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CB > SEC Filings for CB > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for CHUBB CORP

Form 10-K for CHUBB CORP


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of December 31, 2013 compared with December 31, 2012 and the results of operations for each of the three years in the period ended December 31, 2013. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.

INDEX

PAGE
Cautionary Statement Regarding Forward-Looking Information 30 Critical Accounting Estimates and Judgments 32 Overview 32 Property and Casualty Insurance 34 Underwriting Operations 35 Underwriting Results 35 Net Premiums Written 35 Ceded Reinsurance 37 Profitability 39 Review of Underwriting Results by Business Unit 41 Personal Insurance 41 Commercial Insurance 42 Specialty Insurance 44 Reinsurance Assumed 46 Catastrophe Risk Management 46 Natural Catastrophes 46 Terrorism Risk and Legislation 47 Loss Reserves 48 Estimates and Uncertainties 49 Reserves Other than Those Relating to Asbestos and Toxic Waste Claims 50 Reserves Relating to Asbestos and Toxic Waste Claims 53 Asbestos Reserves 54 Toxic Waste Reserves 57 Reinsurance Recoverable 58 Prior Year Loss Development 58 Investment Results 62 Other Income and Charges 62 Corporate and Other 62 Realized Investment Gains and Losses 63 Capital Resources and Liquidity 64 Capital Resources 64 Ratings 66 Liquidity 66 Contractual Obligations and Off-Balance Sheet Arrangements 68 Invested Assets 69 Fair Values of Financial Instruments 70 Pension and Other Postretirement Benefits 71 Subsequent Events 71


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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; asbestos and toxic waste liabilities and related developments; the impact of the economy on our business; the impact of changes to our reinsurance program in 2013 and the cost of reinsurance in 2014; the adequacy of the rates at which we renewed and wrote new business; premium volume, pricing and competition in 2014; property and casualty investment income during 2014; cash flows generated by our fixed income investments; currency rate fluctuations; the repurchase of common stock under our share repurchase program; our capital adequacy and funding of liquidity needs; the funding and timing of loss payments; and the redemption of our capital securities. Forward-looking statements are made based upon management's current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with:

global political, 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;

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;


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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;

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; and

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.


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CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables and the evaluation of whether a decline in value of any investment is temporary or other than temporary. These estimates and judgments, which are discussed within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.

OVERVIEW

The following highlights do not address all of the matters covered in the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to Chubb's shareholders or the investing public. This overview should be read in conjunction with the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Net income was $2.3 billion in 2013, $1.5 billion in 2012 and $1.7 billion in 2011. The increase in net income in 2013 compared with 2012 was due to higher operating income and higher net realized investment gains. The decrease in net income in 2012 compared with 2011 was due to lower operating income and lower net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.

Operating income was $2.1 billion in 2013, $1.4 billion in 2012 and $1.5 billion in 2011. The higher operating income in 2013 compared with 2012 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. The modestly lower operating income in 2012 compared with 2011 was due primarily to lower property and casualty investment income. The underwriting income of our property and casualty insurance business was similar in both 2012 and 2011. 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 2013 compared with profitable results in 2012 and 2011. Our combined loss and expense ratio was 86.1% in 2013 and 95.3% in 2012 and 2011. The more profitable underwriting results in 2013 compared with 2012 and 2011 were primarily due to a substantially lower impact of catastrophes and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. The impact of catastrophes accounted for 3.4 percentage points of the combined ratio in 2013 compared with 9.6 percentage points in 2012 and 8.9 percentage points in 2011.

During 2013, 2012 and 2011, we experienced overall favorable development of $712 million, $614 million and $767 million, respectively, on loss reserves established as of the previous year end. In each year we experienced favorable prior year loss development in each segment of our insurance business.


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Total net premiums written increased by 3% in 2013 and 1% in 2012. The effect of foreign currency translation on total net premium growth was insignificant in 2013 compared with a slightly negative impact in 2012. Net premiums written in the United States increased by 4% in 2013 and 2% in 2012. Net premiums written outside the United States were flat in 2013 and decreased by 3% in 2012. When measured in local currencies, such premiums grew modestly in 2013 and grew slightly in 2012. In both years, premium growth both inside and outside the United States was limited by our emphasis on underwriting discipline in a highly competitive market and our focus on rate adequacy and profitability for both renewal and new business.

Property and casualty investment income after tax decreased by 5% in both 2013 and 2012 compared with the respective prior year, 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 $402 million ($261 million after tax) in 2013 compared with $193 million ($125 million after tax) in 2012 and $288 million ($187 million after tax) in 2011. In 2013, net realized investment gains included the recognition of a gain in connection with the business combination of an issuer in which we held equity securities and warrants. The remaining net realized gains in 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 2012 were primarily related to sales of fixed maturities and investments in limited partnerships. The net realized gains in 2011 were primarily related to investments in limited partnerships.

A summary of our consolidated net income is as follows:

                                                          Years Ended December 31
                                                      2013         2012         2011
                                                               (in millions)
  Property and casualty insurance                    $ 3,072      $ 2,040      $ 2,157
  Corporate and other                                   (237 )       (237 )       (246 )

  Consolidated operating income before income tax      2,835        1,803        1,911
  Federal and foreign income tax                         751          383          420

  Consolidated operating income                        2,084        1,420        1,491
  Realized investment gains after income tax             261          125          187

  Consolidated net income                            $ 2,345      $ 1,545      $ 1,678


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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:



                                                                Years Ended December 31
                                                          2013            2012            2011
                                                                     (in millions)
Underwriting
Net premiums written                                    $ 12,224        $ 11,870        $ 11,758
Increase in unearned premiums                               (158 )           (32 )          (114 )

Premiums earned                                           12,066          11,838          11,644

Losses and loss expenses                                   6,520           7,507           7,407
Operating costs and expenses                               3,893           3,756           3,695
Increase in deferred policy acquisition costs                (59 )            (3 )           (63 )
Dividends to policyholders                                    37              30              31

Underwriting income                                        1,675             548             574

Investments
Investment income before expenses                          1,436           1,518           1,598
Investment expenses                                           45              36              36

Investment income                                          1,391           1,482           1,562

Other income                                                   6              10              21

Property and casualty income before tax                 $  3,072        $  2,040        $  2,157

Property and casualty investment income after tax       $  1,138        $  1,204        $  1,265

Property and casualty income before tax was higher in 2013 than in 2012, due to substantially higher underwriting income, offset in part by a decline in investment income. The increase in underwriting income in 2013 was primarily attributable to a substantially lower impact of catastrophes and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. Property and casualty income before tax in 2012 was modestly lower than in 2011, due primarily to a decrease in investment income. Underwriting income was similar in 2012 and 2011.

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 Operations

Underwriting Results

We evaluate the underwriting results of our property and casualty insurance business in the aggregate and for each of our business units.

Net Premiums Written

Net premiums written were $12.2 billion in 2013, $11.9 billion in 2012 and $11.8
billion in 2011. Net premiums written by business unit were as follows:



                                                           Years Ended December 31
                                                                                     % Increase
                                              % Increase                             (Decrease)
                             2013           2013 vs.  2012           2012           2012 vs. 2011           2011
                                                            (dollars in millions)
Personal insurance         $  4,322                      5%        $  4,125                     4%        $  3,977
Commercial insurance          5,273                     2             5,174                    2             5,051
Specialty insurance           2,633                     3             2,568                   (6)            2,720

Total insurance              12,228                     3            11,867                    1            11,748
Reinsurance assumed              (4 )                   *                 3                    *                10

Total                      $ 12,224                     3          $ 11,870                    1          $ 11,758

* The change in net premiums written is not presented for this business unit since it is in runoff.

Net premiums written increased by 3% in 2013 compared with 2012 and 1% in 2012 compared with 2011. Net premiums written in the United States, which in 2013 represented 75% of our total net premiums, increased by 4% in 2013 and 2% in 2012 compared with the respective prior year. Net premiums written outside the United States, expressed in U.S. dollars, were flat in 2013 and decreased by 3% in 2012. In both 2013 and 2012, foreign currency translation had a negative impact on growth of net premiums written outside the United States, reflecting the impact of the stronger U.S. dollar relative to several currencies in which we wrote business in each year compared to the respective prior year. Measured in local currencies, net premiums written outside the United States grew modestly in 2013 and grew slightly in 2012. The countries outside the United States which were significant contributors to net premiums written in recent years were the United Kingdom, Canada, Brazil, Australia and Germany.

We classify business as written in the United States or outside the United States based on the location of the risks 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.

Growth in net premiums written in the United States in 2013 occurred in each segment of our insurance business, with the most significant growth occurring in our personal insurance segment. Net premiums written in the United States increased modestly in our commercial insurance segment as well as in our specialty insurance segment, of which the predominant component is our professional liability business. Growth in our personal insurance segment 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 segment and our professional liability business, 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.

Net premiums written in the United States increased in 2012 as a result of growth in our personal and commercial insurance segments. Net premiums written in the United States for our specialty insurance segment decreased in 2012. 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. While the pricing environment was positive during 2012 in both the commercial and


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professional liability classes, continuing a trend that began during 2011, the positive trend had a more significant impact on growth in our commercial insurance business.

Premium growth in our professional liability business remained constrained in 2012 by the continuing effects of the economic downturn and our focus on rate adequacy and profitability in the highly competitive marketplace.

Average renewal rates for our personal insurance business in the United States were up modestly in 2013 and up slightly in 2012 compared with expiring rates, driven in both years by our homeowners business. We continued to retain a high percentage of our customers in both years.

Overall, average renewal rates in 2013 and 2012 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 2013 and flat in 2012 compared with the respective prior year. We continued to retain a high percentage of our existing business in our commercial and professional liability classes in both years. Renewal retention levels in our commercial insurance business were similar in 2013 and 2012 but lower than those in 2011. Renewal retention levels in our professional liability business were slightly higher in 2013 after declining in 2012. Renewal retention levels reflected our continued efforts 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 was down in our commercial insurance business in 2013 and 2012 compared with the respective prior year. New business was up modestly in our professional liability business in 2013 after declining in 2012. The levels of new business reflected the competitive market as well as our underwriting discipline.

Net premiums written outside the United States were flat in 2013, as modest growth in our specialty insurance segment was offset by a slight decrease in our personal insurance segment, due to the negative effect of foreign currency translation. Net premiums written in our commercial insurance segment were flat.

Net premiums written outside the United States decreased modestly in 2012, as slight growth in our personal insurance segment was more than offset by decreases in our commercial and specialty insurance segments. The lack of growth in our business outside the United States was primarily due to a lower level of new business in a weak rate environment for commercial and specialty insurance products and, to a lesser extent, the negative impact of foreign currency translation.

Average renewal rates for our personal insurance business outside the United States were modestly higher in 2013 and close to flat in 2012 compared with expiring rates. We continued to retain a high percentage of our customers in both years.

Overall, average renewal rates outside the United States were up slightly in 2013 and 2012 in both the commercial and professional liability components of our business in comparison to expiring rates. The amounts of coverage purchased or the insured exposures were down modestly in our commercial business in 2013 and remained flat in 2012 compared with the respective prior year. For our professional liability business, the amounts of coverage purchased were down modestly in both years. We continued to retain a high percentage of our existing commercial and professional liability business in both years. Retention levels in 2013, as compared with 2012, were similar in our commercial insurance business, but increased modestly in our professional liability business. Renewal retention levels for both our commercial and professional liability business were lower in 2012 than those in 2011. In 2013, the overall level of new business was up slightly in our commercial insurance business but down in the professional liability business compared with 2012. The overall level of new business was down in 2012 compared with 2011 for both our commercial and professional liability business.

The reinsurance assumed business has been in runoff since the sale of our ongoing reinsurance assumed business in 2005. Most of our insurance policies are . . .

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