e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the quarterly period ended JUNE 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission file number 1-8661
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
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NEW JERSEY |
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13-2595722 |
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(State or other jurisdiction of
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(I. R. S. Employer |
incorporation or organization)
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Identification No.) |
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15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY
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07059 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (908) 903-2000
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 þ NO o
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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
The number of shares of common stock outstanding as of June 30, 2010 was 314,549,426.
THE CHUBB CORPORATION
INDEX
Page 1
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
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Second Quarter |
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Six Months |
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2010 |
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2009 |
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2010 |
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2009 |
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(in millions) |
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Revenues |
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Premiums Earned |
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$ |
2,799 |
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$ |
2,828 |
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$ |
5,581 |
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$ |
5,654 |
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Investment Income |
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426 |
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408 |
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836 |
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810 |
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Other Revenues |
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3 |
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3 |
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7 |
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6 |
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Realized Investment Gains (Losses), Net |
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Total Other-Than-Temporary Impairment Losses
on Investments |
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(6 |
) |
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(34 |
) |
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(6 |
) |
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(93 |
) |
Other-Than-Temporary Impairment Losses on
Investments Recognized in Other
Comprehensive Income |
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(2 |
) |
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15 |
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(3 |
) |
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15 |
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Other Realized Investment Gains (Losses),
Net |
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98 |
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46 |
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226 |
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(161 |
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Total Realized Investment Gains
(Losses), Net |
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90 |
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27 |
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217 |
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(239 |
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Total Revenues |
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3,318 |
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3,266 |
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6,641 |
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6,231 |
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Losses and Expenses |
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Losses and Loss Expenses |
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1,660 |
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1,572 |
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3,390 |
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3,187 |
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Amortization of Deferred Policy Acquisition
Costs |
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765 |
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757 |
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1,505 |
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1,485 |
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Other Insurance Operating Costs and
Expenses |
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107 |
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102 |
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222 |
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205 |
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Investment Expenses |
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8 |
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7 |
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18 |
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16 |
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Other Expenses |
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4 |
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4 |
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8 |
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7 |
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Corporate Expenses |
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72 |
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71 |
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148 |
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148 |
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Total Losses and Expenses |
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2,616 |
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2,513 |
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5,291 |
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5,048 |
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Income Before Federal and Foreign Income
Tax |
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702 |
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753 |
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1,350 |
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1,183 |
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Federal and Foreign Income Tax |
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184 |
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202 |
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368 |
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291 |
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Net Income |
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$ |
518 |
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$ |
551 |
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$ |
982 |
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$ |
892 |
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Net Income Per Share |
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Basic |
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$ |
1.60 |
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$ |
1.55 |
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$ |
2.99 |
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$ |
2.51 |
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Diluted |
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1.59 |
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1.54 |
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2.97 |
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2.49 |
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Dividends Declared Per Share |
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.37 |
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.35 |
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.74 |
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.70 |
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See Notes to Consolidated Financial Statements.
Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
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June 30, |
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Dec. 31, |
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2010 |
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2009 |
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(in millions) |
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Assets |
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Invested Assets |
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Short Term Investments |
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$ |
2,211 |
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$ |
1,918 |
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Fixed Maturities |
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Tax Exempt (cost $18,615 and $18,720) |
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19,629 |
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19,587 |
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Taxable (cost $15,836 and $16,470) |
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16,652 |
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16,991 |
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Equity Securities (cost $1,230 and $1,215) |
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1,263 |
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1,433 |
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Other Invested Assets |
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2,240 |
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2,075 |
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TOTAL INVESTED ASSETS |
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41,995 |
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42,004 |
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Cash |
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50 |
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51 |
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Accrued Investment Income |
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445 |
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460 |
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Premiums Receivable |
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2,152 |
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2,101 |
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Reinsurance Recoverable on Unpaid Losses
and Loss Expenses |
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1,950 |
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2,053 |
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Prepaid Reinsurance Premiums |
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334 |
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308 |
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Deferred Policy Acquisition Costs |
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1,562 |
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1,533 |
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Deferred Income Tax |
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141 |
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272 |
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Goodwill |
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467 |
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467 |
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Other Assets |
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1,352 |
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1,200 |
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TOTAL ASSETS |
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$ |
50,448 |
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$ |
50,449 |
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Liabilities |
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Unpaid Losses and Loss Expenses |
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$ |
22,802 |
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$ |
22,839 |
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Unearned Premiums |
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6,197 |
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6,153 |
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Long Term Debt |
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3,975 |
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3,975 |
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Dividend Payable to Shareholders |
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118 |
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118 |
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Accrued Expenses and Other Liabilities |
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1,823 |
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1,730 |
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TOTAL LIABILITIES |
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34,915 |
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34,815 |
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Contingent Liabilities (Note 6) |
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Shareholders Equity |
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Common Stock $1 Par Value; 371,980,460 Shares |
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372 |
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372 |
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Paid-In Surplus |
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175 |
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224 |
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Retained Earnings |
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16,978 |
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16,235 |
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Accumulated Other Comprehensive Income |
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812 |
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720 |
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Treasury Stock, at Cost 57,431,034 and
39,972,796 Shares |
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(2,804 |
) |
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(1,917 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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15,533 |
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15,634 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
50,448 |
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$ |
50,449 |
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See Notes to Consolidated Financial Statements.
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
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Second Quarter |
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Six Months |
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2010 |
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2009 |
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2010 |
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2009 |
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(in millions) |
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Net Income |
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$ |
518 |
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$ |
551 |
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$ |
982 |
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$ |
892 |
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Other
Comprehensive Income (Loss), Net of Tax |
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Change in Unrealized Appreciation or
Depreciation of Investments |
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56 |
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188 |
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163 |
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|
515 |
|
Change in Unrealized Other-Than-Temporary Impairment Losses on
Investments |
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1 |
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(9 |
) |
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4 |
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(9 |
) |
Foreign Currency Translation Gains
(Losses) |
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(66 |
) |
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|
158 |
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(94 |
) |
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45 |
|
Amortization of Net Loss and Prior
Service Cost Included in Net
Postretirement Benefit Costs |
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9 |
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3 |
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19 |
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12 |
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|
340 |
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|
92 |
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|
563 |
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Comprehensive Income |
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$ |
518 |
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$ |
891 |
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$ |
1,074 |
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$ |
1,455 |
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See Notes to Consolidated Financial Statements.
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
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2010 |
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2009 |
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(in millions) |
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Cash Flows from Operating Activities |
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Net Income |
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$ |
982 |
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$ |
892 |
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Adjustments to Reconcile Net Income to Net Cash |
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Provided by Operating Activities |
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Increase in Unpaid Losses and Loss Expenses, Net |
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272 |
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|
171 |
|
Increase (Decrease) in Unearned Premiums, Net |
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70 |
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(65 |
) |
Increase in Premiums Receivable |
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(51 |
) |
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(6 |
) |
Amortization of Premiums and Discounts on Fixed Maturities |
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|
89 |
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|
94 |
|
Depreciation |
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31 |
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|
30 |
|
Realized Investment Losses (Gains), Net |
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(217 |
) |
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|
239 |
|
Other, Net |
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(177 |
) |
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(244 |
) |
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Net Cash Provided by Operating Activities |
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|
999 |
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|
1,111 |
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Cash Flows from Investing Activities |
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Proceeds from Fixed Maturities |
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Sales |
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1,593 |
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|
1,771 |
|
Maturities, Calls and Redemptions |
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1,215 |
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1,206 |
|
Proceeds from Sales of Equity Securities |
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|
42 |
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|
344 |
|
Purchases of Fixed Maturities |
|
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(2,457 |
) |
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|
(4,000 |
) |
Purchases of Equity Securities |
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(52 |
) |
|
|
(4 |
) |
Investments in Other Invested Assets, Net |
|
|
1 |
|
|
|
(24 |
) |
Increase in Short Term Investments, Net |
|
|
(275 |
) |
|
|
(182 |
) |
Increase in Net Payable from Security
Transactions Not Settled |
|
|
118 |
|
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|
196 |
|
Purchases of Property and Equipment, Net |
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(25 |
) |
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(24 |
) |
Other, Net |
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4 |
|
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|
Net Cash Provided by (Used in) Investing Activities |
|
|
160 |
|
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|
(713 |
) |
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|
|
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Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Increase (Decrease) in Funds Held under
Deposit Contracts |
|
|
24 |
|
|
|
(2 |
) |
Proceeds from Issuance of Common Stock Under
Stock-Based Employee Compensation Plans |
|
|
31 |
|
|
|
16 |
|
Repurchase of Shares |
|
|
(976 |
) |
|
|
(161 |
) |
Dividends Paid to Shareholders |
|
|
(239 |
) |
|
|
(242 |
) |
|
|
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Net Cash Used in Financing Activities |
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|
(1,160 |
) |
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|
(389 |
) |
|
|
|
|
|
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|
|
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|
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|
|
Net Increase (Decrease) in Cash |
|
|
(1 |
) |
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|
9 |
|
|
|
|
|
|
|
|
|
|
Cash at Beginning of Year |
|
|
51 |
|
|
|
56 |
|
|
|
|
|
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|
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|
Cash at End of Period |
|
$ |
50 |
|
|
$ |
65 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The accompanying consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles (GAAP) and include the accounts of The Chubb
Corporation (Chubb) and its subsidiaries (collectively, the Corporation). Significant
intercompany transactions have been eliminated in consolidation.
Effective April 1, 2009, the Corporation adopted new guidance issued by the Financial
Accounting Standards Board (FASB) related to the recognition and presentation of
other-than-temporary impairments. This guidance was not permitted to be retroactively
applied to prior periods financial statements; accordingly, consolidated financial
statements for periods prior to April 1, 2009 have not been restated for this change in
accounting policy. This accounting change is further described
in Note (3)(b).
The amounts included in this report are unaudited but include those adjustments,
consisting of normal recurring items, that management considers necessary for a fair
presentation. These consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Notes to Consolidated Financial
Statements included in the Corporations Annual Report on Form 10-K for the year ended
December 31, 2009.
2) Adoption of New Accounting Pronouncement
Effective January 1, 2010, the Corporation adopted new guidance issued by the FASB
related to the accounting for a variable interest entity (VIE). A company would consolidate a
VIE, as the primary beneficiary, when a company has both of the following characteristics:
(a) the power to direct the activities of a VIE that most significantly impact the VIEs
economic performance and (b) the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive benefits from the VIE that
could potentially be significant to the VIE. Ongoing reassessment of whether a company is
the primary beneficiary of a VIE is required. The new guidance replaces the
quantitative-based approach previously required for determining which company, if any, has a
controlling financial interest in a VIE. The adoption of this guidance did not have a
significant effect on the Corporations financial position or results of operations.
The Corporation is involved in the normal course of business with VIEs primarily as a
passive investor in residential mortgage-backed securities, commercial mortgage-backed
securities and private equity limited partnerships issued by third party VIEs. The
Corporation is not the primary beneficiary of these VIEs. The Corporations maximum exposure
to loss with respect to these investments is limited to the investment carrying values
included in the Corporations consolidated balance sheet and any unfunded partnership
commitments.
Page 6
3) Invested Assets
(a) The amortized cost and fair value of fixed maturities and equity securities were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Value |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
18,615 |
|
|
$ |
1,073 |
|
|
$ |
59 |
|
|
$ |
19,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
government agency and
authority obligations |
|
|
780 |
|
|
|
35 |
|
|
|
5 |
|
|
|
810 |
|
Corporate bonds |
|
|
6,081 |
|
|
|
424 |
|
|
|
23 |
|
|
|
6,482 |
|
Foreign government and
government agency
obligations |
|
|
5,733 |
|
|
|
258 |
|
|
|
7 |
|
|
|
5,984 |
|
Residential
mortgage-backed
securities |
|
|
1,565 |
|
|
|
84 |
|
|
|
11 |
|
|
|
1,638 |
|
Commercial
mortgage-backed
securities |
|
|
1,677 |
|
|
|
62 |
|
|
|
1 |
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,836 |
|
|
|
863 |
|
|
|
47 |
|
|
|
16,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
34,451 |
|
|
$ |
1,936 |
|
|
$ |
106 |
|
|
$ |
36,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,230 |
|
|
$ |
180 |
|
|
$ |
147 |
|
|
$ |
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Appreciation |
|
|
Depreciation |
|
|
Value |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
18,720 |
|
|
$ |
933 |
|
|
$ |
66 |
|
|
$ |
19,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
government agency and
authority obligations |
|
|
756 |
|
|
|
12 |
|
|
|
10 |
|
|
|
758 |
|
Corporate bonds |
|
|
6,287 |
|
|
|
327 |
|
|
|
24 |
|
|
|
6,590 |
|
Foreign government and
government agency
obligations |
|
|
5,903 |
|
|
|
221 |
|
|
|
11 |
|
|
|
6,113 |
|
Residential
mortgage-backed
securities |
|
|
1,850 |
|
|
|
69 |
|
|
|
20 |
|
|
|
1,899 |
|
Commercial
mortgage-backed
securities |
|
|
1,674 |
|
|
|
6 |
|
|
|
49 |
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,470 |
|
|
|
635 |
|
|
|
114 |
|
|
|
16,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
35,190 |
|
|
$ |
1,568 |
|
|
$ |
180 |
|
|
$ |
36,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,215 |
|
|
$ |
261 |
|
|
$ |
43 |
|
|
$ |
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 7
At June 30, 2010 and December 31, 2009, the gross unrealized depreciation of fixed
maturities included $9 million and $15 million, respectively, of unrealized
other-than-temporary impairment losses recognized in accumulated other comprehensive income.
The amortized cost and fair value of fixed maturities at June 30, 2010 by contractual
maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
|
(in millions) |
|
Due in one year or less |
|
$ |
1,300 |
|
|
$ |
1,321 |
|
Due after one year through five years |
|
|
10,755 |
|
|
|
11,299 |
|
Due after five years through ten years |
|
|
11,940 |
|
|
|
12,798 |
|
Due after ten years |
|
|
7,214 |
|
|
|
7,487 |
|
|
|
|
|
|
|
|
|
|
|
31,209 |
|
|
|
32,905 |
|
Residential mortgage-backed securities |
|
|
1,565 |
|
|
|
1,638 |
|
Commercial mortgage-backed securities |
|
|
1,677 |
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,451 |
|
|
$ |
36,281 |
|
|
|
|
|
|
|
|
Actual maturities could differ from contractual maturities because borrowers may have
the right to call or prepay obligations.
The Corporations equity securities comprise a diversified portfolio of primarily U.S.
publicly-traded common stocks.
(b) The components of unrealized appreciation or depreciation, including unrealized
other-than-temporary impairment losses, of investments carried at fair value were as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
Gross unrealized appreciation |
|
$ |
1,936 |
|
|
$ |
1,568 |
|
Gross unrealized depreciation |
|
|
106 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
1,830 |
|
|
|
1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
Gross unrealized appreciation |
|
|
180 |
|
|
|
261 |
|
Gross unrealized depreciation |
|
|
147 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
1,863 |
|
|
|
1,606 |
|
Deferred income tax liability |
|
|
652 |
|
|
|
562 |
|
|
|
|
|
|
|
|
|
|
$ |
1,211 |
|
|
$ |
1,044 |
|
|
|
|
|
|
|
|
When the fair value of an investment is lower than its cost, an assessment is made to
determine whether the decline is temporary or other than temporary. The assessment of
other-than-temporary impairment of fixed maturities and equity securities is based on both
quantitative criteria and qualitative information and also considers a number of other
factors including, but not limited to, the length of time and the extent to which the fair
value has been less than the cost, the financial condition and near term prospects of the
issuer, whether the issuer is current on contractually obligated interest and principal
payments, general market conditions and industry or sector specific factors.
Page 8
In determining whether fixed maturities are other than temporarily impaired, prior to
April 1, 2009, the Corporation considered many factors including its intent and ability to
hold a security for a period of time sufficient to allow for the recovery of the securitys
cost. When an impairment was deemed other than temporary, the security was written down to
fair value and the entire writedown was included in net income as a realized investment loss.
Effective April 1, 2009, the Corporation adopted new guidance which modified the guidance on
the recognition and presentation of other-than-temporary impairments of debt securities.
Under this guidance, the Corporation is required to recognize an other-than-temporary
impairment loss when it concludes it has the intent to sell or it is more likely than not it
will be required to sell an impaired fixed maturity before the security recovers to its
amortized cost value or it is likely it will not recover the entire amortized cost value of
an impaired debt security. Also under this guidance, if the Corporation has the intent to
sell or it is more likely than not that the Corporation will be required to sell an impaired
fixed maturity before the security recovers to its amortized cost value, the security is
written down to fair value and the entire amount of the writedown is included in net income
as a realized investment loss. For all other impaired fixed maturities, the impairment loss
is separated into the amount representing the credit loss and the amount representing the
loss related to all other factors. The amount of the impairment loss that represents the
credit loss is included in net income as a realized investment loss and the amount of the
impairment loss that relates to all other factors is included in other comprehensive income.
For fixed maturities, the split between the amount of other-than-temporary impairment
losses that represents credit losses and the amount that relates to all other factors is
principally based on assumptions regarding the amount and timing of projected cash flows.
For fixed maturities other than mortgage-backed securities, cash flow estimates are based on
assumptions regarding the probability of default and estimates regarding the timing and
amount of recoveries associated with a default. For mortgage-backed securities, cash flow
estimates are based on assumptions regarding future prepayment rates, default rates, loss
severity and timing of recoveries. The Corporation has developed the estimates of projected
cash flows using information based on historical market data, industry analyst reports and
forecasts and other data relevant to the collectability of a security.
In determining whether equity securities are other than temporarily impaired, the
Corporation considers its intent and ability to hold a security for a period of time
sufficient to allow for the recovery of cost. If the decline in the fair value of an equity
security is deemed to be other than temporary, the security is written down to fair value and
the amount of the writedown is included in net income as a realized investment loss.
Page 9
The following table summarizes, for all investment securities in an unrealized loss
position at June 30, 2010, the aggregate fair value and gross unrealized depreciation,
including unrealized other-than-temporary impairment losses, by investment category and
length of time that individual securities have continuously been in an unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
343 |
|
|
$ |
8 |
|
|
$ |
528 |
|
|
$ |
51 |
|
|
$ |
871 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
government agency and
authority
obligations |
|
|
105 |
|
|
|
1 |
|
|
|
16 |
|
|
|
4 |
|
|
|
121 |
|
|
|
5 |
|
Corporate bonds |
|
|
294 |
|
|
|
10 |
|
|
|
131 |
|
|
|
13 |
|
|
|
425 |
|
|
|
23 |
|
Foreign government and
government agency
obligations |
|
|
634 |
|
|
|
5 |
|
|
|
39 |
|
|
|
2 |
|
|
|
673 |
|
|
|
7 |
|
Residential mortgage-backed securities |
|
|
7 |
|
|
|
1 |
|
|
|
73 |
|
|
|
10 |
|
|
|
80 |
|
|
|
11 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
1 |
|
|
|
38 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,040 |
|
|
|
17 |
|
|
|
297 |
|
|
|
30 |
|
|
|
1,337 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities |
|
|
1,383 |
|
|
|
25 |
|
|
|
825 |
|
|
|
81 |
|
|
|
2,208 |
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
287 |
|
|
|
46 |
|
|
|
322 |
|
|
|
101 |
|
|
|
609 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,670 |
|
|
$ |
71 |
|
|
$ |
1,147 |
|
|
$ |
182 |
|
|
$ |
2,817 |
|
|
$ |
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, approximately 465 individual fixed maturity and equity securities
were in an unrealized loss position, of which approximately 405 were fixed maturities. The
Corporation does not have the intent to sell and it is not more likely than not that the
Corporation will be required to sell these fixed maturities before the securities recover to
their amortized cost value. In addition, the Corporation believes that none of the declines
in the fair values of these fixed maturities relate to credit losses. The Corporation has
the intent and ability to hold the equity securities in an unrealized loss position for a
period of time sufficient to allow for the recovery of cost. The Corporation believes that
none of the declines in the fair value of these fixed maturities and equity securities were
other than temporary at June 30, 2010.
Page 10
The following table summarizes, for all investment securities in an unrealized loss
position at December 31, 2009, the aggregate fair value and gross unrealized depreciation,
including unrealized other-than-temporary impairment losses, by investment category and
length of time that individual securities have continuously been in an unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
Value |
|
|
Depreciation |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
542 |
|
|
$ |
8 |
|
|
$ |
1,048 |
|
|
$ |
58 |
|
|
$ |
1,590 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
government agency and
authority
obligations |
|
|
195 |
|
|
|
6 |
|
|
|
44 |
|
|
|
4 |
|
|
|
239 |
|
|
|
10 |
|
Corporate bonds |
|
|
657 |
|
|
|
19 |
|
|
|
88 |
|
|
|
5 |
|
|
|
745 |
|
|
|
24 |
|
Foreign government and
government agency
obligations |
|
|
809 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
11 |
|
Residential mortgage-backed securities |
|
|
9 |
|
|
|
4 |
|
|
|
89 |
|
|
|
16 |
|
|
|
98 |
|
|
|
20 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
1,273 |
|
|
|
49 |
|
|
|
1,273 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,670 |
|
|
|
40 |
|
|
|
1,494 |
|
|
|
74 |
|
|
|
3,164 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities |
|
|
2,212 |
|
|
|
48 |
|
|
|
2,542 |
|
|
|
132 |
|
|
|
4,754 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
82 |
|
|
|
6 |
|
|
|
393 |
|
|
|
37 |
|
|
|
475 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,294 |
|
|
$ |
54 |
|
|
$ |
2,935 |
|
|
$ |
169 |
|
|
$ |
5,229 |
|
|
$ |
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in unrealized appreciation or depreciation of investments carried at
fair value, including the change in unrealized other-than-temporary impairment losses and the
cumulative effect adjustment of $30 million as a result of adopting new guidance related to
the recognition and presentation of other-than-temporary impairments during the second
quarter of 2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in millions) |
|
Change in unrealized appreciation or
depreciation of fixed maturities |
|
$ |
331 |
|
|
$ |
138 |
|
|
$ |
442 |
|
|
$ |
694 |
|
Change in unrealized appreciation or
depreciation of equity securities |
|
|
(243 |
) |
|
|
91 |
|
|
|
(185 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
229 |
|
|
|
257 |
|
|
|
732 |
|
Deferred income tax |
|
|
31 |
|
|
|
80 |
|
|
|
90 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57 |
|
|
$ |
149 |
|
|
$ |
167 |
|
|
$ |
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11
|
(c) |
|
Realized investment gains and losses were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
19 |
|
|
$ |
29 |
|
|
$ |
57 |
|
|
$ |
65 |
|
Gross realized losses |
|
|
(6 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
|
|
(17 |
) |
Other-than-temporary
impairment losses |
|
|
(2 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
7 |
|
|
|
43 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
3 |
|
|
|
60 |
|
|
|
12 |
|
|
|
71 |
|
Gross realized losses |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Other-than-temporary
impairment losses |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
52 |
|
|
|
5 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets |
|
|
83 |
|
|
|
(32 |
) |
|
|
169 |
|
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90 |
|
|
$ |
27 |
|
|
$ |
217 |
|
|
$ |
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) As of June 30, 2010 and December 31, 2009, fixed maturities still held by the
Corporation for which a portion of their other-than-temporary impairment losses were
recognized in other comprehensive income had cumulative credit-related losses of $21
million and $20 million, respectively, recognized in net income.
4) Fair Values of Financial Instruments
Fair values of financial instruments are determined using valuation techniques that
maximize the use of observable inputs and minimize the use of unobservable inputs. Fair
values are generally measured using quoted prices in active markets for identical assets or
liabilities or other inputs, such as quoted prices for similar assets or liabilities, that
are observable either directly or indirectly. In those instances where observable inputs are
not available, fair values are measured using unobservable inputs for the asset or liability.
Unobservable inputs reflect the Corporations own assumptions about the assumptions that
market participants would use in pricing the asset or liability and are developed based on
the best information available in the circumstances. Fair value estimates derived from
unobservable inputs are affected by the assumptions used, including the discount rates and
the estimated amounts and timing of future cash flows. The derived fair value estimates
cannot be substantiated by comparison to independent markets and are not necessarily
indicative of the amounts that would be realized in a current market exchange. Certain
financial instruments, particularly insurance contracts, are excluded from fair value
disclosure requirements.
Page 12
The methods and assumptions used to estimate the fair values of financial instruments
are as follows:
|
(i) |
|
The carrying value of short term investments approximates fair value
due to the short maturities of these investments. |
|
|
(ii) |
|
Fair values for fixed maturities are determined by management,
utilizing prices obtained from an independent, nationally recognized pricing
service or, in the case of securities for which prices are not provided by a
pricing service, from independent brokers. For fixed maturities that have quoted
prices in active markets, market quotations are provided. For fixed maturities
that do not trade on a daily basis, the pricing service and brokers provide fair
value estimates using a variety of inputs including, but not limited to, benchmark
yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers,
reference data, prepayment spreads and measures of volatility. Management reviews
on an ongoing basis the reasonableness of the methodologies used by the relevant
pricing service and brokers. In addition, management, using the prices received
for the securities from the pricing service and brokers, determines the aggregate
portfolio price performance and reviews it against applicable indices. If
management believes that significant discrepancies exist, it will discuss these
with the relevant pricing service or broker to resolve the discrepancies. |
|
|
(iii) |
|
Fair values of equity securities are based on quoted market prices. |
|
|
(iv) |
|
Fair values of long term debt issued by Chubb are determined by
management, utilizing prices obtained from an independent, nationally recognized
pricing service. |
The carrying values and fair values of financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
|
|
|
|
|
|
(in millions) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
$ |
2,211 |
|
|
$ |
2,211 |
|
|
$ |
1,918 |
|
|
$ |
1,918 |
|
Fixed maturities |
|
|
36,281 |
|
|
|
36,281 |
|
|
|
36,578 |
|
|
|
36,578 |
|
Equity securities |
|
|
1,263 |
|
|
|
1,263 |
|
|
|
1,433 |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
|
3,975 |
|
|
|
4,244 |
|
|
|
3,975 |
|
|
|
4,102 |
|
Page 13
A pricing service provides fair value amounts for approximately 99% of the Corporations
fixed maturities. The prices obtained from a pricing service and brokers generally are
non-binding, but are reflective of current market transactions in the applicable financial
instruments.
At June 30, 2010 and December 31, 2009, the Corporation did not hold financial
instruments in its investment portfolio for which a lack of market liquidity impacted the
determination of fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels as follows:
Level 1 Unadjusted quoted prices in active markets for identical
assets.
Level 2 Other inputs that are observable for the asset, either
directly or indirectly.
Level 3 Inputs that are unobservable.
The fair value of fixed maturities and equity securities categorized based upon the
lowest level of input that was significant to the fair value measurement was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
|
|
|
$ |
19,621 |
|
|
$ |
8 |
|
|
$ |
19,629 |
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
Agency and authority
obligations |
|
|
|
|
|
|
810 |
|
|
|
|
|
|
|
810 |
|
Corporate bonds |
|
|
|
|
|
|
6,336 |
|
|
|
146 |
|
|
|
6,482 |
|
Foreign government and
government agency obligations |
|
|
|
|
|
|
5,984 |
|
|
|
|
|
|
|
5,984 |
|
Residential mortgage-backed
securities |
|
|
|
|
|
|
1,638 |
|
|
|
|
|
|
|
1,638 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
1,738 |
|
|
|
|
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,506 |
|
|
|
146 |
|
|
|
16,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
36,127 |
|
|
|
154 |
|
|
|
36,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
1,250 |
|
|
|
|
|
|
|
13 |
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,250 |
|
|
$ |
36,127 |
|
|
$ |
167 |
|
|
$ |
37,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(in millions) |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
|
$ |
|
|
|
$ |
19,578 |
|
|
$ |
9 |
|
|
$ |
19,587 |
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government
Agency and authority
obligations |
|
|
|
|
|
|
725 |
|
|
|
33 |
|
|
|
758 |
|
Corporate bonds |
|
|
|
|
|
|
6,482 |
|
|
|
108 |
|
|
|
6,590 |
|
Foreign government and
government agency obligations |
|
|
|
|
|
|
6,113 |
|
|
|
|
|
|
|
6,113 |
|
Residential mortgage-backed
securities |
|
|
|
|
|
|
1,898 |
|
|
|
1 |
|
|
|
1,899 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
1,631 |
|
|
|
|
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,849 |
|
|
|
142 |
|
|
|
16,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
36,427 |
|
|
|
151 |
|
|
|
36,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
1,207 |
|
|
|
|
|
|
|
226 |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,207 |
|
|
$ |
36,427 |
|
|
$ |
377 |
|
|
$ |
38,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of Level 3 equity securities at June 30, 2010 decreased compared to December
31, 2009 primarily due to the exchange, as a result of a merger, of
equity securities of a non-public company in which the Corporation
held an investment for equity securities of a public company for which a quoted price in an active market was
available.
5) Segments Information
The principal business of the Corporation is the sale of property and casualty
insurance. The profitability of the property and casualty insurance business depends on the
results of both underwriting operations and investments, which are viewed as two distinct
operations. The underwriting operations are managed and evaluated separately from the
investment function.
The property and casualty insurance subsidiaries (P&C Group) underwrite most lines of
property and casualty insurance. Underwriting operations consist of four separate business
units: personal insurance, commercial insurance, specialty insurance and reinsurance assumed.
The personal segment targets the personal insurance market. The personal classes include
automobile, homeowners and other personal coverages. The commercial segment includes those
classes of business that are generally available in broad markets and are of a more commodity
nature. Commercial classes include multiple peril, casualty, workers compensation and
property and marine. The specialty segment includes those classes of business that are
available in more limited markets since they require specialized underwriting and claim
settlement. Specialty classes include professional liability coverages and surety. The
reinsurance assumed business is effectively in run-off following the sale of the
ongoing business to a reinsurance company in 2005.
Corporate and other includes investment income earned on corporate invested assets,
corporate expenses and the results of the Corporations non-insurance subsidiaries.
Page 15
|
|
Revenues and income before income tax of the operating segments were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
$ |
933 |
|
|
$ |
917 |
|
|
$ |
1,858 |
|
|
$ |
1,824 |
|
Commercial insurance |
|
|
1,164 |
|
|
|
1,195 |
|
|
|
2,316 |
|
|
|
2,393 |
|
Specialty insurance |
|
|
698 |
|
|
|
705 |
|
|
|
1,399 |
|
|
|
1,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
2,795 |
|
|
|
2,817 |
|
|
|
5,573 |
|
|
|
5,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
4 |
|
|
|
11 |
|
|
|
8 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,799 |
|
|
|
2,828 |
|
|
|
5,581 |
|
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
393 |
|
|
|
394 |
|
|
|
789 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
insurance |
|
|
3,192 |
|
|
|
3,222 |
|
|
|
6,370 |
|
|
|
6,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
36 |
|
|
|
17 |
|
|
|
54 |
|
|
|
36 |
|
Realized investment gains
(losses), net |
|
|
90 |
|
|
|
27 |
|
|
|
217 |
|
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
3,318 |
|
|
$ |
3,266 |
|
|
$ |
6,641 |
|
|
$ |
6,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
$ |
42 |
|
|
$ |
131 |
|
|
$ |
18 |
|
|
$ |
243 |
|
Commercial insurance |
|
|
68 |
|
|
|
123 |
|
|
|
111 |
|
|
|
221 |
|
Specialty insurance |
|
|
131 |
|
|
|
123 |
|
|
|
281 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
241 |
|
|
|
377 |
|
|
|
410 |
|
|
|
712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
1 |
|
|
|
15 |
|
|
|
14 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
392 |
|
|
|
424 |
|
|
|
752 |
|
Increase in deferred policy
acquisition costs |
|
|
21 |
|
|
|
4 |
|
|
|
43 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
|
263 |
|
|
|
396 |
|
|
|
467 |
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
385 |
|
|
|
387 |
|
|
|
772 |
|
|
|
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (charges) |
|
|
4 |
|
|
|
1 |
|
|
|
(3 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
insurance |
|
|
652 |
|
|
|
784 |
|
|
|
1,236 |
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other loss |
|
|
(40 |
) |
|
|
(58 |
) |
|
|
(103 |
) |
|
|
(121 |
) |
Realized investment gains
(losses), net |
|
|
90 |
|
|
|
27 |
|
|
|
217 |
|
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income tax |
|
$ |
702 |
|
|
$ |
753 |
|
|
$ |
1,350 |
|
|
$ |
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 16
6) Contingent Liabilities
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. 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 Generals business practices investigation.
This action alleges violations of Ohios antitrust laws. In July 2008, the court denied the
Corporations and the other defendants motions to dismiss the Ohio Attorney Generals
complaint. Since then discovery has been on-going. 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.
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.
Page 17
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.
The Corporation cannot predict at this time the ultimate outcome of the aforementioned
ongoing investigations and legal proceedings, including any potential amounts that the
Corporation may be required to pay in connection with them. Nevertheless, management
believes that it is likely that the outcome will not have a material adverse effect on the
Corporations results of operations or financial condition.
7) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Second Quarter |
|
|
Six Months |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in millions, |
|
|
|
except for per share amounts) |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
518 |
|
|
$ |
551 |
|
|
$ |
982 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding |
|
|
324.5 |
|
|
|
354.8 |
|
|
|
328.7 |
|
|
|
355.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.60 |
|
|
$ |
1.55 |
|
|
$ |
2.99 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
518 |
|
|
$ |
551 |
|
|
$ |
982 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding |
|
|
324.5 |
|
|
|
354.8 |
|
|
|
328.7 |
|
|
|
355.0 |
|
Additional shares from assumed
exercise of stock-based
compensation awards |
|
|
2.2 |
|
|
|
2.6 |
|
|
|
2.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares and potential shares
assumed outstanding for computing
diluted earnings per share |
|
|
326.7 |
|
|
|
357.4 |
|
|
|
330.8 |
|
|
|
357.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.59 |
|
|
$ |
1.54 |
|
|
$ |
2.97 |
|
|
$ |
2.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations
addresses the financial condition of the Corporation as of June 30, 2010 compared with December 31,
2009 and the results of operations for the six months and three months ended June 30, 2010 and
2009. This discussion should be read in conjunction with the condensed consolidated financial
statements and related notes contained in this report and the consolidated financial statements and
related notes and managements discussion and analysis of financial condition and results of
operations included in the Corporations Annual Report on Form 10-K for the year ended December 31,
2009.
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 number and severity of surety-related
claims; the cost of reinsurance in 2010; the impact of the 2010 second quarter decline in equity
markets on our limited partnership investments; the adequacy of the rates at which we renewed and
wrote new business; premium volume, competition and other market conditions in 2010; the repurchase
of common stock under our share repurchase program; our capital adequacy and funding of liquidity
needs; the impact of a downgrade in our credit or financial strength
ratings; and the need to obtain regulatory approval prior to the
payment of dividends by the property and casualty subsidiaries
during the remainder of the year. Forward-looking statements
frequently can be identified by words such as believe, expect, anticipate, intend, plan,
will, may, should, could, would, likely, estimate, predict, potential,
continue, or other similar expressions. Forward-looking statements are made based upon
managements current expectations and beliefs concerning trends and future developments and their
potential effects on us. These statements are not guarantees of future performance. Actual
results may differ materially from those suggested by forward-looking statements as a result of
risks and uncertainties, which include, among others, those discussed or identified from time to
time in our public filings with the Securities and Exchange Commission and those associated with:
|
|
global political conditions and the occurrence of terrorist attacks, including any nuclear,
biological, chemical or radiological events; |
|
|
|
the effects of the outbreak or escalation of war or hostilities; |
|
|
|
premium pricing and profitability or growth estimates overall or by lines of business or
geographic area, and related expectations with respect to the timing and terms of any required
regulatory approvals; |
|
|
|
adverse changes in loss cost trends; |
|
|
|
our ability to retain existing business and attract new business; |
|
|
|
our expectations with respect to cash flow and investment income and with respect to other
income; |
Page 19
|
|
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; |
|
|
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; |
Page 20
|
|
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 managements strategic plans and initiatives. |
Chubb assumes no obligation to update any forward-looking information set forth in this
document, which speak as of the date hereof.
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 in Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2009 as supplemented 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.
Page 21
Overview
The following highlights do not address all of the matters covered in the other sections of
Managements Discussion and Analysis of Financial Condition and Results of Operations or contain
all of the information that may be important to Chubbs shareholders or the investing public. This
overview should be read in conjunction with the other sections of Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
|
Net income was $982 million in the first six months of 2010 and $518 million
in the second quarter compared with $892 million and $551 million, respectively, in the
same periods of 2009. The higher net income in the first six months of 2010 was due to
net realized investment gains in the first six months of 2010 compared with substantial
net realized investment losses in the same period in 2009. Operating income, which we
define as net income excluding realized investment gains and losses after tax, was lower
in the first six months and second quarter of 2010 compared with the same periods of
2009. The lower net income in the second quarter of 2010 was due to lower operating
income. |
|
|
|
|
Operating income was $841 million in the first six months of 2010 and $460
million in the second quarter compared with $1.0 billion and $533 million, respectively,
in the comparable periods of 2009. The lower operating income in the 2010 periods was
due to lower underwriting income in our property and casualty insurance business.
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 profitable in the first six months and second
quarter of both 2010 and 2009, but more so in the 2009 periods. Our combined loss and
expense ratio was 92.0% in the first six months of 2010 and 90.4% in the second quarter
compared with 87.0% and 85.9% in the respective periods of 2009. The less profitable
results in the 2010 periods were due primarily to a substantially higher impact of
catastrophes. The impact of catastrophes accounted for 9.6 percentage points of the
combined ratio in the first six months of 2010 and 6.9 percentage points in the second
quarter, compared with 1.2 and 1.5 percentage points, respectively, in the same periods
of 2009. |
|
|
|
|
During the first six months and second quarter of 2010, we estimate that we
experienced overall favorable development of about $400 million and $180 million,
respectively, on loss reserves established as of the previous year end, due primarily to
favorable loss experience in the professional liability, commercial liability and
personal insurance classes. During the first six months and second quarter of 2009, we
estimate that we experienced overall favorable development of about $340 million and
$210 million, respectively, primarily in the professional liability, commercial
liability and commercial property classes. |
Page 22
|
|
|
Total net premiums written increased by 1% in the first six months and
second quarter of 2010 compared with the same periods in 2009. The increase was
attributable to the impact of currency fluctuation as a result of a weaker U.S. dollar
relative to several currencies in which we write business in the first six months and
second quarter of 2010 compared to the respective periods of 2009. Growth in net
premiums written has been limited by the ongoing impact of the general economic downturn
and our continued emphasis on underwriting discipline in a market environment that
remains competitive. |
|
|
|
|
Property and casualty investment income after tax increased by 1% in the
first six months of 2010 and was flat in the second quarter compared with the same
periods in 2009. Growth was positively affected in the 2010 periods by the effects of
currency fluctuation on income from our non-U.S. investments, in what continued to be a
low yield investment environment. 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 tax were $217 million ($141 million
after tax) in the first six months of 2010 compared with net realized losses before tax
of $239 million ($155 million after tax) in the same period of 2009. Net realized
investment gains before tax were $90 million ($58 million after tax) in the second
quarter of 2010 compared with net realized gains of $27 million ($18 million after tax)
in the same period of 2009. The net realized gains in the first six months and second
quarter of 2010 were primarily related to investments in limited partnerships, which are
reported on a quarter lag. The net realized losses in the first six months of 2009 were
primarily attributable to losses in the first quarter from investments in limited
partnerships. |
A summary of our consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Property and casualty insurance |
|
$ |
1,236 |
|
|
$ |
1,543 |
|
|
$ |
652 |
|
|
$ |
784 |
|
Corporate and other |
|
|
(103 |
) |
|
|
(121 |
) |
|
|
(40 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income before
income tax |
|
|
1,133 |
|
|
|
1,422 |
|
|
|
612 |
|
|
|
726 |
|
Federal and foreign income tax |
|
|
292 |
|
|
|
375 |
|
|
|
152 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income |
|
|
841 |
|
|
|
1,047 |
|
|
|
460 |
|
|
|
533 |
|
Realized investment gains (losses)
after income tax |
|
|
141 |
|
|
|
(155 |
) |
|
|
58 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
982 |
|
|
$ |
892 |
|
|
$ |
518 |
|
|
$ |
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 23
Property and Casualty Insurance
A summary of the results of operations of our property and casualty insurance business is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Underwriting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums Written |
|
$ |
5,651 |
|
|
$ |
5,589 |
|
|
$ |
2,886 |
|
|
$ |
2,846 |
|
Decrease (Increase) in Unearned
Premiums |
|
|
(70 |
) |
|
|
65 |
|
|
|
(87 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned |
|
|
5,581 |
|
|
|
5,654 |
|
|
|
2,799 |
|
|
|
2,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss Expenses |
|
|
3,390 |
|
|
|
3,187 |
|
|
|
1,660 |
|
|
|
1,572 |
|
Operating Costs and Expenses |
|
|
1,751 |
|
|
|
1,700 |
|
|
|
889 |
|
|
|
857 |
|
Increase in Deferred Policy
Acquisition Costs |
|
|
(43 |
) |
|
|
(20 |
) |
|
|
(21 |
) |
|
|
(4 |
) |
Dividends to Policyholders |
|
|
16 |
|
|
|
15 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Income |
|
|
467 |
|
|
|
772 |
|
|
|
263 |
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income Before Expenses |
|
|
789 |
|
|
|
780 |
|
|
|
393 |
|
|
|
394 |
|
Investment Expenses |
|
|
17 |
|
|
|
14 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income |
|
|
772 |
|
|
|
766 |
|
|
|
385 |
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Charges) |
|
|
(3 |
) |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Income Before Tax |
|
$ |
1,236 |
|
|
$ |
1,543 |
|
|
$ |
652 |
|
|
$ |
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Investment Income
After Tax |
|
$ |
624 |
|
|
$ |
618 |
|
|
$ |
311 |
|
|
$ |
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty income before tax was lower in the first six months and second quarter
of 2010 compared to the same periods in 2009. The lower income in the 2010 periods was due to a
decrease in underwriting income, which was primarily the result of a higher impact of catastrophes
during the periods. Investment income increased slightly in the first six months of 2010 and
decreased slightly in the second quarter compared to the same periods of 2009.
The profitability of the 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.
Page 24
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 were $5.7 billion in the first six months of 2010 and $2.9 billion in the
second quarter, compared with $5.6 billion and $2.8 billion, respectively, in the comparable
periods of 2009.
Net premiums written by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
June 30 |
|
|
% Incr. |
|
|
June 30 |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
(Decr.) |
|
|
2010 |
|
|
2009 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Personal insurance |
|
$ |
1,882 |
|
|
$ |
1,804 |
|
|
|
4 |
% |
|
$ |
1,008 |
|
|
$ |
961 |
|
|
|
5 |
% |
Commercial insurance |
|
|
2,452 |
|
|
|
2,473 |
|
|
|
(1 |
) |
|
|
1,209 |
|
|
|
1,213 |
|
|
|
|
|
Specialty insurance |
|
|
1,312 |
|
|
|
1,299 |
|
|
|
1 |
|
|
|
666 |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
5,646 |
|
|
|
5,576 |
|
|
|
1 |
|
|
|
2,883 |
|
|
|
2,843 |
|
|
|
1 |
|
Reinsurance assumed |
|
|
5 |
|
|
|
13 |
|
|
|
(62 |
) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,651 |
|
|
$ |
5,589 |
|
|
|
1 |
|
|
$ |
2,886 |
|
|
$ |
2,846 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written increased by 1% in the first six months and second quarter of 2010
compared with the same periods in 2009. Premiums in the United States, which represented 73% of
our premiums written in the first six months of 2010, decreased by 3% in the first six months and
1% in the second quarter. Premiums outside the United States, expressed in U.S. dollars, increased
by 14% in the first six months and 11% in the second quarter. The increase in premiums written
outside the United States was largely due to the impact of the weaker U.S. dollar relative to
several currencies in which we write business in the first six months and second quarter of 2010
compared to the same periods of 2009. Net premiums written outside the United States grew modestly
in both periods when measured in local currencies.
Premium growth was constrained in the first six months of 2010 by the challenging economic
environment and a highly competitive marketplace where we continued our emphasis on underwriting
discipline. Overall, renewal rates in the first six months of 2010 in the U.S. were flat in
commercial lines and down slightly in the professional liability business in comparison to expiring
rates. The amounts of coverage purchased or the insured exposure amounts, both of which are bases
upon which we calculate the premiums we charge, were generally flat to
down slightly due to the general downturn in the economy which began in 2008. We continued to
retain a high percentage of our existing customers, albeit in some cases with reduced amounts of
coverage or lower insured exposures, and to renew those accounts at what we believe are acceptable
rates relative to the risks. We expect the highly competitive market to continue throughout the
remainder of 2010.
Page 25
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 reinsurance.
The most significant component of our ceded reinsurance program is property reinsurance. We
purchase two types of such property treaties: catastrophe and property per risk. We renewed our
major traditional property catastrophe treaties and our commercial property per risk treaty in
April 2010, with no change in coverage. In June 2010, we purchased supplemental catastrophe
reinsurance that provides additional coverage for our northeast United States exposures.
For property risks in the United States and Canada, we purchase catastrophe reinsurance in two
forms. We purchase traditional catastrophe reinsurance, which includes our primary treaty, known
as the North American catastrophe treaty, as well as the supplemental catastrophe reinsurance
purchased in June 2010. We have also arranged for the purchase of multiyear, collateralized
reinsurance coverage funded through the issuance of collateralized risk linked securities, known as
catastrophe bonds.
Our North American catastrophe treaty has an initial retention of $500 million.
The combination of the North American catastrophe treaty and a portion of the catastrophe bond
coverages provide coverage for United States and Canadian exposures of approximately 69% of losses
(net of recoveries from other available
reinsurance) between $500 million and $1.37 billion and 60% of losses between $1.37 billion and
$1.65 billion. For catastrophic events in the northeastern part of the United States and in
Florida, the combination of the North American catastrophe treaty, the supplemental catastrophe
reinsurance and the catastrophe bond coverages provide additional coverages as discussed below.
The catastrophe bond coverages generally provide reinsurance coverage for specific types of
losses in specific geographic locations. They are generally designed to supplement coverage
provided under the North American catastrophe treaty. We currently have three catastrophe bond
coverages in effect: a $250 million reinsurance arrangement that expires in 2011 that provides
coverage for homeowners-related hurricane losses in the northeastern part of the United
States; a $200 million reinsurance arrangement that expires in 2011 that provides coverage for
homeowners and commercial exposures 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); and a $150 million reinsurance arrangement that expires in 2012 that provides
coverage for homeowners-related hurricane losses in Florida.
For catastrophic events in the northeastern part of the United States, the combination of the
North American catastrophe treaty, the supplemental catastrophe reinsurance and certain catastrophe
bond coverages provide additional coverage of approximately 40% of losses (net of recoveries from
other available reinsurance) between $1.37 billion and $2.17 billion, approximately 90% of losses
between $2.50 billion and $2.85 billion, and approximately 30% of homeowners-related hurricane
losses between $1.47 billion and $2.30 billion.
Page 26
For hurricane events in Florida, 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. Our participation in this program limits our initial
retention in Florida for homeowners-related losses to approximately $170 million and provides
coverage of 90% of covered losses between approximately $170 million and $620 million.
Additionally, certain catastrophe bond coverages provide coverage of approximately 50% of Florida
homeowners-related hurricane losses between $850 million and $1.15 billion.
Our primary property catastrophe treaty for events outside the United States provides coverage
of approximately 75% of losses (net of recoveries from other available reinsurance) between $100
million and $350 million.
Recoveries under our property reinsurance treaties are subject to certain coinsurance
requirements that affect the interaction of some elements of our reinsurance program.
In addition to catastrophe treaties, we also have a commercial property per risk treaty. This
treaty provides up to approximately $800 million (depending upon the currency in which the
insurance policy was issued) of coverage per risk in excess of our initial retention, which is
generally between $25 million and $35 million.
In addition to our major property catastrophe and property per risk treaties, we purchase
several smaller property treaties that only cover specific classes of business or locations having
potential concentrations of risk.
Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated
by foreign terrorists, and for nuclear, biological, chemical and radiological loss causes whether
such acts are perpetrated by foreign or domestic terrorists.
Overall, reinsurance rates for property risks have decreased in 2010, although rates have
increased for non-U.S. property exposures in response to events during the first quarter such as
the earthquake in Chile. We expect that the overall cost of our property reinsurance program in
2010 will be modestly lower than that in 2009.
Profitability
The combined loss and expense ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the property and casualty insurance business.
Management evaluates the performance of our underwriting operations and of each of our business
units using, among other measures, the combined loss and expense ratio calculated in accordance
with statutory accounting principles. It is the sum of the ratio of losses and loss expenses to
premiums earned (loss ratio) plus the ratio of statutory underwriting expenses to premiums written
(expense ratio) after reducing both premium amounts by dividends to policyholders. When the
combined ratio is under
100%, underwriting results are generally considered profitable; when the
combined ratio is over 100%, underwriting results are generally considered unprofitable.
Page 27
Statutory accounting principles applicable to property and casualty insurance companies differ
in certain respects from generally accepted
accounting principles (GAAP). Under statutory accounting principles, policy acquisition and other
underwriting expenses are recognized immediately, not at
the time premiums are earned. Management uses underwriting results determined
in accordance with GAAP, among other measures, to assess the overall performance
of our underwriting operations. To convert statutory underwriting results to a
GAAP basis, policy acquisition expenses are deferred and amortized over the
period in which the related premiums are earned. Underwriting income determined in accordance with
GAAP is defined as premiums earned less losses and loss expenses incurred and GAAP underwriting
expenses incurred.
Underwriting results were profitable in the first six months and second quarter of 2010 and
2009, but more so in the 2009 periods. The combined loss and expense ratio for our overall
property and casualty business was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
Six Months |
|
Second Quarter |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Loss ratio |
|
|
60.9 |
% |
|
|
56.5 |
% |
|
|
59.5 |
% |
|
|
55.7 |
% |
Expense ratio |
|
|
31.1 |
|
|
|
30.5 |
|
|
|
30.9 |
|
|
|
30.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.0 |
% |
|
|
87.0 |
% |
|
|
90.4 |
% |
|
|
85.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss ratio was higher in the first six months and second quarter of 2010 compared with the
same periods in 2009. The increase in both periods was due to a substantially higher impact from
catastrophe losses. The loss ratio in all periods reflected favorable loss experience which we
believe resulted from our disciplined underwriting in recent years as well as relatively mild loss
trends in certain classes of business.
The impact of catastrophe losses in the first six months of 2010 was $537 million, including
incurred losses of $528 million and reinsurance reinstatement premium costs of $9 million, which
collectively represented 9.6 percentage points of the combined loss and expense ratio. This
compares with catastrophe losses of $69 million, or 1.2 percentage points, in the same period in
2009. The $9 million reinstatement premium reinstated coverage under property catastrophe treaties
for events outside the United States, including coverage for property catastrophe losses in parts
of Latin America. The impact of catastrophe losses in the second quarter of 2010 was $193 million,
reflecting incurred losses of $197 million and a reduction in reinsurance reinstatement premium
costs of $4 million, which collectively represented 6.9 percentage points of the combined loss and
expense ratio. This compares with catastrophe
losses of $43 million, or 1.5 percentage points, in the second quarter of 2009.
A significant portion of the catastrophe losses in the first six months of 2010
related to numerous storms in the United States, including a severe hail storm in Oklahoma in the
second quarter and the earthquake in Chile in the first quarter.
The expense ratio was higher in the first six months and second quarter of 2010 compared with
the same periods in 2009. The increase in the 2010 periods was due to an increase in commission
rates for certain classes of business in the United States, as well as overhead expenses increasing
at a rate that exceeded the rate of growth of premiums written.
Page 28
Review of Underwriting Results by Business Unit
Personal Insurance
Net premiums written from personal insurance, which represented 33% of our premiums written in
the first six months of 2010, increased by 4% in the first six months of 2010 and 5% in the second
quarter compared with the same periods in 2009. The increase in both periods was largely due to
the impact of currency fluctuation on business written outside the U.S. Excluding the impact of
currency fluctuation, premiums from personal insurance increased slightly in both periods. Net
premiums written for the classes of business within the personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
June 30 |
|
|
|
|
|
|
June 30 |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Incr. |
|
|
2010 |
|
|
2009 |
|
|
% Incr. |
|
|
|
(in millions) |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Automobile |
|
$ |
314 |
|
|
$ |
278 |
|
|
|
13 |
% |
|
$ |
168 |
|
|
$ |
147 |
|
|
|
14 |
% |
Homeowners |
|
|
1,164 |
|
|
|
1,151 |
|
|
|
1 |
|
|
|
647 |
|
|
|
637 |
|
|
|
2 |
|
Other |
|
|
404 |
|
|
|
375 |
|
|
|
8 |
|
|
|
193 |
|
|
|
177 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal |
|
$ |
1,882 |
|
|
$ |
1,804 |
|
|
|
4 |
|
|
$ |
1,008 |
|
|
$ |
961 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal automobile premiums increased in the first six months and second quarter of 2010,
driven by growth outside the United States, due to the impact of currency fluctuation and new
business. Premiums for automobile business written in the United States decreased due to a highly
competitive marketplace. Premium growth in our homeowners business continued to be constrained by
the downturn in the United States economy which has resulted in a slowdown in new housing
construction as well as lower demand for jewelry and fine arts policy endorsements. Premiums from
our other personal business, which includes accident and health, excess liability and yacht
coverages, increased in the first six months and second quarter of 2010 compared with the same
periods in 2009, due in large part to growth in the accident and health business written outside
the United States, including a benefit from the effect of currency fluctuation.
Our personal insurance business produced profitable underwriting results in the first six
months and the second quarter of 2010 compared with highly profitable results in the comparable
periods of 2009. The less profitable results in the 2010 periods were due to higher homeowners
catastrophe losses. The combined loss and expense ratios for the classes of business within the
personal insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
Six Months |
|
Second Quarter |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Automobile |
|
|
90.8 |
% |
|
|
90.1 |
% |
|
|
90.2 |
% |
|
|
90.5 |
% |
Homeowners |
|
|
103.8 |
|
|
|
84.3 |
|
|
|
94.5 |
|
|
|
80.7 |
|
Other |
|
|
88.9 |
|
|
|
93.9 |
|
|
|
90.5 |
|
|
|
90.7 |
|
Total personal |
|
|
98.6 |
|
|
|
87.0 |
|
|
|
92.9 |
|
|
|
84.2 |
|
Page 29
Our personal automobile business produced highly profitable results in the first six months
and second quarter of 2010 and 2009. Results in all periods benefited from favorable prior year
loss development.
Homeowners results were unprofitable in the first six months of 2010 and profitable in the
second quarter compared with highly profitable results in the comparable periods of 2009. The
results in the 2010 periods were adversely affected by high catastrophe losses. Catastrophe losses
represented 27.7 and 20.3 percentage points of the combined ratio for this class in the first six
months and second quarter of 2010, respectively, compared with 3.5 and 4.7 percentage points,
respectively, in the comparable periods in 2009.
Other personal results were highly profitable in the first six months of 2010 compared with
profitable results in the same period of 2009. Results were highly profitable in the second
quarter of both years. The improved profitability in the first six
months of 2010 reflected improved results in the accident and health and the excess liability components of our other
personal business. Our accident and health business
produced profitable results in the first six months and second quarter of 2010
compared with breakeven results in the same periods in 2009. Our excess liability and yacht
business produced highly profitable results in the first six months and second quarter of both 2010
and 2009. Our other personal business experienced favorable prior year loss development in each
period, but more so in the first six months of 2010 compared to the same period of 2009.
Commercial Insurance
Net premiums written from commercial insurance, which represented 43% of our premiums written
in the first six months of 2010, decreased by 1% in the first six months of 2010 and were flat in
the second quarter compared with the comparable periods a year ago. Net premiums written for the
classes of business within the commercial insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
June 30 |
|
|
% Incr. |
|
|
June 30 |
|
|
% Incr. |
|
|
|
2010 |
|
|
2009 |
|
|
(Decr.) |
|
|
2010 |
|
|
2009 |
|
|
(Decr.) |
|
|
|
(in millions) |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Multiple peril |
|
$ |
540 |
|
|
$ |
561 |
|
|
|
(4 |
)% |
|
$ |
286 |
|
|
$ |
292 |
|
|
|
(2 |
)% |
Casualty |
|
|
812 |
|
|
|
815 |
|
|
|
|
|
|
|
398 |
|
|
|
406 |
|
|
|
(2 |
) |
Workers compensation |
|
|
409 |
|
|
|
424 |
|
|
|
(4 |
) |
|
|
187 |
|
|
|
188 |
|
|
|
(1 |
) |
Property and marine |
|
|
691 |
|
|
|
673 |
|
|
|
3 |
|
|
|
338 |
|
|
|
327 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
2,452 |
|
|
$ |
2,473 |
|
|
|
(1 |
) |
|
$ |
1,209 |
|
|
$ |
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in total premiums in our commercial insurance business in the first six months of
2010 was tempered somewhat by the positive impact of currency fluctuation on business written
outside the United States, particularly in the casualty and property and marine lines of business.
Excluding the impact of currency fluctuation, premiums in our commercial insurance business
decreased modestly in the first six months of 2010. The impact of currency fluctuation on premium
growth was less pronounced in the second quarter of 2010; excluding the impact of currency
fluctuation, premiums decreased slightly. The decrease in both periods primarily reflected reduced
exposures on renewal business due to the continuing effects of the weak economy, but the decline in
renewal exposures moderated in the second quarter. Overall, commercial insurance renewal rates
Page 30
were flat in the first six months of 2010. Retention levels of our existing customers remained
strong, with slight improvement over those in the first six months of 2009. New business volume in
the first six months of 2010 was up modestly compared with the same period in 2009. We have
continued to maintain our underwriting discipline in the competitive market, renewing business and
writing new business only where we believe we are securing acceptable rates and
and appropriate terms and conditions for the exposures. We expect these market conditions will
continue for the remainder of this year.
Our commercial insurance business produced profitable underwriting results in the first six
months and second quarter of 2010 compared with highly profitable results in the same periods in
2009. The combined loss and expense ratios for the classes of business within the commercial
insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
Six Months |
|
Second Quarter |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Multiple peril |
|
|
103.6 |
% |
|
|
82.8 |
% |
|
|
95.2 |
% |
|
|
79.9 |
% |
Casualty |
|
|
89.7 |
|
|
|
97.7 |
|
|
|
91.0 |
|
|
|
92.7 |
|
Workers compensation |
|
|
90.8 |
|
|
|
89.6 |
|
|
|
91.5 |
|
|
|
91.8 |
|
Property and marine |
|
|
90.8 |
|
|
|
86.2 |
|
|
|
93.9 |
|
|
|
91.4 |
|
Total commercial |
|
|
93.4 |
|
|
|
89.7 |
|
|
|
92.9 |
|
|
|
89.2 |
|
Results for our commercial insurance business were less profitable in the 2010 periods due to
a higher impact of catastrophe losses, particularly in the multiple peril and property and marine
classes. The impact of catastrophe losses represented 8.5 percentage points of the combined ratio
for the commercial insurance segment in the first six months of 2010 and 5.6 percentage points in
the second quarter compared with 1.1 and 1.2 percentage points, respectively, in the comparable
periods in 2009. The higher impact of catastrophe losses in the first six months of 2010 was
offset in part by better results in the casualty class as well as better non-catastrophe loss
experience in the property and marine classes. Results in both years benefited from disciplined
risk selection and appropriate policy terms and conditions in recent years.
Multiple peril results were unprofitable in the first six months of 2010 and profitable in the
second quarter compared with highly profitable results in the same periods in 2009. The
unprofitable results in the first six months of 2010 and less profitable results in the second
quarter compared to the same periods in 2009 were due to the significant impact of catastrophes.
The impact of catastrophes was 21.8 percentage points of the combined ratio for this class in the
first six months of 2010 and 10.7 percentage points in the second quarter compared with 1.4 and 0.7
percentage points, respectively, in the comparable periods of 2009. Results in the first six
months of 2010 included better
current accident year non-catastrophe loss experience in the property component of this business
than in 2009. The liability component of this business was near breakeven in the first six months
of 2010 and unprofitable in the second quarter compared to highly profitable results in the same
periods in 2009. Reported losses for this component were higher in the 2010 periods. Results in
the first six months of both years for both the property and liability components of this business
benefited from favorable prior year loss development.
Page 31
Our casualty business produced highly profitable results in the first six months of 2010
compared with profitable results in the same period in 2009. Results in the second quarter of 2010
and 2009 were profitable. The significantly better results in the first six months of 2010 were
due to substantial improvement in the excess liability component of this business. The excess
liability component produced highly profitable results in the first six months of 2010 compared
with breakeven results in the same period in 2009. Results for the excess liability component in
the first six months of 2010 benefited from a more significant amount of favorable prior year loss
development than in the same period in 2009. Results for this component were highly profitable in the second quarter of both years.
Results for the primary liability component were profitable in the first six months and second
quarter of both years, but more so in the 2009 periods. The automobile component of this business
produced near breakeven results in the first six months and second quarter of 2010 compared with
profitable results in the same periods in 2009. Casualty results were adversely affected by
incurred losses related to toxic waste claims in the first six months and second quarter of both
years, but more so in the 2009 periods. These losses represented 1.3 and 4.4 percentage points of
the combined ratio in the first six months of 2010 and 2009, respectively, and 0.8 and 3.8
percentage points in the second quarter of 2010 and 2009, respectively.
Workers compensation results were profitable in the first six months and second quarter of
both 2010 and 2009. Results in both years benefited from our disciplined risk selection during the
past several years.
Property and marine results were profitable in the first six months and second quarter of 2010
and 2009, but less so in 2010 partly due to a higher impact of catastrophes. Catastrophe losses
represented 10.4 percentage points of the combined ratio for this class in the first six months of
2010 and 9.1 percentage points in the second quarter compared with 1.3 and 2.3 percentage points,
respectively, in the comparable periods of 2009.
Specialty Insurance
Net premiums written from specialty insurance, which represented 23% of our premiums written
in the first six months of 2010, increased by 1% in the first six months of 2010 and were flat in
the second quarter compared with the same periods in 2009. Net premiums written for the classes of
business within the specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
June 30 |
|
|
% Incr. |
|
|
June 30 |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
(Decr.) |
|
|
2010 |
|
|
2009 |
|
|
% Decr. |
|
|
|
(in millions) |
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Professional liability |
|
$ |
1,153 |
|
|
$ |
1,137 |
|
|
|
1 |
% |
|
$ |
583 |
|
|
$ |
584 |
|
|
|
|
% |
Surety |
|
|
159 |
|
|
|
162 |
|
|
|
(2 |
) |
|
|
83 |
|
|
|
85 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
$ |
1,312 |
|
|
$ |
1,299 |
|
|
|
1 |
|
|
$ |
666 |
|
|
$ |
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 32
Growth in net premiums written in our professional liability business in the first six months
and second quarter of 2010 was favorably impacted by currency fluctuation on business written
outside the United States. Excluding the impact of currency fluctuation, net premiums written were
down slightly in the 2010 periods. Renewal rates in the U.S. decreased slightly overall in the
first six months of 2010 compared with those in the same period of 2009. Retention levels were
slightly higher in the first six months of 2010 compared with those in the same period of 2009.
New business volume was down modestly. We have continued our focus on underwriting discipline,
obtaining what we believe are acceptable rates and appropriate terms and conditions on both new
business and renewals.
The decrease in net premiums written for our surety business in the first six months and
second quarter of 2010 reflected the effects of the weak economy as well as increased competition.
We expect this trend will continue for the remainder of the year.
Our specialty insurance business produced highly profitable underwriting results in the first
six months and second quarter of 2010 and 2009. The combined loss and expense ratios for the
classes of business within the specialty insurance segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
Six Months |
|
Second Quarter |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Professional liability |
|
|
86.7 |
% |
|
|
90.6 |
% |
|
|
87.2 |
% |
|
|
90.1 |
% |
Surety |
|
|
43.9 |
|
|
|
38.4 |
|
|
|
47.7 |
|
|
|
38.5 |
|
Total specialty |
|
|
81.7 |
|
|
|
84.4 |
|
|
|
82.5 |
|
|
|
83.9 |
|
Our professional liability business produced highly profitable results in the first six months
and second quarter of 2010. Results in the first six months and second quarter of 2009 were
profitable. Results in each of the periods were particularly profitable in the fiduciary
liability, employment practices liability and fidelity classes. Results in the directors and
officers liability class, while profitable in the first six months and second quarter of both
years, improved in the 2010 periods compared with the same periods in 2009. Results in the errors
and omissions liability class were highly unprofitable in the first six months and second quarter
of both years. The overall results for our professional liability business were more profitable in
the 2010 periods due primarily to an improvement in the current accident year loss ratio. The
current accident year combined ratio for our professional liability business is slightly below
breakeven, lower than that for the 2009 accident year, which was more affected by the financial
market crisis. The favorable prior year loss development in the first six months and second
quarter of both years was driven mainly by continued positive loss trends related to accident years
2006 and prior. These trends were largely the result of a favorable business climate, lower policy
limits and better terms and conditions.
Surety results were highly profitable in the first six months and second quarter of both 2010
and 2009. Our surety business tends to be characterized by infrequent but potentially high
severity losses.
Page 33
Reinsurance Assumed
Net premiums written from our reinsurance assumed business, which is in runoff, were not
significant in the first six months and second quarter of 2010 or 2009.
Reinsurance assumed results were profitable in the first six months and second quarter of 2010
and 2009. Results in the first six months of both years, but more so in 2009, benefited from
favorable prior year loss development.
Loss Reserves
Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability
of our business.
Our loss reserves include case estimates for claims that have been reported and estimates for
claims that have been incurred but not reported at the balance sheet date as well as estimates of
the expenses associated with processing and settling all reported and unreported claims, less
estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss
experience modified for current trends as well as prevailing economic, legal and social conditions.
Our loss reserves are not discounted to present value.
We regularly review our loss reserves using a variety of actuarial techniques. We update the
reserve estimates as historical loss experience develops, additional claims are reported and/or
settled and new information becomes available. Any changes in estimates are reflected in operating
results in the period in which the estimates are changed.
Page 34
Our gross case and incurred but not reported (IBNR) loss reserves and related reinsurance
recoverable by class of business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross Loss Reserves |
|
|
Reinsurance |
|
|
Loss |
|
|
|
Case |
|
|
IBNR |
|
|
Total |
|
|
Recoverable |
|
|
Reserves |
|
|
|
(in millions) |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
237 |
|
|
$ |
172 |
|
|
$ |
409 |
|
|
$ |
14 |
|
|
$ |
395 |
|
Homeowners |
|
|
438 |
|
|
|
378 |
|
|
|
816 |
|
|
|
29 |
|
|
|
787 |
|
Other |
|
|
328 |
|
|
|
686 |
|
|
|
1,014 |
|
|
|
161 |
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal |
|
|
1,003 |
|
|
|
1,236 |
|
|
|
2,239 |
|
|
|
204 |
|
|
|
2,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril |
|
|
564 |
|
|
|
1,212 |
|
|
|
1,776 |
|
|
|
61 |
|
|
|
1,715 |
|
Casualty |
|
|
1,437 |
|
|
|
4,946 |
|
|
|
6,383 |
|
|
|
349 |
|
|
|
6,034 |
|
Workers compensation |
|
|
887 |
|
|
|
1,466 |
|
|
|
2,353 |
|
|
|
191 |
|
|
|
2,162 |
|
Property and marine |
|
|
692 |
|
|
|
475 |
|
|
|
1,167 |
|
|
|
362 |
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
3,580 |
|
|
|
8,099 |
|
|
|
11,679 |
|
|
|
963 |
|
|
|
10,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
1,507 |
|
|
|
6,313 |
|
|
|
7,820 |
|
|
|
449 |
|
|
|
7,371 |
|
Surety |
|
|
22 |
|
|
|
49 |
|
|
|
71 |
|
|
|
8 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
1,529 |
|
|
|
6,362 |
|
|
|
7,891 |
|
|
|
457 |
|
|
|
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
6,112 |
|
|
|
15,697 |
|
|
|
21,809 |
|
|
|
1,624 |
|
|
|
20,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
278 |
|
|
|
715 |
|
|
|
993 |
|
|
|
326 |
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,390 |
|
|
$ |
16,412 |
|
|
$ |
22,802 |
|
|
$ |
1,950 |
|
|
$ |
20,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross Loss Reserves |
|
|
Reinsurance |
|
|
Loss |
|
|
|
Case |
|
|
IBNR |
|
|
Total |
|
|
Recoverable |
|
|
Reserves |
|
|
|
(in millions) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
226 |
|
|
$ |
187 |
|
|
$ |
413 |
|
|
$ |
13 |
|
|
$ |
400 |
|
Homeowners |
|
|
395 |
|
|
|
293 |
|
|
|
688 |
|
|
|
23 |
|
|
|
665 |
|
Other |
|
|
372 |
|
|
|
660 |
|
|
|
1,032 |
|
|
|
160 |
|
|
|
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal |
|
|
993 |
|
|
|
1,140 |
|
|
|
2,133 |
|
|
|
196 |
|
|
|
1,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple peril |
|
|
550 |
|
|
|
1,091 |
|
|
|
1,641 |
|
|
|
26 |
|
|
|
1,615 |
|
Casualty |
|
|
1,499 |
|
|
|
4,849 |
|
|
|
6,348 |
|
|
|
360 |
|
|
|
5,988 |
|
Workers compensation |
|
|
887 |
|
|
|
1,448 |
|
|
|
2,335 |
|
|
|
197 |
|
|
|
2,138 |
|
Property and marine |
|
|
781 |
|
|
|
426 |
|
|
|
1,207 |
|
|
|
449 |
|
|
|
758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
3,717 |
|
|
|
7,814 |
|
|
|
11,531 |
|
|
|
1,032 |
|
|
|
10,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
1,626 |
|
|
|
6,379 |
|
|
|
8,005 |
|
|
|
453 |
|
|
|
7,552 |
|
Surety |
|
|
18 |
|
|
|
48 |
|
|
|
66 |
|
|
|
8 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
1,644 |
|
|
|
6,427 |
|
|
|
8,071 |
|
|
|
461 |
|
|
|
7,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance |
|
|
6,354 |
|
|
|
15,381 |
|
|
|
21,735 |
|
|
|
1,689 |
|
|
|
20,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance assumed |
|
|
305 |
|
|
|
799 |
|
|
|
1,104 |
|
|
|
364 |
|
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,659 |
|
|
$ |
16,180 |
|
|
$ |
22,839 |
|
|
$ |
2,053 |
|
|
$ |
20,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 35
Loss reserves, net of reinsurance recoverable, increased by $66 million during the first six
months of 2010. The increase in loss reserves reflected a decrease of approximately $206 million
related to currency fluctuation due to the strength of the U.S. dollar at June 30, 2010 compared to
December 31, 2009. Loss reserves related to our insurance business increased by $139 million during
the first six months of 2010 due primarily to catastrophe-related losses. Loss reserves related to
our reinsurance assumed business, which is in runoff, decreased by $73 million.
The increase in gross case and IBNR reserves related to our homeowners and commercial multiple
peril classes of business during the first six months of 2010 was due largely to catastrophe losses
in the first six months of 2010 that remained unpaid at June 30. The decrease in gross case
reserves related to our professional liability classes of business in the first six months of 2010
was partly due to the settlement of claims for which case reserves were previously established.
In establishing the loss reserves of our property and casualty subsidiaries, we consider facts
currently known and the present state of the law and coverage litigation. Based on all information
currently available, we believe that the aggregate loss reserves at June 30, 2010 were adequate to
cover claims for losses that had occurred as of that date, including both those
known to us and those yet to be reported. However, as discussed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2009, there are significant uncertainties inherent in the
loss reserving process. It is
therefore possible that managements estimate of the ultimate liability for losses that had
occurred as of June 30, 2010 may change, which could have a material effect on the Corporations
results of operations and financial condition.
Changes in loss reserve estimates are unavoidable because such estimates are subject to the
outcome of future events. Loss trends vary and time is required for changes in trends to be
recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are
referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that
decrease previous estimates of ultimate cost are referred to as favorable development or reserve
releases.
We estimate that we experienced overall favorable prior year development of about $400 million
during the first six months of 2010 and $180 million in the second quarter compared with favorable
prior year development of about $340 million and $210 million in the comparable periods of 2009.
The favorable development in the first six months of 2010 was primarily in the professional
liability classes due to continued favorable loss trends related largely to accident years 2006 and
prior and particularly outside the United States, in the commercial liability classes related
mainly to accident years 2007 and prior, and in the personal insurance classes. The favorable
development in the first six months of 2009 was primarily in the professional liability classes due
to favorable loss trends related to accident years 2004 through 2006, in the commercial property
classes largely related to the 2008 accident year and in the commercial casualty classes related to
accident years 2006 and prior.
Page 36
Investment Results
Property and casualty investment income before taxes increased by 1% in the first six months
of 2010 and decreased by 1% in the second quarter of 2010 compared with the same periods in 2009.
Included in these results was a slight positive impact from the effect of currency fluctuation on
the income of our non-U.S. investments. While the average invested assets of the property and
casualty subsidiaries were higher during the first six months of 2010 and the second quarter of
2010 compared with the same periods of 2009, growth in investment income was limited by the
continuing impact of the low yield environment on the investment of both new cash and the proceeds
of maturing fixed maturity securities.
The effective tax rate on investment income was 19.2% in the first six months of 2010 compared
with 19.3% in the same period of 2009. The effective tax rate fluctuates as a result of our
holding a different proportion of our investment portfolio in tax exempt securities during
different periods.
On an after-tax basis, property and casualty investment income increased by 1% in the first
six months of 2010 and was flat in the second quarter of 2010 compared with the same periods in
2009. The after-tax annualized yield on the investment portfolio that supports our property and
casualty insurance business was 3.26% and 3.41% in the first six months of 2010 and 2009,
respectively.
Corporate and Other
Corporate and other comprises investment income earned on corporate invested assets, interest
expense and other expenses not allocated to our operating subsidiaries and the results of our
non-insurance subsidiaries.
Corporate and other produced a loss before taxes of $103 million in the first six months of
2010 compared with a loss of $121 million in the first six months of 2009. The lower loss in 2010
was due to higher investment income, which was largely due to a $20 million special dividend
received on an equity security investment during the second quarter of 2010.
Page 37
Realized Investment Gains and Losses
Net realized investment gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30 |
|
|
|
Six Months |
|
|
Second Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in millions) |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
46 |
|
|
$ |
48 |
|
|
$ |
13 |
|
|
$ |
18 |
|
Equity securities |
|
|
11 |
|
|
|
71 |
|
|
|
2 |
|
|
|
60 |
|
Other invested assets |
|
|
169 |
|
|
|
(280 |
) |
|
|
83 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
(161 |
) |
|
|
98 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(3 |
) |
|
|
(19 |
) |
|
|
(2 |
) |
|
|
(11 |
) |
Equity securities |
|
|
(6 |
) |
|
|
(59 |
) |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(78 |
) |
|
|
(8 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
(losses) before tax |
|
$ |
217 |
|
|
$ |
(239 |
) |
|
$ |
90 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
(losses) after tax |
|
$ |
141 |
|
|
$ |
(155 |
) |
|
$ |
58 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net realized gains and losses of our other invested assets represent primarily the
aggregate of distributions to us from the limited partnerships in which we have an interest and
changes in our equity in the net assets of those partnerships based on valuations provided to us by
the manager of each partnership. Due to the timing of our receipt of valuation data from the
investment managers, these investments are generally reported on a one quarter lag.
The net realized gains of the limited partnerships reported in the first six months of 2010
reflected the strong performance of the equity and high yield investment markets in the fourth
quarter of 2009 and the first quarter of 2010. Any impact on the net assets of the limited partnerships from the
decline in the equity markets in second quarter of 2010 will be reflected in our third quarter 2010
results. In the first six months of 2009, the limited partnership losses were largely due to
losses on the underlying assets held by the limited partnerships that reflected both the decline in
the value of equities and the increase in credit spreads that occurred during late 2008.
We regularly review those invested assets whose fair value is less than cost to determine if
an other-than-temporary decline in value has occurred. We have a monitoring process overseen by a
committee of investment and accounting
professionals that is responsible for identifying those securities to be specifically evaluated for
potential other-than-temporary impairment.
The determination of whether a decline in value of any investment is temporary or
other than temporary requires the judgment of management. The
assessment of other-than-temporary
impairment of fixed maturities and equity securities is based on both quantitative criteria and
qualitative information
Page 38
and also considers a number of factors including, but not limited to, the length of time and the
extent to which the fair value has been less than the cost, the financial condition and near term
prospects of the issuer, whether the issuer is current on contractually obligated interest and
principal payments, general market conditions and industry or sector specific factors. The
decision to recognize a decline in the value of a security carried at fair value as other than
temporary rather than temporary has no impact on shareholders equity.
In determining whether fixed maturities are other than temporarily impaired, prior to April 1,
2009, we considered many factors including the intent and ability to hold a security for a period
of time sufficient to allow for the recovery of the securitys cost. When an impairment was deemed
other than temporary, the security was written down to fair value and the entire writedown was
included in net income as a realized investment loss. Effective April 1, 2009, the Corporation
adopted new guidance which modified the guidance on the recognition and presentation of
other-than-temporary impairments of debt securities. Under the new guidance, we are required to
recognize an other-than-temporary impairment loss for a fixed maturity when we conclude that we
have the intent to sell or it is more likely than not that we will be required to sell an impaired
fixed maturity before the security recovers to its amortized cost value or it is likely we will not
recover the entire amortized cost value of an impaired debt security. Also under this guidance, if
we have the intent to sell
or it is more likely than not we will be required to sell an impaired fixed maturity before the
security recovers to its amortized cost value, the security is written down to fair value and the
entire amount of the writedown is included in net income as a realized investment loss. For all
other impaired fixed maturities, the impairment loss is separated into the amount representing the
credit loss and the amount representing the loss related to all other factors. The amount of the
impairment loss that represents the credit loss is included in
net income as a realized investment loss and the amount of the impairment loss that relates to all
other factors is included in other comprehensive income.
In determining whether equity securities are other than temporarily impaired, we consider our
intent and ability to hold a security for a period of time sufficient to allow us to recover our
cost. If a decline in the fair value of an equity security is deemed to be other than temporary,
the security is written down to fair value and the amount of the writedown is included in net
income as a realized investment loss.
Income Taxes
Net income in the first six months of 2010 included an income tax charge of $22 million in the
first quarter related to a decrease in deferred tax assets as a result of federal health care
legislation enacted in March 2010. The legislation eliminated the tax benefit associated with
Medicare Part D subsidies we expect to receive for providing qualifying prescription drug coverage
to retirees.
Capital Resources and Liquidity
Capital resources and liquidity represent a companys overall financial strength and its
ability to generate cash flows, borrow funds at competitive rates and raise new capital to meet
operating and growth needs.
Page 39
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to
support the business of underwriting insurance risks and
facilitate continued business growth. At June 30, 2010, the Corporation had shareholders equity
of $15.5 billion and total debt of $4.0 billion.
Management regularly monitors the Corporations capital resources. In connection with our
long term capital strategy, Chubb from time to time contributes capital to its property and
casualty subsidiaries. In addition, in
order to satisfy capital needs as a result of any rating agency capital adequacy
or other future rating issues, or in the event we were to need additional capital to make strategic
investments in light of market opportunities, we may
take a variety of actions, which could include the issuance of additional debt and/or equity
securities. We believe that our strong financial position and
current debt level provide us with the flexibility and capacity to obtain
funds externally through debt or equity financings on both a short term and long term basis.
In December 2009, the Board of Directors authorized the repurchase of up to 25,000,000 shares
of Chubbs common stock. In June 2010, the Board of Directors authorized an increase of 14,000,000
shares to the authorization approved in December 2009. The authorization has no expiration date.
During the first six months of 2010, we repurchased 19,394,818 shares of Chubbs common stock in
open market transactions at a cost of $980 million. As of June 30, 2010, 16,765,307 shares
remained under the share repurchase authorization. We expect to repurchase all of the shares
remaining under the authorization by the end of 2010, subject to market conditions.
Ratings
Chubb and its property and casualty subsidiaries are rated by major rating agencies. These
ratings reflect the rating agencys opinion of our financial strength, operating performance,
strategic position and ability to meet our obligations to policyholders.
Ratings are an important factor in establishing our competitive position in the insurance
markets. There can be no assurance that our ratings will
continue for any given period of time or that they will not be changed.
It is possible that one or more of the rating agencies may raise or lower our existing ratings
in the future. If our credit ratings were downgraded, we might incur higher borrowing costs and
might have more limited means to access capital. A downgrade in our financial strength ratings
could adversely affect the competitive position of our insurance operations, including a possible
reduction in demand for our products in certain markets.
Liquidity
Liquidity is a measure of a companys ability to generate sufficient cash flows to meet the
short and long term cash requirements of its business operations.
Page 40
The Corporations liquidity requirements in the past have generally been met by funds from
operations and we expect that in the future funds from operations will continue to be sufficient to
meet such requirements. Liquidity requirements could also be met by funds received upon the
maturity or sale of
marketable securities in our investment portfolio. The Corporation also has the ability to borrow
under its existing $500 million credit facility and we believe we could issue debt or equity
securities.
Our property and casualty operations provide liquidity in that premiums are generally received
months or even years before losses are paid under the policies purchased by such premiums.
Historically, cash receipts from
operations, consisting of insurance premiums and investment income, have provided more than
sufficient funds to pay losses, operating expenses and
dividends to Chubb. After satisfying our cash requirements, excess cash flows are used to build
the investment portfolio and thereby increase future investment income.
Our strong underwriting and investment results continued to generate substantial cash from
operations. New cash available for investment by our property and casualty subsidiaries was
approximately $60 million in the first six months of 2010 compared with $1.0 billion in the same
period in 2009. New cash available for investment by our property and casualty subsidiaries was
lower as a result of $1.0 billion of dividends paid to Chubb by the property and casualty
subsidiaries in the first six months of 2010 compared with no dividends paid to Chubb in the first
six months of 2009. This was caused by a difference in the timing of subsidiary dividends in 2009
and those in 2010. The impact on new cash available for investment of modestly higher loss
payments and reduced premium collections were largely offset by lower income tax payments in the
first six months of 2010 compared with the same period in 2009.
Our property and casualty subsidiaries maintain substantial investments in highly liquid,
short term marketable securities. Accordingly, we do not anticipate selling long term fixed
maturity investments to meet any liquidity needs.
Chubbs liquidity requirements primarily include the payment of dividends to shareholders and
interest and principal on debt obligations. The declaration and payment of future dividends to
Chubbs shareholders will be at the
discretion of Chubbs Board of Directors and will depend upon many factors, including our operating
results, financial condition, capital requirements and any regulatory constraints.
As a holding company, Chubbs ability to continue to pay dividends to shareholders and to
satisfy its debt obligations relies on the availability of
liquid assets, which is dependent in large part on the dividend paying ability
of its property and casualty subsidiaries. The timing and amount of dividends
paid by the property and casualty subsidiaries to Chubb may vary from year to year. Our property
and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they
operate that restrict the amount and timing of dividends they may pay within twelve consecutive
months without the prior approval of regulatory authorities. The restrictions are generally based
on net income and on certain levels of policyholders surplus as determined in accordance with
statutory accounting practices. Dividends in
Page 41
excess of such thresholds are considered extraordinary and require prior regulatory approval.
During
the second quarter of 2010, the subsidiaries sought and obtained
regulatory approval for the payment of dividends of $700 million to Chubb, due to the limitation on the amount
of dividends that may be paid within twelve consecutive months. During the first six months of
2010, the subsidiaries paid aggregate dividends of $1.0 billion
to Chubb. As of June 30, 2010, the maximum dividend distribution that
may be made by the property and casualty subsidiaries to Chubb for
the remainder of 2010 without prior regulatory approval is
approximately $500 million. Depending upon the timing and amount of
additional dividend payments by the property and casualty subsidiaries during the
remainder of the year, such dividends may also require prior regulatory approval.
Invested Assets
The main objectives in managing our investment portfolios are to maximize after-tax investment
income and total investment returns while minimizing credit
risks in order to ensure that funds will be available to meet our insurance
obligations. Investment strategies are developed based on many factors
including underwriting results and our resulting tax position, regulatory requirements,
fluctuations in interest rates and consideration of other market
risks. Investment decisions are centrally managed by investment professionals based on guidelines
established by management and approved by the boards of directors of Chubb and its respective
operating companies.
Our investment portfolio primarily comprises high quality bonds, principally tax exempt
securities, corporate bonds, mortgage-backed securities and U.S. Treasury securities, as well as
foreign government and corporate bonds that support our operations outside the United States. The
portfolio also includes equity securities, primarily publicly traded common stocks, and other
invested assets, primarily private equity limited partnerships, all of which are held with the
primary objective of capital appreciation.
Our objective is to achieve the appropriate mix of taxable and tax exempt securities in our
portfolio to balance both investment and tax strategies. At June 30, 2010 and December 31, 2009,
67% of our fixed maturity portfolio which supports our U.S. operations was invested in highly rated
tax exempt bonds. Although about 40% of our tax exempt bonds are insured, the effect of insurance
on the average credit rating of these bonds is insignificant. The insured tax exempt bonds in our
portfolio have been selected based on the quality of the underlying credit and not the value of the
credit insurance enhancement.
At June 30, 2010, we held $3.4 billion of highly rated mortgage-backed securities which
comprised 20% of our taxable bond portfolio. About 50% of these securities are residential
mortgage-backed securities, consisting of government agency pass-through securities guaranteed by a
government agency or a government sponsored enterprise (GSE), GSE collateralized mortgage
obligations (CMOs) and other CMOs, all backed by single family home mortgages. The majority of the
CMOs are actively traded in liquid markets. The balance of the mortgage-backed securities are call
protected, commercial mortgage-backed securities (CMBS). About 90% of our CMBS are senior
securities with the highest level of subordination. The remainder of our CMBS are seasoned
securities that were issued in 2004 or earlier.
Page 42
The net unrealized appreciation before tax of our fixed maturities and equity securities
carried at fair value was $1.9 billion at June 30, 2010 compared with net unrealized appreciation
before tax of $1.6 billion at December 31, 2009. Such unrealized appreciation is reflected in
accumulated other comprehensive income, net of applicable deferred income tax.
Fair Values of Financial Instruments
Fair values of financial instruments are determined using valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. Fair values are
generally measured using quoted prices in active markets for identical assets or liabilities or
other inputs, such as
quoted prices for similar assets or liabilities, that are observable either
directly or indirectly. In those instances where observable inputs are not available, fair values
are measured using unobservable inputs for the asset or
liability. Unobservable inputs reflect our own assumptions about the assumptions that market
participants would use in pricing the asset or liability and are developed based on the best
information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used,
including the discount rates and the estimated amounts and timing of future cash flows. The
derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the
amounts that would be realized in a current market exchange.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure the
fair values of our fixed maturities and equity securities into three broad levels as follows:
|
|
|
Level 1 Unadjusted quoted prices in active markets for identical assets. |
|
|
|
|
Level 2 Other inputs that are observable for the asset, either directly or
indirectly. |
|
|
|
|
Level 3 Inputs that are unobservable. |
The methods and assumptions used to estimate the fair values of financial instruments are as
follows:
Fair values for fixed maturities are determined by management, utilizing prices obtained from
an independent, nationally recognized pricing service or, in the case of securities for which
prices are not provided by a pricing
service, from independent brokers. For fixed maturities that have quoted prices
in active markets, market quotations are provided. For fixed maturities that do not trade on a
daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs
including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, bids, offers, reference data, prepayment spreads and measures of volatility. Management
reviews on an ongoing basis the reasonableness of the methodologies used by the
relevant pricing service and brokers. In addition, management, using the prices received for the
securities from the pricing service and brokers, determines the aggregate portfolio price
performance and reviews it against applicable indices. If management believes that significant
discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve
the discrepancies.
Page 43
Fair values of equity securities are based on quoted market prices.
The carrying value of short term investments approximates fair value due to the short
maturities of these investments.
Fair values of long term debt issued by Chubb are determined by management, utilizing prices
obtained from an independent, nationally recognized pricing service.
A pricing service provides fair value amounts for approximately 99% of our fixed maturities.
The prices we obtain from a pricing service and brokers generally are non-binding, but are
reflective of current market transactions in the applicable financial instruments.
At June 30, 2010 and December 31, 2009, we did not hold financial instruments in our
investment portfolio for which a lack of market liquidity impacted our determination of fair value.
Item 4 Controls and Procedures
As of June 30, 2010, an evaluation of the effectiveness of the design and operation of the
Corporations disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934) was performed under the supervision and with the participation of
the Corporations management, including the chief executive officer and chief financial officer.
Based on that evaluation, Chubbs chief executive officer and chief financial officer concluded
that the Corporations disclosure controls and procedures were effective as of June 30, 2010.
During the quarter ended June 30, 2010, there were no changes in internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
the Corporations internal control over financial reporting.
Page 44
PART II. OTHER INFORMATION
Item 1A Risk Factors
The Corporations business is subject to a number of risks, including those identified in
Item 1A of Chubbs Annual Report on Form 10-K for the year ended December 31, 2009, that could have
a material effect on our business, results of operations, financial condition and/or liquidity and
that could cause our operating results to vary significantly from fiscal period to fiscal period.
The risks described in the Annual Report on Form 10-K are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also
could have a material effect on our business, results of operations, financial condition and/or
liquidity.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes Chubbs stock repurchased each month in the quarter ended June
30, 2010:
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Total Number of |
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Maximum Number of |
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Shares Purchased |
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Shares that May |
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Total Number |
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Average |
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as Part of |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Publicly Announced |
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Under the |
Period |
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Purchased(a) |
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Per Share |
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Plans or Programs |
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Plans or Programs(b) |
April 2010 |
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1,750,238 |
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$ |
52.53 |
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1,750,238 |
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13,448,220 |
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May 2010 |
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7,956,813 |
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51.03 |
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|
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7,956,813 |
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5,491,407 |
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June 2010 |
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2,726,100 |
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50.56 |
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2,726,100 |
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16,765,307 |
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Total |
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12,433,151 |
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51.14 |
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12,433,151 |
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(a) |
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The stated amounts exclude 1,710 shares and 1,145 shares delivered to Chubb during the
months of April 2010 and June 2010, respectively, by employees of the Corporation to cover
option exercise prices and withholding taxes in connection with the Corporations stock-based
compensation plans. |
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(b) |
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On December 3, 2009, the Board of Directors authorized the repurchase of up to 25,000,000
shares of common stock. On June 10, 2010, the Board of Directors authorized an increase of
14,000,000 shares to the authorization approved in December 2009. The authorization has no
expiration date. |
Page 45
Item 6 Exhibits
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Exhibit |
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Number |
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Description |
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Rule 13a-14(a)/15d-14(a) Certifications |
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31.1
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Certification by John D. Finnegan filed herewith. |
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31.2
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Certification by Richard G. Spiro filed herewith. |
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Section 1350 Certifications |
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32.1
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Certification by John D. Finnegan filed herewith. |
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32.2
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Certification by Richard G. Spiro filed herewith. |
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Interactive Data File |
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101.INS*
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XBRL Instance Document |
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101.SCH*
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XBRL Taxonomy Extension Schema Document |
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101.CAL*
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB*
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE*
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF*
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XBRL Taxonomy Extension Definition Linkbase Document |
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* |
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Pursuant to applicable securities laws and regulations, the Corporation is deemed to have
complied with the reporting obligation relating to the submission of interactive data files in
such exhibits and is not subject to liability under any anti-fraud provisions of the federal
securities laws as long as the Corporation has made a good faith attempt to comply with the
submission requirements and promptly amends the interactive data files after becoming aware
that the interactive data files fail to comply with the submission requirements. Users of
this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not
filed and otherwise are not subject to liability. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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THE CHUBB CORPORATION
(Registrant)
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By: |
/s/ John J. Kennedy |
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John J. Kennedy |
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Senior Vice-President and
Chief Accounting Officer |
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Date:
August 6, 2010