Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of September 30, 2008 compared with December 31, 2007 and the results of operations for the nine months and three months ended September 30, 2008 and 2007. 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 management's discussion and analysis of financial condition and results of operations included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2007. Cautionary Statement Regarding Forward-Looking Information Certain statements in this document are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding our loss reserve and reinsurance recoverable estimates; the impact of changes to our reinsurance program; premium volume, rates and terms and conditions of the policies we write; the impact of market disruptions on our opportunities to write new business; competition; the fourth quarter 2008 performance of our limited partnership investments; the repurchase of common stock under our share repurchase program; our capital adequacy and funding of liquidity needs; and the impact of widening credit spreads and equity market declines. Forward-looking statements are made based upon management's current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with:
• global political conditions and the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events;

• the effects of the outbreak or escalation of war or hostilities;

• premium pricing and profitability or growth estimates overall or by lines of business or geographic area, and related expectations with respect to the timing and terms of any required regulatory approvals;

• adverse changes in loss cost trends;

• the 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;

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Page 13 • the adequacy of our 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, in particular contingent commissions and loss mitigation and finite reinsurance arrangements, 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;

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Page 14 • general economic and market conditions including:

- changes in interest rates, market credit spreads and the performance of the financial markets;

- currency fluctuations;

- the effects of inflation;

- changes in domestic and foreign laws, regulations and taxes;

- changes in competition and pricing environments;

- regional or general changes in asset valuations;

- the inability to reinsure certain risks economically; and

- changes in the litigation environment; and

• our ability to implement management's strategic plans and initiatives.

Chubb assumes no obligation to update any forward-looking information set forth in this document, which speak as of the date hereof. 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. These estimates and judgments, which are discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 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.
Overview
The following highlights do not address all of the matters covered in the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to Chubb's shareholders or the investing public. This overview should be read in conjunction with the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations.
• Net income was $1.4 billion in the first nine months of 2008 and $264 million in the third quarter compared with $2.2 billion and $738 million, respectively, in the comparable periods of 2007. The lower net income in the 2008 periods was due primarily to two factors. First, underwriting income in our property and casualty insurance business was substantially lower in the 2008 periods compared with the same periods in 2007, due in large part to higher catastrophe losses. Second, we had realized investment losses in the 2008 periods compared with realized investment gains in the 2007 periods.

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Page 15 • Underwriting results were highly profitable in the first nine months of 2008 and 2007, but more so in 2007. Underwriting results in the third quarter of 2008 were modestly profitable compared to highly profitable results in the same period of 2007. Results in the 2008 periods, particularly in the third quarter, were adversely affected by high catastrophe losses. Catastrophe losses were $616 million in the first nine months of 2008 and $402 million in the third quarter compared with $249 million and $58 million, respectively, in the corresponding periods in 2007. The combined loss and expense ratio was 90.2% in the first nine months of 2008 and 98.1% in the third quarter compared with 82.6% and 81.6% in the respective 2007 periods.

• During the first nine months and third quarter of 2008, we experienced overall favorable development of about $660 million and $210 million, respectively, on loss reserves established as of the previous year end, due primarily to favorable loss experience in certain professional liability and commercial liability classes and lower than expected emergence of losses in the homeowners and commercial property classes. During the first nine months and third quarter of 2007, we experienced overall favorable development of about $480 million and $150 million, respectively, primarily in the professional liability classes and the homeowners and commercial property classes as well as in the run-off of the reinsurance assumed business.

• In a highly competitive market environment, total net premiums written were flat in the first nine months of 2008 and decreased by 1% in the third quarter compared with the same periods in 2007. Net premiums written in the United States decreased by 3% in the first nine months of 2008 and 4% in the third quarter. Net premiums written outside the United States increased by 11% in the first nine months of 2008 and 8% in the third quarter; the growth was largely attributable to the impact of currency fluctuation due to the weakness of the U.S. dollar.

• Property and casualty investment income after tax increased 4% in the first nine months of 2008 and 1% in the third quarter compared with the same periods in 2007. The growth was due to an increase in invested assets over the past year. For more information on this non-GAAP financial measure, see "Property and Casualty Insurance - Investment Results."

• Net realized investment losses were $121 million in the first nine months of 2008 and $113 million in the third quarter compared with net realized investment gains of $328 million and $117 million, respectively, in the comparable periods of 2007. The net realized losses in the first nine months and third quarter of 2008 were primarily attributable to other-than-temporary impairment losses. The net realized gains in the first nine months and third quarter of 2007 were primarily attributable to gains from investments in limited partnerships.

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Page 16 A summary of our consolidated net income is as follows:

Periods Ended September 30 Third Quarter Nine Months 2008 2007 2008 2007

(in millions)

Property and Casualty Insurance $ 484 $ 973 $ 2,156 $ 2,815 Corporate and Other (53 ) (43 ) (159 ) (108 ) Realized Investment Gains (Losses) (113 ) 117 (121 ) 328

Consolidated Income Before Income Tax 318 1,047 1,876 3,035 Federal and Foreign Income Tax 54 309 479 878

Consolidated Net Income $ 264 $ 738 $ 1,397 $ 2,157

Property and Casualty Insurance A summary of the results of operations of our property and casualty insurance business is as follows: Periods Ended September 30 Third Quarter Nine Months 2008 2007 2008 2007 (in millions) Underwriting Net Premiums Written $ 2,900 $ 2,938 $ 8,883 $ 8,863 Decrease in Unearned Premiums 64 40 43 64 Premiums Earned 2,964 2,978 8,926 8,927 Losses and Loss Expenses 2,006 1,541 5,339 4,693 Operating Costs and Expenses 871 874 2,669 2,649 Decrease (Increase) in Deferred Policy Acquisition Costs 7 (11 ) (29 ) (64 ) Dividends to Policyholders 11 5 29 13 Underwriting Income 69 569 918 1,636 Investments Investment Income Before Expenses 418 413 1,254 1,201 Investment Expenses 7 8 23 25 Investment Income 411 405 1,231 1,176 Other Income (Charges) 4 (1 ) 7 3 Property and Casualty Income Before Tax $ 484 $ 973 $ 2,156 $ 2,815 Property and Casualty Investment Income After Tax $ 327 $ 324 $ 981 $ 942

Property and casualty income before tax was much lower in the first nine months and third quarter of 2008 compared with the same periods in 2007. Underwriting income was substantially lower in the 2008 periods compared with the same periods in 2007. The decrease in underwriting income in 2008 was due in large part to higher catastrophe losses, particularly in the third quarter. Investment income grew in both 2008 periods compared with the same periods in 2007, but growth slowed considerably in the third quarter.

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Page 17 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.
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 $8.9 billion in the first nine months of 2008, nearly identical to the amount in the same period of 2007. Net premiums written in the third quarter of 2008 were $2.9 billion, a decrease of 1% compared with the same period of 2007.
Net premiums written by business unit were as follows:

Quarter Ended Nine Months Ended Sept. 30 % Incr. Sept. 30 % Incr. 2008 2007 (Decr.) 2008 2007 (Decr.) (in millions) (in millions) Personal insurance $ 995 $ 977 2 % $ 2,887 $ 2,792 3 % Commercial insurance 1,178 1,204 (2 ) 3,819 3,821 - Specialty insurance 709 726 (2 ) 2,123 2,150 (1 ) Total insurance 2,882 2,907 (1 ) 8,829 8,763 1 Reinsurance assumed 18 31 (42 ) 54 100 (46 ) Total $ 2,900 $ 2,938 (1 ) $ 8,883 $ 8,863 -

Net premiums written from our insurance business increased 1% in the first nine months of 2008 and decreased by 1% in the third quarter compared with the corresponding periods in 2007. Premiums in the United States, which represented 75% of our insurance premiums in the first nine months of 2008, decreased by 2% in the first nine months and 3% in the third quarter. Premiums outside the U.S. increased by 11% in the first nine months and 8% in the third quarter. The growth outside the U.S. was largely attributable to the impact of currency fluctuation due to the weakness of the U.S. dollar in the 2008 periods compared with the 2007 periods; in local currencies, growth outside the U.S. was 4% in both periods.
In a highly competitive market environment, we continued our emphasis on underwriting discipline. Rates continued to be under competitive pressure that varied by class of business and geographic area. The decline in rates in the third quarter of 2008 was somewhat less than we had experienced in recent quarters. We continued to retain a high percentage of our existing customers and to renew these accounts at acceptable prices relative to the exposure. However, there were fewer opportunities to write new business at acceptable rates in the first nine months of 2008 compared with the same period in 2007.

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Page 18 Over the past few months, the property and casualty insurance market has experienced significant disruption as a result of broader issues in the financial markets and the economies of the United States and other countries. The market disruption may result in an increase in opportunities for us to write new business, but competition for that new business may also be significant. Nonetheless, we currently expect the market environment to remain competitive for the balance of 2008.
Net premiums written in the reinsurance assumed business, which is in runoff, were not significant in the first nine months or third quarter of 2008 or 2007.
Reinsurance Ceded
Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies we write that are subject to the reinsurance.
Reinsurance rates for property risks have declined somewhat in 2008. However, capacity restrictions continued in some segments of the marketplace.
We renewed our major property reinsurance treaties, which represent the most significant component of our reinsurance program, in April 2008.
On our commercial property per risk treaty, we increased the reinsurance coverage in the top layer of the treaty. This treaty now provides approximately $560 million of coverage per risk in excess of our $25 million retention.
The structure of our property catastrophe program for events in the United States was modified, but the overall coverage is similar to the previous program. We purchased $200 million of fully collateralized three-year reinsurance coverage in place of traditional reinsurance. This reinsurance was purchased from East Lane Re II Ltd., which financed the provision of reinsurance through the issuance of $200 million in catastrophe bonds to investors under three separate bond tranches. The current traditional catastrophe reinsurance treaty, in combination with the collateralized coverage, provides coverage of approximately 70% of losses (net of recoveries from other available reinsurance) between $350 million and $1.3 billion, with additional coverage of 60% of losses between $1.3 billion and $2.05 billion in the northeastern part of the United States, where we have our greatest concentration of catastrophe exposure.
We have additional fully collateralized four-year reinsurance coverage, purchased in 2007, for homeowners-related losses sustained from qualifying hurricane loss events in the northeastern part of the United States. This reinsurance was purchased from East Lane Re Ltd., which financed the provision of reinsurance through the issuance of $250 million in catastrophe bonds to investors under two separate bond tranches. This reinsurance provides coverage in 2008 of approximately 30% of covered losses between $1.35 billion and $2.2 billion.
We have additional reinsurance from the Florida Hurricane Catastrophe Fund, 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 $185 million.

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Page 19 On our property catastrophe treaty for events outside the United States, we increased the reinsurance coverage in the top layer of the treaty by $50 million and modestly increased our participation in the program. The treaty now provides coverage of approximately 85% of losses (net of recoveries from other available reinsurance) between $75 million and $325 million.
Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated by foreign terrorists, and for nuclear, biological, chemical and radiological loss causes whether such acts are perpetrated by foreign or domestic terrorists.
The overall cost of our property reinsurance program in the first nine months of 2008 was modestly lower than that in the comparable period in 2007. We do not expect the changes we made to our reinsurance program during 2008 to have a material effect on the Corporation's results of operations, financial condition or liquidity.
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.
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 highly profitable in the first nine months of 2008 and 2007. Underwriting results in the third quarter of 2008 were modestly profitable compared to highly profitable results in the same period in 2007. The combined loss and expense ratio for our overall property and casualty business was as follows:

Periods Ended September 30 Third Quarter Nine Months 2008 2007 2008 2007 Loss ratio 67.9 % 51.8 % 60.0 % 52.7 % Expense ratio 30.2 29.8 30.2 29.9 Combined ratio 98.1 % 81.6 % 90.2 % 82.6 %

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Page 20 The loss ratio was significantly higher in both the first nine months and third quarter of 2008 compared with the respective periods in 2007. The increase, particularly in the third quarter, was due in large part to higher catastrophe losses. Excluding the impact of catastrophes, the loss ratio in both years remained relatively low, reflecting our disciplined underwriting in recent years as well as favorable reserve development. However, the loss ratio in the 2008 periods was adversely affected by declining earned premium rates and several large non-catastrophe losses.
Catastrophe losses were $616 million in the first nine months of 2008, which represented 6.9 percentage points of the loss ratio, compared with $249 million or 2.8 percentage points in the same period of 2007. Catastrophe losses were $402 million in the third quarter of 2008, which represented 13.6 percentage points of the loss ratio, compared with $58 million or 2.0 percentage points in the same period in 2007. Of the catastrophe losses in the third quarter of 2008, about $340 million related to Hurricane Ike, including our estimated share of an assessment from the Texas Windstorm Insurance Association, a windstorm insurance entity created by the State of Texas. The estimated loss from Hurricane Ike does not reflect any reinsurance recoveries from our catastrophe reinsurance treaties since the aggregate gross loss was within our initial retention of $350 million.
The expense ratio was slightly higher in the first nine months and third quarter of 2008 compared to the same periods of 2007, due to an increase in commissions, which more than offset lower operating costs related to the run-off of our reinsurance business. The increase in commissions was due to premium growth outside the United States in countries where commission rates are higher than in the United States as well as modestly higher commission rates in the United States in certain classes of business.
In lieu of paying contingent commissions, beginning in 2007, we implemented a new guaranteed supplemental compensation program for agents and brokers in the United States with whom we previously had contingent commission agreements. Under this arrangement, agents and brokers are paid a percentage of written premiums on eligible lines of business in a calendar year based upon their prior performance. The change in our commission arrangements created a difference in the timing of expense recognition, which resulted in a one-time benefit to income during the 2007 transition year. The impact of the change in the first . . .