Annual Report 2005 - Chubb Group of Insurance Companies

Our specialty insurance business produced modestly proÑtable underwriting results in 2005
compared with unproÑtable results in 2004 and 2003. The combined loss and expense ratios for the
classes of business within specialty insurance were as follows:
Years Ended December 31
2005 2004 2003
Professional liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99.8% 112.0% 108.4%
Surety ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62.9 57.2 39.0
Total specialty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97.3% 108.2% 103.9%
Our professional liability business improved substantially in 2005, producing near breakeven
results compared with the highly unproÑtable results in 2004 and 2003. Results have begun to beneÑt
from the cumulative eÅect of price increases, lower policy limits and better terms and conditions in
recent years. Results in all three years, but more so in 2004 and 2003, were adversely aÅected by
unfavorable loss development related to accident years 2002 and prior, particularly in the errors and
omissions class. The adverse development was predominantly from claims that have arisen due to
corporate failures and allegations of management misconduct and accounting irregularities. Results
were particularly unproÑtable in 2004 due to an increase of about $160 million in errors and omissions
liability loss reserves in the second quarter related to investment banks. The Ñdelity component of our
professional liability business was highly proÑtable in each of the past three years due to favorable loss
experience.
Our surety business produced highly proÑtable results in each of the past three years due to
favorable loss experience.
Our surety business tends to be characterized by infrequent but potentially high severity losses.
We continue to manage our exposure on an absolute basis and by speciÑc bond type. The majority of
our obligations are intended to be performance-based guarantees. When losses occur, they are
mitigated, at times, by the customer's balance sheet, contract proceeds, collateral and bankruptcy
recovery.
We continue to have substantial commercial and construction surety exposure for current and
prior customers. In that regard, we have exposures related to surety bonds issued on behalf of
companies that have experienced deterioration in creditworthiness since we issued bonds to them. We
therefore may experience an increase in Ñled claims and may incur high severity losses. Such losses
would be recognized if and when claims are Ñled and determined to be valid, and could have a material
adverse eÅect on the Corporation's results of operations and liquidity.
Reinsurance Assumed
Our reinsurance assumed business is treaty reinsurance, primarily casualty reinsurance. Premiums
from our reinsurance assumed business, which represented 7% of our net premiums written in 2005,
decreased by 21% in 2005 compared with a 16% increase in 2004. Premiums in 2005 included net
reinsurance reinstatement premium revenue of $43 million related to Hurricane Katrina. The signiÑcant
decrease in premiums in 2005 was in line with our expectations as we had anticipated fewer
attractive opportunities in the reinsurance market.
Our reinsurance assumed business was proÑtable in 2005, 2004 and 2003. The combined loss and
expense ratio for this business was 96.1%, 94.3% and 93.6% in 2005, 2004 and 2003, respectively. The
impact of catastrophes accounted for 5.2 percentage points of the combined loss and expense ratio in
2005 and 2.2 percentage points in 2004. Catastrophe losses were not signiÑcant in 2003.
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