Annual Report 2005 - Chubb Group of Insurance Companies

In establishing toxic waste reserves, the exposure strengthening of loss reserves for commercial excess
presented by each insured is evaluated. As part of this umbrella and other commercial liability classes. There
evaluation, consideration is given to the probable liability, was signiÑcant reported loss activity during 2005 related
available insurance coverage, judicial interpretations, past to these older accident years, which resulted in a lengthsettlement
values of similar exposures as well as facts that ening of the expected loss emergence period for these
are unique to each insured.
classes. Favorable development of about $160 million was
A reconciliation of the beginning and ending liability experienced due to fewer than expected late reported
for unpaid losses and loss expenses, net of reinsurance homeowners and commercial property losses. Favorable
recoverable, and a reconciliation of the net liability to the development of about $90 million was experienced in the
corresponding liability on a gross basis is as follows: Ñdelity and surety classes due to lower than expected
2005 2004 2003 reported loss emergence.
(in millions) The net unfavorable development of $326.9 million in
Gross liability, beginning of year ÏÏÏ $20,291.9 $17,947.8 $16,713.1 2004 was also the result of various factors. Unfavorable
Reinsurance recoverable,
beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏ 3,483.2 3,426.6 4,071.5 development of about $415 million was experienced in the
Net liability, beginning of year ÏÏÏÏ 16,808.7 14,521.2 12,641.6 professional liability classes, principally directors and officers
liability and errors and omissions liability, resulting
Net incurred losses and loss
expenses related to
from adverse loss trends in accident years 1998 through
Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,650.8 6,994.0 6,469.9 2002 due in large part to claims related to corporate
Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162.7 326.9 397.3
failures and allegations of management misconduct and
7,813.5 7,320.9 6,867.2
accounting irregularities, especially those involving invest-
Net payments for losses and loss
expenses related to
ment banks and other financial institutions. Unfavorable
Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,878.4 1,691.4 1,588.8 development of about $185 million was experienced re-
Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,031.3 3,342.0 3,398.8 lated to accident years prior to 1995, including $75 million
5,909.7 5,033.4 4,987.6 related to asbestos claims. Loss reserves were strengthened
Net liability, end of yearÏÏÏÏÏÏÏÏ 18,712.5 16,808.7 14,521.2 for certain commercial liability classes. Unfavorable devel-
Reinsurance recoverable,
end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,769.2 3,483.2 3,426.6 opment of about $50 million was experienced in the
workers' compensation class due primarily to higher aver-
Gross liability, end of year ÏÏÏÏÏÏ $22,481.7 $20,291.9 $17,947.8
age severity of the medical portion of these claims.
The gross liability for unpaid losses and loss expenses
Favorable development of about $270 million was experand
reinsurance recoverable included $966.9 million and
ienced related to the 2003 accident year, due in large part
$755.8 million, respectively, at December 31, 2005 reand
commercial property losses. Favorable development of
to an unusually low amount of late reported homeowners
lated to Hurricane Katrina. The gross liability for unpaid
losses and loss expenses and reinsurance recoverable
$80 million was experienced due to a reduction in loss
included $412.9 million and $353.8 million, respectively,
reserves related to the September 11 attack.
at December 31, 2005, $700.5 million and $582.1 mil- The unfavorable development in 2003 was due primarily
lion, respectively, at December 31, 2004, and $999.3 mil- to two factors. First, asbestos loss reserves were strengthlion
and $748.2 million, respectively, at December 31, ened by $250 million. Second, unfavorable development of
2003 related to the September 11, 2001 attack. about $140 million was experienced in the professional
Because loss reserve estimates are subject to the outcome liability classes, principally directors and officers liability and
of future events, changes in estimates are unavoidable given errors and omissions liability, as adverse loss trends in the
that loss trends vary and time is required for changes in 2000 through 2002 accident years more than offset
trends to be recognized and confirmed. During 2005, the favorable loss experience in older accident years.
P&C Group experienced overall unfavorable development Management believes that the aggregate loss reserves
of $162.7 million on net unpaid losses and loss expenses of the P&C Group at December 31, 2005 were adequate
established as of the previous year end. This compares with to cover claims for losses that had occurred, including
unfavorable prior year development of $326.9 million in both those known and those yet to be reported. In
2004 and $397.3 million in 2003. Such adverse development establishing such reserves, management considers facts
was reflected in operating results in these respective years. currently known and the present state of the law and
The net unfavorable development of $162.7 million in coverage litigation. However, given the judicial decisions
2005 was due to various factors. Unfavorable develop- and legislative actions that have broadened the scope of
ment of about $200 million was experienced in the coverage and expanded theories of liability in the past
professional liability classes other than Ñdelity. Adverse and the possibilities of similar interpretations in the
development related to accident years 1998 through future, particularly as they relate to asbestos claims and,
2002, due largely to errors and omissions liability claims to a lesser extent, toxic waste claims, it is possible that
related to corporate failures and allegations of manage- management's estimate of the ultimate liability for losses
ment misconduct and accounting irregularities, was oÅset that occurred as of December 31, 2005 may increase in
in part by favorable development related to accident future periods. Such increases in estimates could have a
years 2003 and 2004. Unfavorable development of about material adverse eÅect on the Corporation's future oper-
$175 million was experienced related to accident years ating results. However, management does not expect that
prior to 1996, including $35 million related to asbestos any such increases would have a material adverse eÅect
claims. The adverse development was due largely to the on the Corporation's consolidated Ñnancial condition.
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