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CB > SEC Filings for CB > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for CHUBB CORP


8-May-2013

Quarterly Report


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 March 31, 2013 compared with December 31, 2012 and the results of operations for the quarters ended March 31, 2013 and 2012. 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, 2012.

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 market conditions in 2013, including premium volume, rate trends, the pricing environment and competition; the cost of our property reinsurance program in 2013; our loss reserve and reinsurance recoverable estimates; the repurchase of common stock under our share repurchase program; and our financial position, capital adequacy and funding of liquidity needs. 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 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, economic and market conditions, particularly in the jurisdictions in which we operate and/or invest, including:

- changes in credit ratings, 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;

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

the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events;


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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 at acceptable rates;

our expectations with respect to cash flow and investment income and with respect to other income;

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; and

- the impact from the bankruptcy protection sought by various asbestos producers and other related businesses;

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 or changes to our estimates (or the assessments of rating agencies and other third parties) of our potential exposure to such events;

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 we insure, particularly with respect to our lines of business that have a longer time span, or tail, between the incidence of a loss and the settlement of the claim;

the impact of legislative, regulatory, judicial and similar developments on companies we insure, particularly with respect to our longer tail lines of business;

the impact of legislative, regulatory, judicial and similar developments on our business, including those relating to insurance industry reform, terrorism, catastrophes, the financial markets, solvency standards, capital requirements, accounting guidance and taxation;

any downgrade in our claims-paying, financial strength or other credit ratings;


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the ability of our subsidiaries to pay us dividends;

our plans to repurchase shares of our common stock, including as a result of changes in:

- our financial position and financial results;

- our capital position and/or capital adequacy levels required to maintain our existing ratings from independent rating agencies;

- our share price;

- investment opportunities;

- opportunities to profitably grow our property and casualty insurance business;

- corporate and regulatory requirements; 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 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, 2012 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.


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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 $656 million in the first quarter of 2013 compared with $506 million in the same period of 2012. Net income was substantially higher in the first quarter of 2013 compared to the same period of 2012 due to higher operating income and, to a lesser extent, higher net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.

Operating income was $566 million in the first quarter of 2013 compared with $469 million in the same period of 2012. The higher operating income in the first quarter of 2013 was due to substantially higher underwriting income in our property and casualty insurance business. Property and casualty investment income decreased in the first quarter of 2013 compared with the same period of 2012. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.

Underwriting results were highly profitable in the first quarter of 2013 and 2012, but more so in 2013. Our combined loss and expense ratio was 84.6% in the first quarter of 2013 compared with 90.2% in the same period of 2012. Results were more profitable in the first quarter of 2013 primarily due to a higher amount of favorable prior year loss development and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. The impact of catastrophes was not significant in the first quarter of either year, accounting for 0.6 of a percentage point of the combined ratio in the first quarter of 2013 compared with 0.8 of a percentage point in the same period of 2012.

During the first quarter of 2013, we estimate that we experienced overall favorable development of about $190 million on loss reserves established as of the previous year end. We estimate that during the first quarter of 2012, we experienced overall favorable development of about $100 million. The overall favorable development in the first quarter of 2013 was due primarily to favorable loss experience in the commercial property classes and, to a lesser extent, in the commercial liability and professional liability classes. The overall favorable development in the first quarter of 2012 was due primarily to favorable loss experience in the commercial liability, professional liability and personal insurance classes.


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Total net premiums written increased by 4% in the first quarter of 2013 compared with the same period in 2012. Net premiums written in the United States increased by 3% in the first quarter of 2013. Net premiums written outside the United States increased by 6% in the first quarter of 2013 in U.S. dollars and by a slightly higher amount when measured in local currencies.

Property and casualty investment income after tax decreased by 6% in the first quarter of 2013 compared with the same period in 2012 due to a decline in the average yield on our investment portfolio. Management uses property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment results because it reflects the impact of any change in the proportion of tax exempt investment income to total investment income and is therefore more meaningful for analysis purposes than investment income before income tax.

Net realized investment gains before tax were $138 million ($90 million after tax) in the first quarter of 2013 compared with $56 million ($37 million after tax) in the same period of 2012. The net realized gains in the first quarter of 2013 were primarily related to investments in limited partnerships and sales of equity securities. The net realized gains in the first quarter of 2012 were primarily related to sales of fixed maturities and equity securities.

A summary of our consolidated net income is as follows:

                                                        Quarter Ended March 31
                                                        2013               2012
                                                             (in millions)
   Property and casualty insurance                   $      841         $      682
   Corporate and other                                      (63 )              (59 )

   Consolidated operating income before income tax          778                623
   Federal and foreign income tax                           212                154

   Consolidated operating income                            566                469
   Realized investment gains after income tax                90                 37

   Consolidated net income                           $      656         $      506


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Property and Casualty Insurance

A summary of the results of operations of our property and casualty insurance
business is as follows:



                                                         Quarter Ended March 31
                                                          2013              2012
                                                              (in millions)
   Underwriting
   Net premiums written                                $     3,057        $  2,949
   Decrease (increase) in unearned premiums                    (53 )             2

   Premiums earned                                           3,004           2,951

   Losses and loss expenses                                  1,568           1,707
   Operating costs and expenses                                983             947
   Increase in deferred policy acquisition costs               (41 )           (14 )
   Dividends to policyholders                                    9               8


   Underwriting income                                         485             303


   Investments
   Investment income before expenses                           363             391
   Investment expenses                                          12              11


   Investment income                                           351             380


   Other income (charges)                                        5              (1 )


   Property and casualty income before tax             $       841        $    682

Property and casualty investment income after tax $ 288 $ 308

Property and casualty income before tax was substantially higher in the first quarter of 2013 compared with the same period in 2012. The higher income in the first quarter of 2013 was due to an increase in underwriting income. The increase in underwriting income in the first quarter of 2013 compared with the same period in 2012 was primarily attributable to a higher amount of favorable prior year loss development and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. The impact of catastrophes was not significant in the first quarter of either year. Investment income decreased in the first quarter of 2013 compared with the same period of 2012, due to a decline in the average yield on our investment portfolio.

The profitability of our property and casualty insurance business depends on the results of both our underwriting and investment operations. We view these as two distinct operations since the underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.


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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 $3.1 billion in the first quarter of 2013 compared
with $2.9 billion in the same period of 2012. Net premiums written by business
unit were as follows:



                                         Quarter Ended
                                            March 31
                                       2013         2012       % Increase
                                         (in millions)
               Personal insurance     $   987      $   940               5 %
               Commercial insurance     1,440        1,405               2
               Specialty insurance        632          602               5

               Total insurance          3,059        2,947               4
               Reinsurance assumed         (2 )          2               *

               Total                  $ 3,057      $ 2,949               4

* The change in net premiums written is not presented since the business is in runoff.

Net premiums written increased by 4% in the first quarter of 2013 compared with the same period in 2012. Net premiums written in the United States, which represented 70% of our total net premiums written in the first quarter of 2013, increased by 3%. In the first quarter of 2013, net premiums written outside the United States, expressed in U.S. dollars, increased by 6% and increased by a slightly higher amount when measured in local currencies.

We classify business as written in the United States or outside the United States based on the location of the risk associated with the underlying policies. The method of determining location of risk varies by class of business. Location of risk for property classes is typically based on the physical location of the covered property, while location of risk for liability classes may be based on the main location of the insured, or in the case of the workers' compensation class, the primary work location of the covered employee.

Net premiums written in the United States grew in the first quarter of 2013 compared to the same period in 2012 in each segment of our insurance business, but more so in our personal insurance segment. Growth in our personal insurance business was attributable to new business, strong retention of existing business as well as higher rates and insured exposures upon renewal. Growth in our commercial insurance business and our professional liability insurance business, which is the predominant component of our specialty insurance segment, reflected higher rates and continued strong retention. Growth in the commercial and professional liability businesses, however, remained constrained by the highly competitive market.


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Average renewal rates for our personal insurance business in the United States were up modestly in the first quarter of 2013, driven by our homeowners business. Average renewal rates in the first quarter of 2013 in the United States were up significantly in both our commercial and professional liability businesses in comparison to expiring rates. The amounts of coverage purchased or the insured exposures, both of which are bases upon which we calculate the premiums we charge, were down slightly in the first quarter of 2013 compared to the same period in 2012 in our commercial and professional liability businesses. We continued to retain a high percentage of our existing commercial and professional liability business; renewal retention levels in the first quarter of 2013 were slightly higher in our commercial insurance business and modestly lower in our professional liability business than those in the same period of 2012. During the first quarter of 2013, we continued to seek renewal rate increases in most of the classes within these businesses and to take underwriting actions to improve profitability, particularly in some of the professional liability classes. The overall level of new business in the United States in our commercial and professional liability businesses was down in the first quarter of 2013 compared with the same period of 2012, reflecting both the competitive market as well as our underwriting discipline.

Outside the United States, net premiums written also increased in each segment of our insurance business in the first quarter of 2013 compared to the same period in 2012. Growth in our personal and commercial insurance premiums written outside the United States was modest in the first quarter of 2013. Growth in our specialty insurance premiums written outside the United States was significant in the first quarter of 2013, driven by both our surety business and our professional liability business. Average renewal rates for our personal insurance business outside the United States were up modestly in the first quarter of 2013. Average renewal rates outside the United States were up modestly in our commercial insurance business and up slightly in our professional liability business in the first quarter of 2013. Retention levels for our commercial and professional liability business written outside the United States in the first quarter of 2013 were similar to those in the same period of 2012. The level of new business written outside the United States in the first quarter of 2013 was slightly lower overall than that in the same period of 2012 for our commercial business and nearly unchanged for our professional liability business.

We expect that market conditions will remain competitive but that the positive pricing environment in the United States, as well as the slightly positive pricing environment outside the United States, will continue throughout 2013.

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 main types of property reinsurance: catastrophe and property per risk.


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For property risks in the United States and Canada, we purchase traditional catastrophe reinsurance, including our primary treaty which we refer to as our North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our exposures in the northeastern United States. For certain exposures in the United States, we have also arranged for the purchase of multi-year, collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds. For events outside the United States, we also purchase traditional catastrophe reinsurance.

We renewed our primary traditional property catastrophe treaties and our commercial property per risk treaty in April 2013 with no changes in coverage. The supplemental catastrophe reinsurance that provides coverage for our exposures in the northeastern United States that renewed in June 2012 remains in effect until June 2013. The two catastrophe bond arrangements currently in place expire in years subsequent to 2013.

The North American catastrophe treaty has an initial retention of $500 million and provides coverage for exposures in the United States and Canada of approximately 34% of losses (net of recoveries from other available reinsurance) between $500 million and $900 million and approximately 72% of losses (net of recoveries) between $900 million and $1.65 billion. For certain catastrophic events in the northeastern part of the United States or along the southern U.S. coastline, the combination of the North American catastrophe treaty, supplemental catastrophe reinsurance and/or the catastrophe bond arrangements provide additional coverages as discussed below.

The catastrophe bond arrangements 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 two catastrophe bond arrangements in effect. We have a $475 million reinsurance arrangement, a portion of which expires in March 2014 and the remainder in March 2015, that provides coverage for our exposure to homeowners and commercial losses related to certain hurricane, earthquake, severe thunderstorm and winter storm loss events in twelve states in the northeastern United States and the District of Columbia. We also have a $150 million reinsurance arrangement that expires in March 2016 that provides coverage for homeowners-related hurricane and severe thunderstorm losses in eight states along the southern U.S. coastline.

For the indicated catastrophic events in the northeastern United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the $475 million catastrophe bond arrangement provides additional coverage of approximately 65% of losses (net of recoveries from other available reinsurance) between $1.65 billion and $3.65 billion.

For hurricane and severe thunderstorm events along the southern U.S. coastline, the $150 million catastrophe bond arrangement provides additional coverage of approximately 50% of homeowners-related hurricane and severe thunderstorm losses (net of recoveries from other available reinsurance) between $860 million and $1.16 billion.


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For hurricane events in Florida, in addition to the coverage provided by the North American catastrophe treaty and the $150 million catastrophe bond arrangement discussed above, we have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this mandatory program limits our initial retention in Florida for homeowners-related losses to approximately $165 million and provides coverage of 90% of covered losses between approximately $165 million and $610 million.

Our primary property catastrophe treaty for events outside the United States, including Canada, provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million. For catastrophic events in Australia and Canada, additional reinsurance provides coverage of 80% of losses (net of recoveries from other available reinsurance) between $350 million and $475 million.

Our commercial property per risk treaty provides coverage per risk of approximately $600 million to $800 million (depending upon the currency in which the insurance policy was issued) in excess of our initial retention. Our initial retention 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 concentrations of risk.

Recoveries under our property reinsurance treaties are subject to certain coinsurance requirements that affect the interaction of some elements of our reinsurance program.

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