, respectively, by employees of the Corporation to cover option exercise prices and withholding taxes in connection with the Corporation's stock-based compensation plans. |
| (b) | On December 4, 2008, the Board of Directors authorized the repurchase of up to 20,000,000 shares of common stock. No shares remain under this share repurchase authorization. On December 3, 2009, the Board of Directors authorized the repurchase of up to 25,000,000 additional shares of common stock. The authorization has no expiration date. |
20
Stock Performance Graph
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.
Cumulative Total Return
Based upon an initial investment of $100 on December 31,
2004
with dividends reinvested
| December 31 | ||||||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Chubb | $ | 100 | $ | 130 | $ | 143 | $ | 151 | $ | 145 | $ | 144 | ||||||||||||
S&P 500 | 100 | 105 | 121 | 128 | 81 | 102 | ||||||||||||||||||
S&P 500 Property & Casualty Insurance | 100 | 115 | 130 | 112 | 79 | 89 | ||||||||||||||||||
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.
21
Item 6. Selected Financial Data
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (in millions except for per share amounts) | ||||||||||||||||||||
FOR THE YEAR | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Property and Casualty Insurance | ||||||||||||||||||||
Premiums Earned | $ | 11,331 | $ | 11,828 | $ | 11,946 | $ | 11,958 | $ | 12,176 | ||||||||||
Investment Income | 1,585 | 1,652 | 1,622 | 1,485 | 1,342 | |||||||||||||||
Other Revenues | 2 | 4 | 11 | - | - | |||||||||||||||
Corporate and Other | 75 | 108 | 154 | 315 | 181 | |||||||||||||||
Realized Investment Gains (Losses), Net | 23 | (371 | ) | 374 | 245 | 384 | ||||||||||||||
Total Revenues | $ | 13,016 | $ | 13,221 | $ | 14,107 | $ | 14,003 | $ | 14,083 | ||||||||||
Income | ||||||||||||||||||||
Property and Casualty Insurance | ||||||||||||||||||||
Underwriting Income | $ | 1,631 | $ | 1,361 | $ | 2,116 | $ | 1,905 | $ | 921 | (a) | |||||||||
Investment Income | 1,549 | 1,622 | 1,590 | 1,454 | 1,315 | |||||||||||||||
Other Income (Charges) | (3 | ) | 9 | 6 | 10 | (1 | ) | |||||||||||||
Property and Casualty Insurance Income | 3,177 | 2,992 | 3,712 | 3,369 | 2,235 | |||||||||||||||
Corporate and Other | (238 | ) | (214 | ) | (149 | ) | (89 | ) | (172 | ) | ||||||||||
Realized Investment Gains (Losses), Net | 23 | (371 | ) | 374 | 245 | 384 | ||||||||||||||
Income Before Income Tax | 2,962 | 2,407 | 3,937 | 3,525 | 2,447 | |||||||||||||||
Federal and Foreign Income Tax | 779 | 603 | 1,130 | 997 | 621 | |||||||||||||||
Net Income | $ | 2,183 | $ | 1,804 | $ | 2,807 | $ | 2,528 | $ | 1,826 | ||||||||||
Per Share | ||||||||||||||||||||
Net Income | $ | 6.18 | $ | 4.92 | $ | 7.01 | $ | 5.98 | $ | 4.47 | ||||||||||
Dividends Declared on Common Stock | 1.40 | 1.32 | 1.16 | 1.00 | .86 | |||||||||||||||
AT DECEMBER 31 | ||||||||||||||||||||
Total Assets | $ | 50,449 | $ | 48,429 | $ | 50,574 | $ | 50,277 | $ | 48,061 | ||||||||||
Long Term Debt | 3,975 | 3,975 | 3,460 | 2,466 | 2,467 | |||||||||||||||
Total Shareholders' Equity | 15,634 | 13,432 | 14,445 | 13,863 | 12,407 | |||||||||||||||
Book Value Per Share | 47.09 | 38.13 | 38.56 | 33.71 | 29.68 | |||||||||||||||
| (a) | Underwriting income in 2005 reflected net costs of $462 million ($300 million after-tax or $0.74 per share) related to Hurricane Katrina. |
22
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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.
INDEX
| PAGE | ||||
Cautionary Statement Regarding Forward-Looking Information | 24 | |||
Critical Accounting Estimates and Judgments | 26 | |||
Overview | 26 | |||
Property and Casualty Insurance | 28 | |||
Underwriting Operations | 28 | |||
Underwriting Results | 28 | |||
Net Premiums Written | 28 | |||
Reinsurance Ceded | 30 | |||
Profitability | 31 | |||
Review of Underwriting Results by Business Unit | 33 | |||
Personal Insurance | 33 | |||
Commercial Insurance | 34 | |||
Specialty Insurance | 36 | |||
Reinsurance Assumed | 37 | |||
Catastrophe Risk Management | 37 | |||
Natural Catastrophes | 38 | |||
Terrorism Risk and Legislation | 38 | |||
Loss Reserves | 39 | |||
Estimates and Uncertainties | 41 | |||
Reserves Other than Those Relating to Asbestos and Toxic Waste Claims | 41 | |||
Reserves Relating to Asbestos and Toxic Waste Claims | 45 | |||
Asbestos Reserves | 45 | |||
Toxic Waste Reserves | 48 | |||
Reinsurance Recoverable | 49 | |||
Prior Year Loss Development | 50 | |||
Investment Results | 53 | |||
Other Income and Charges | 54 | |||
Corporate and Other | 54 | |||
Chubb Financial Solutions | 54 | |||
Realized Investment Gains and Losses | 55 | |||
Capital Resources and Liquidity | 56 | |||
Capital Resources | 56 | |||
Ratings | 57 | |||
Liquidity | 58 | |||
Contractual Obligations and Off-Balance Sheet Arrangements | 59 | |||
Invested Assets | 60 | |||
Fair Values of Financial Instruments | 61 | |||
Pension and Other Postretirement Benefits | 62 | |||
23
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this document are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding our loss reserve and reinsurance recoverable estimates; the impact of future catastrophes (including acts of terrorism); asbestos and toxic waste liability developments; the number and severity of surety-related claims; 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:
| • | global political conditions and the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events; | |
| • | the effects of the outbreak or escalation of war or hostilities; | |
| • | premium pricing and profitability or growth estimates overall or by lines of business or geographic area, and related expectations with respect to the timing and terms of any required regulatory approvals; | |
| • | adverse changes in loss cost trends; | |
| • | our ability to retain existing business and attract new business; | |
| • | our expectations with respect to cash flow and investment income and with respect to other income; | |
| • | the adequacy of loss reserves, including: |
| • | our expectations relating to reinsurance recoverables; | |
| • | the willingness of parties, including us, to settle disputes; | |
| • | developments in judicial decisions or regulatory or legislative actions relating to coverage and liability, in particular, for asbestos, toxic waste and other mass tort claims; | |
| • | development of new theories of liability; | |
| • | our estimates relating to ultimate asbestos liabilities; | |
| • | the impact from the bankruptcy protection sought by various asbestos producers and other related businesses; and | |
| • | the effects of proposed asbestos liability legislation, including the impact of claims patterns arising from the possibility of legislation and those that may arise if legislation is not passed; |
| • | the availability and cost of reinsurance coverage; | |
| • | the occurrence of significant weather-related or other natural or human-made disasters, particularly in locations where we have concentrations of risk; |
24
| • | the impact of economic factors on companies on whose behalf we have issued surety bonds, and in particular, on those companies that file for bankruptcy or otherwise experience deterioration in creditworthiness; | |
| • | the effects of disclosures by, and investigations of, companies relating to possible accounting irregularities, practices in the financial services industry, investment losses or other corporate governance issues, including: |
| • | claims and litigation arising out of stock option "backdating," spring loading" and other equity grant practices by public companies; | |
| • | the effects on the capital markets and the markets for directors and officers and errors and omissions insurance; | |
| • | claims and litigation arising out of actual or alleged accounting or other corporate malfeasance by other companies; | |
| • | claims and litigation arising out of practices in the financial services industry; | |
| • | claims and litigation relating to uncertainty in the credit and broader financial markets; and | |
| • | legislative or regulatory proposals or changes; |
| • | the effects of changes in market practices in the U.S. property and casualty insurance industry arising from any legal or regulatory proceedings, related settlements and industry reform, including changes that have been announced and changes that may occur in the future; | |
| • | the impact of legislative and regulatory developments on our business, including those relating to terrorism, catastrophes and the financial markets; | |
| • | any downgrade in our claims-paying, financial strength or other credit ratings; | |
| • | the ability of our subsidiaries to pay us dividends; | |
| • | general political, economic and market conditions, whether globally or in the markets in which we operate, including: |
| • | changes in interest rates, market credit spreads and the performance of the financial markets; | |
| • | currency fluctuations; | |
| • | the effects of inflation; | |
| • | changes in domestic and foreign laws, regulations and taxes; | |
| • | changes in competition and pricing environments; | |
| • | regional or general changes in asset valuations; | |
| • | the inability to reinsure certain risks economically; and | |
| • | changes in the litigation environment; and |
| • | our ability to implement management's strategic plans and initiatives. |
Chubb assumes no obligation to update any forward-looking information set forth in this document, which speak as of the date hereof.
25
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables and the evaluation of whether a decline in value of any investment is temporary or other-than-temporary. These estimates and judgments, which are discussed within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.
OVERVIEW
The following highlights do not address all of the matters covered in the other sections of 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.
| • | Net income was $2.2 billion in 2009 compared with $1.8 billion in 2008 and $2.8 billion in 2007. The increase in net income in 2009 compared with 2008 was due to higher operating income in 2009 and modest net realized investment gains in 2009 compared with substantial net realized investment losses in 2008. We define operating income as net income excluding realized investment gains and losses after tax. The decrease in net income in 2008 compared with 2007 was due to both a significant decline in operating income and substantial realized investment losses in 2008 compared with substantial realized investments gains in 2007. | |
| • | Operating income was $2.2 billion in 2009, $2.0 billion in 2008 and $2.6 billion in 2007. Higher operating income in 2009 compared with that in 2008 was due to higher underwriting income in our property and casualty insurance business offset in part by lower investment income. The lower operating income in 2008 compared with that in 2007 was due primarily to substantially lower underwriting income in our property and casualty insurance business in 2008 than in 2007. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends. | |
| • | Underwriting results were highly profitable in 2009, 2008 and 2007. Our combined loss and expense ratio was 86.0% in 2009 compared with 88.7% in 2008 and 82.9% in 2007. The more profitable results in 2009 compared to 2008 were due to substantially lower catastrophe losses offset in part by a lower amount of favorable prior year loss development. The less profitable results in 2008 compared to 2007 were due in large part to higher catastrophe losses as well as the cumulative impact of the rate reductions experienced in the commercial and professional liability classes over the past several years. The impact of catastrophes accounted for 0.8 of a percentage point of the combined ratio in 2009 compared with 5.1 percentage points in 2008 and 3.0 percentage points in 2007. |
26
| • | During 2009, we experienced overall favorable development of $762 million on loss reserves established as of the previous year end, due primarily to favorable loss experience in certain professional liability and commercial liability classes as well as lower than expected emergence of losses in the homeowners and commercial property classes. During 2008, we experienced overall favorable development of $873 million due primarily to favorable loss trends in certain professional liability and commercial liability classes, as well as lower than expected emergence of losses in the homeowners and commercial property classes. During 2007, we experienced overall favorable development of $697 million due primarily to favorable loss trends in the professional liability classes, lower than expected emergence of losses in the homeowners and commercial property classes and better than expected reported loss activity in the run-off of our reinsurance assumed business. | |
| • | Total net premiums written decreased by 6% in 2009 and 1% in 2008. The decrease in 2009 was largely attributable to the general downturn in the economy and, to a lesser extent, the impact of currency fluctuation on business written outside the United States due to the strengthening of the U.S. dollar in 2009 compared to 2008. The lack of premium growth in both years also reflects our continued emphasis on underwriting discipline in a highly competitive market environment. Net premiums written in the United States decreased by 6% in 2009 and 2% in 2008. Net premiums written outside the United States decreased by 6% in 2009 and increased by 6% in 2008. Measured in local currencies, premiums outside the United States grew modestly in both years. | |
| • | Property and casualty investment income after tax decreased by 3% in 2009 and increased by 2% in 2008. The decline 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. The growth in 2008 was limited as average invested assets increased only modestly during the year. Management uses property and casualty investment income after-tax, a non-GAAP financial measure, to evaluate its investment performance because it reflects the impact of any change in the proportion of the investment portfolio invested in tax exempt securities and is therefore more meaningful for analysis purposes than investment income before income tax. | |
| • | Net realized investment gains before taxes were $23 million ($15 million after tax) in 2009 compared with net realized losses before taxes of $371 million ($241 million after tax) in 2008 and net realized gains before taxes of $374 million ($243 million after tax) in 2007. The net realized losses in 2008 were primarily attributable to other-than-temporary impairment losses on equity securities. The net realized gains in 2007 were primarily attributable to gains from investments in limited partnerships. |
A summary of our consolidated net income is as follows:
| Years Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
Property and casualty insurance | $ | 3,177 | $ | 2,992 | $ | 3,712 | ||||||
Corporate and other | (238 | ) | (214 | ) | (149 | ) | ||||||
Consolidated operating income before income tax | 2,939 | 2,778 | 3,563 | |||||||||
Federal and foreign income tax | 771 | 733 | 999 | |||||||||
Consolidated operating income | 2,168 | 2,045 | 2,564 | |||||||||
Realized investment gains (losses) after income tax | 15 | (241 | ) | 243 | ||||||||
Consolidated net income | $ | 2,183 | $ | 1,804 | $ | 2,807 | ||||||
27
PROPERTY AND CASUALTY INSURANCE
A summary of the results of operations of our property and casualty insurance business is as follows:
| Years Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
Underwriting | ||||||||||||
Net premiums written | $ | 11,077 | $ | 11,782 | $ | 11,872 | ||||||
Decrease in unearned premiums | 254 | 46 | 74 | |||||||||
Premiums earned | 11,331 | 11,828 | 11,946 | |||||||||
Losses and loss expenses | 6,268 | 6,898 | 6,299 | |||||||||
Operating costs and expenses | 3,377 | 3,546 | 3,564 | |||||||||
Decrease (increase) in deferred policy acquisition costs | 27 | (17 | ) | (52 | ) | |||||||
Dividends to policyholders | 28 | 40 | 19 | |||||||||
Underwriting income | 1,631 | 1,361 | 2,116 | |||||||||
Investments | ||||||||||||
Investment income before expenses | 1,585 | 1,652 | 1,622 | |||||||||
Investment expenses | 36 | 30 | 32 | |||||||||
Investment income | 1,549 | 1,622 | 1,590 | |||||||||
Other income (charges) | (3 | ) | 9 | 6 | ||||||||
Property and casualty income before tax | $ | 3,177 | $ | 2,992 | $ | 3,712 | ||||||
Property and casualty investment income after tax | $ | 1,252 | $ | 1,297 | $ | 1,273 | ||||||
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
Underwriting Results
We evaluate the underwriting results of our property and casualty insurance business in the aggregate and also for each of our separate business units.
Net Premiums Written
Net premiums written amounted to $11.1 billion in 2009, a decrease of 6% compared with 2008. Net premiums written in 2008 decreased by 1% compared with 2007.
28
Net premiums written by business unit were as follows:
| Years Ended December 31 | ||||||||||||||||||||
| % Increase | ||||||||||||||||||||
| % Decrease | (Decrease) | |||||||||||||||||||
| 2009 | 2009 vs. 2008 | 2008 | 2008 vs. 2007 | 2007 | ||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
Personal insurance | $ | 3,657 | (4 | )% | $ | 3,826 | 3 | % | $ | 3,709 | ||||||||||
Commercial insurance | 4,660 | (7 | ) | 4,993 | (2 | ) | 5,083 | |||||||||||||
Specialty insurance | 2,739 | (6 | ) | 2,899 | (2 | ) | 2,944 | |||||||||||||
Total insurance | 11,056 | (6 | ) | 11,718 | - | 11,736 | ||||||||||||||
Reinsurance assumed | 21 | (67 | ) | 64 | (53 | ) | 136 | |||||||||||||
Total | $ | 11,077 | (6 | ) | $ | 11,782 | (1 | ) | $ | 11,872 | ||||||||||
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.
29
Reinsurance Ceded
Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies we write that are subject to the reinsurance. Most of our ceded reinsurance arrangements consist of excess of loss and catastrophe contracts that protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. Therefore, unless we incur losses that exceed our initial retention under these contracts, we do not receive any loss recoveries. As a result, in certain years, we cede premiums to reinsurance companies and receive few, if any, loss recoveries. However, in a year in which there is a significant catastrophic event or a series of large individual losses, we may receive substantial loss recoveries. The impact of ceded reinsurance on net premiums written and earned and on net losses and loss expenses incurred for the three years ended December 31, 2009 is presented in Note (10) of the Notes to Consolidated Financial Statements.
The most significant component of our ceded reinsurance program is property reinsurance. We purchase two types of coverage: catastrophe and property per risk.
For property risks in the United States and Canada, we purchase catastrophe reinsurance in two forms. We purchase a traditional catastrophe reinsurance treaty which we refer to as our North American catastrophe treaty. In recent years, we have also arranged for the purchase of multi-year, collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, known as catastrophe bonds.
Our North American catastrophe treaty has been in place for many years. For the 2009 treaty, our initial retention is $500 million per occurrence. We did not renew the coverage for 45% of covered losses between $350 million and $500 million we had under the 2008 treaty. We also converted a northeastern United States-only layer into a layer that covers all of the United States and Canada. The overall impact of these changes was to slightly reduce the maximum amount that we can recover per occurrence under the North American catastrophe treaty.
The combination of the 2009 North American catastrophe treaty and a portion of the catastrophe bond coverages in effect during 2009, collectively, provide coverage for United States and Canadian exposures of approximately 72% of losses (net of recoveries from other available reinsurance) between $500 million and $1.15 billion and 60% of losses between $1.15 billion and $1.65 billion.
We currently have three catastrophe bond coverages in effect. The first of the catastrophe bond coverages, which we established in 2007, is a $250 million, four-year reinsurance arrangement that provides coverage for homeowners-related hurricane losses in the northeastern part of the United States, where we have our greatest concentration of catastrophe exposure. The second of the catastrophe bond coverages, which we established in 2008, is a $200 million, three-year reinsurance arrangement that provides coverage for homeowners and commercial exposures. The full $200 million of coverage is available for loss events in the northeastern part of the United States. For losses occurring elsewhere in the continental United States or Canada, the coverage is limited to $55 million. Our third catastrophe bond coverage, which we established in 2009, is a $150 million, three-year reinsurance arrangement that provides coverage for homeowners-related hurricane losses in Florida.
For catastrophe events in the northeastern part of the United States, in addition to the United States and Canadian coverage discussed above, we have reinsurance that covers approximately 35% of losses (net of recoveries from other available reinsurance) between $1.15 billion and $2.05 billion. This coverage is provided through a combination of our North American catastrophe reinsurance treaty and the catastrophe bond coverage that we established in 2008. Additionally, the catastrophe bond coverage established in 2007 provides coverage for approximately 30% of homeowners-related hurricane losses between $1.45 billion and $2.25 billion.
For hurricane events in Florida, we have a combination of reinsurance coverages that operate in conjunction with the United States and Canadian coverage discussed above. We have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Coverage under this program,
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