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CB > SEC Filings for CB > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for CHUBB CORP


7-Nov-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 September 30, 2013 compared with December 31, 2012 and the results of operations for the nine months and three months ended September 30, 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; property and casualty investment income after taxes for the full year 2013; 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 $1.8 billion in the first nine months of 2013 and $541 million in the third quarter compared with $1.4 billion and $533 million, respectively in the same periods of 2012. Net income was higher in the first nine months of 2013 compared to the same period of 2012 due to higher operating income and higher net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.

Operating income was $1.6 billion in the first nine months of 2013 and $529 million in the third quarter compared with $1.4 billion and $533 million, respectively, in the same periods of 2012. The higher operating income in the first nine months of 2013 was due to substantially higher underwriting income in our property and casualty insurance business, offset in part by a decrease in property and casualty investment income. Operating income was similar in the third quarter of 2013 and 2012 as a modest increase in underwriting income was offset by a modest decrease in property and casualty investment income. 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 nine months and third quarter of 2013 and 2012. Our combined loss and expense ratio was 86.4% in the first nine months of 2013 and 85.7% in the third quarter compared with 90.1% and 86.3% in the respective periods of 2012. Results were more profitable in the first nine months of 2013 compared to the same period in 2012 due to a lower current accident year loss ratio excluding catastrophes and a higher amount of favorable prior year loss development, offset in part by a higher impact of catastrophes. Results were slightly more profitable in the third quarter of 2013 compared to the same period in 2012 due to a lower current accident year loss ratio excluding catastrophes and a higher amount of favorable prior year loss development, offset in large part by a higher impact of catastrophes. The impact of catastrophes accounted for 3.9 percentage points of the combined ratio in the first nine months of 2013 and 3.0 percentage points in the third quarter compared with 3.0 and 0.6 percentage points, respectively, in the same periods of 2012.

During the first nine months and third quarter of 2013, we estimate that we experienced overall favorable prior year loss development of about $595 million and $190 million, respectively. We estimate that during the first nine months and third quarter of 2012, we experienced overall favorable prior year loss development of about $410 million and $145 million, respectively. In each period we experienced favorable prior year loss development in each segment of our insurance business.


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Total net premiums written increased by 2% in the first nine months of 2013 and 4% in the third quarter compared with the same periods of 2012. Net premiums written in the United States increased by 3% in the first nine months of 2013 and 5% in the third quarter. Net premiums written outside the United States expressed in U.S. dollars increased by 1% in the first nine months of 2013 and were flat in the third quarter. When measured in local currencies, such premiums increased modestly in the first nine months of 2013 and increased slightly in the third quarter.

Property and casualty investment income after tax decreased by 6% in the first nine months and third quarter of 2013 compared with the same periods of 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 $335 million ($218 million after tax) in the first nine months of 2013 compared with $103 million ($67 million after tax) in the same period of 2012. Net realized investment gains before tax were $18 million ($12 million after tax) in the third quarter of 2013 compared to negligible net realized investment losses before tax in the third quarter of 2012. In the first nine months of 2013, net realized investment gains included the recognition of a gain in connection with the merger of an issuer in which we held equity securities and warrants. The remaining net realized gains in the first nine months of 2013 were primarily related to investments in limited partnerships, which generally are reported on a quarter lag, and sales of equity securities. The net realized gains in the first nine months of 2012 were primarily related to sales of fixed maturity and equity securities. The net realized gains in the third quarter of 2013 were primarily related to investments in limited partnerships.

A summary of our consolidated net income is as follows:

                                                                Periods Ended September 30
                                                           Nine Months              Third Quarter
                                                        2013          2012         2013        2012
                                                                      (in millions)
Property and casualty insurance                       $  2,298      $  2,003      $  782      $  783
Corporate and other                                       (182 )        (173 )       (61 )       (56 )

Consolidated operating income before income tax          2,116         1,830         721         727
Federal and foreign income tax                             558           454         192         194

Consolidated operating income                            1,558         1,376         529         533
Realized investment gains after income tax                 218            67          12           -

Consolidated net income                               $  1,776      $  1,443      $  541      $  533


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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:



                                                                     Periods Ended September 30
                                                               Nine Months              Third Quarter
                                                            2013         2012         2013         2012
                                                                           (in millions)
Underwriting
Net premiums written                                       $ 9,186      $ 8,962      $ 3,029      $ 2,913
Decrease (increase) in unearned premiums                      (160 )        (51 )         (2 )         64

Premiums earned                                              9,026        8,911        3,027        2,977

Losses and loss expenses                                     4,862        5,164        1,600        1,597
Operating costs and expenses                                 2,960        2,859          986          946
Decrease (increase) in deferred policy acquisition costs       (69 )        (15 )        (12 )          9
Dividends to policyholders                                      28           23           10            7


Underwriting income                                          1,245          880          443          418


Investments
Investment income before expenses                            1,076        1,145          352          373
Investment expenses                                             34           28           10            9


Investment income                                            1,042        1,117          342          364


Other income (charges)                                          11            6           (3 )          1


Property and casualty income before tax                    $ 2,298      $ 2,003      $   782      $   783


Property and casualty investment income after tax          $   854      $   908      $   280      $   297

Property and casualty income before tax was higher in the first nine months of 2013 compared with the same period of 2012. The higher income in the first nine months of 2013 was due to substantially higher underwriting income, offset in part by a decline in investment income. Property and casualty income before tax was similar in the third quarter of 2013 and 2012, as modestly higher underwriting income in the 2013 period was offset by a modest decrease in investment income. The increase in underwriting income in the first nine months of 2013 compared with the same period of 2012 was attributable to a lower current accident year loss ratio excluding catastrophes and a higher amount of favorable prior year loss development, offset in part by a higher impact of catastrophes. The modestly higher underwriting income in the third quarter of 2013 compared with the same period in 2012 was due to a lower current accident year loss ratio excluding catastrophes and a higher amount of favorable prior year loss development, offset in large part by a higher impact of catastrophes. The decrease in investment income in the first nine months and third quarter of 2013 compared with the same periods of 2012 was due to a decline in the average yield on our investment portfolio.


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

Underwriting 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 $9.2 billion in the first nine months of 2013 and $3.0
billion in the third quarter compared with $9.0 billion and $2.9 billion,
respectively, in the same periods of 2012. Net premiums written by business unit
were as follows:



                          Nine Months Ended                          Quarter Ended
                            September  30                             September 30
                          2013          2012        % Incr.        2013         2012        % Incr.
                            (in millions)                            (in millions)
 Personal insurance     $   3,247      $ 3,111             4 %    $ 1,106      $ 1,062             4 %
 Commercial insurance       4,014        3,969             1        1,255        1,211             4
 Specialty insurance        1,928        1,880             3          670          640             5

 Total insurance            9,189        8,960             3        3,031        2,913             4
 Reinsurance assumed           (3 )          2             *           (2 )          -             *

 Total                  $   9,186      $ 8,962             2      $ 3,029      $ 2,913             4

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

Net premiums written increased by 2% in the first nine months of 2013 and 4% in the third quarter compared with the same periods of 2012. Net premiums written in the United States, which represented 75% of our total net premiums written in the first nine months of 2013, increased by 3% in the first nine months of 2013 and 5% in the third quarter. Net premiums written outside the United States, expressed in U.S. dollars, increased by 1% in the first nine months of 2013 and were flat in the third quarter. When measured in local currencies, net premiums written outside the United States increased modestly in the first nine months of 2013 and increased slightly in the third quarter.

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.


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Growth in net premiums written in the United States in the first nine months of 2013 occurred in each segment of our business, with the most significant growth occurring in our personal insurance segment. Net premiums written in the United States increased slightly in the first nine months of 2013 in both our commercial insurance and specialty insurance segments. Growth in net premiums written in the United States in the third quarter of 2013 occurred in each segment of our business. Growth in our personal insurance business in both periods of 2013 was attributable to new business, strong retention of existing business as well as higher rates and insured exposures upon renewal. In both the first nine months and third quarter of 2013, growth in our commercial insurance segment and our professional liability insurance business, which is the predominant component of our specialty insurance segment, while reflecting higher rates and continued strong retention, remained constrained by our underwriting actions and judicious approach to new business in the highly competitive market.

Average renewal rates for our personal insurance business in the United States were up modestly in the first nine months and third quarter of 2013, driven particularly by our homeowners business. Average renewal rates in the first nine months and third quarter of 2013 in the United States were up significantly in both our commercial and professional liability businesses. 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 nine months and third quarter of 2013 compared to the same periods in 2012 in our commercial insurance and our professional liability businesses. We continued to retain a high percentage of our existing commercial and professional liability business. Renewal retention levels in the first nine months of 2013 were similar in our commercial insurance business and slightly higher in our professional liability business compared to those in the same period of 2012. As part of our ongoing catastrophe management activities, during the first nine months of 2013 we did not renew or reduced our participation in some commercial accounts that had catastrophe-related exposure. Retention levels in the third quarter of 2013 were slightly higher in our commercial insurance business and modestly higher in our professional liability business than in the same period of 2012. During the first nine months 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 modestly in the first nine months of 2013 compared with the same period of 2012, reflecting both the competitive market as well as our underwriting discipline. However, the overall level of new business was up slightly in the third quarter of 2013 for both our commercial insurance and professional liability insurance business compared with the same period of 2012.

Outside the United States, growth in net premiums written in the first nine months of 2013 was driven by modest growth in our specialty insurance segment. Net premiums written increased only slightly in our personal insurance segment and were flat in our commercial insurance segment. In the third quarter of 2013, net premiums written outside the United States were flat, as a modest increase in our specialty insurance segment and a slight increase in our commercial insurance segment were offset by a decrease in our personal insurance segment. Overall growth in net premiums written outside the United States in the first nine months and third quarter of 2013 reflected a slight negative impact from foreign currency translation.


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Growth in our personal insurance business outside the United States in the first nine months and third quarter of 2013 reflected modest increases in average renewal rates. Average renewal rates outside the United States were up modestly in our commercial insurance business in the first nine months of 2013 but up only slightly in the third quarter. Average renewal rates in our professional liability business were up slightly in the first nine months and third quarter of 2013. Retention levels for our commercial insurance business written outside the United States were similar in the first nine months of 2013 and 2012 and were modestly higher in the third quarter of 2013 than in the same period of 2012. Retention levels for our professional liability business written outside the United States were slightly higher in the first nine months of 2013 and modestly higher in the third quarter than in the same periods of 2012. For our commercial insurance business, the level of new business written outside the United States was slightly higher in the first nine months and third quarter of 2013 compared to the respective periods of 2012. The level of new business written outside the United States for our professional liability business was slightly lower in both periods of 2013 compared to the same periods of 2012.

We expect our net written premiums for the full year 2013 will increase at a rate similar to the rate in the first nine months of the year. We expect that market conditions will remain competitive but that the positive pricing environment, particularly in the United States, will continue during the remainder of 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.

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 . . .

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