Annual Report 2005 - Chubb Group of Insurance Companies

Transfer of Ongoing Reinsurance Assumed Business
In December 2005, we completed a transaction involving a new Bermuda-based reinsurance
company, Harbor Point Limited. As part of the transaction, we transferred our continuing reinsurance
assumed business and certain related assets, including renewal rights, to Harbor Point. In exchange, we
received from Harbor Point $200 million of 6% convertible notes and warrants to purchase common
stock of Harbor Point. The notes and warrants represent in the aggregate on a fully diluted basis
approximately 16% of the new company.
Harbor Point generally did not assume our reinsurance liabilities relating to reinsurance contracts
incepting prior to December 31, 2005. We retained those liabilities and the related assets.
Other than pursuant to certain arrangements entered into with Harbor Point, we generally will no
longer engage directly in the reinsurance assumed business. However, Harbor Point will have the right
for a transition period of up to two years to underwrite speciÑc reinsurance business on our behalf. We
will retain a portion of any such business and will cede the balance to Harbor Point in return for a
fronting commission.
The transaction resulted in a pre-tax gain of $204 million, of which $171 million was recognized as
a realized investment gain in 2005. The remaining gain of $33 million was deferred and will be
recognized based on the timing of the ultimate disposition of our economic interest in Harbor Point.
We will receive additional payments over the next two years based on the amount of business
renewed by Harbor Point, which will be recognized as realized investment gains when earned.
Regulatory Developments
To promote and distribute our insurance products, we rely on a large network of independent
brokers and agents. Accordingly, our business is dependent on the willingness of these brokers and
agents to recommend our products to their customers. We have agreements in place with insurance
brokers under which we agree to pay commissions that are contingent on the volume and/or the
proÑtability of business placed with us. We also have in place contingent commission arrangements
with agents who are appointed by us to sell our insurance.
The New York Attorney General and other regulators have commenced investigations with
respect to potential conÖicts of interest and anti-competitive behavior arising from the payment of
contingent commissions to brokers and agents. In connection with these investigations, we have
received subpoenas and requests for information from the Attorneys General of several states, as well
as from various states' insurance regulators. We are cooperating, and intend to continue to cooperate,
fully with these investigations.
As a result of these investigations, in certain instances, brokers and agents and, in at least one case,
a major insurance carrier have entered into settlement agreements with such regulators. Among other
things, these agreements prohibit the acceptance or payment, as applicable, of contingent commissions
for some or all lines of business. Several other brokers and some agents have voluntarily eliminated the
practice of receiving contingent compensation from insurers. Other industry participants may make
similar or diÅerent determinations in the future. In addition, a number of states have announced that
they are looking at compensation arrangements and considering regulatory action or reform in this
area. The rules that would be imposed if these actions or reforms were adopted range in nature from
disclosure requirements to prohibition of certain forms of compensation to imposition of new duties on
insurance agents, brokers or carriers in dealing with customers. These or other developments may
require changes to market practices relative to contingent commissions. Changes to the manner in
which we interact with and compensate insurance brokers and agents could have a material adverse
impact on our ability to renew business or write new business, which, in turn, could have a material
adverse impact on our results of operations.
Certain regulators also have commenced investigations into certain loss mitigation and Ñnite
reinsurance arrangements in the property and casualty insurance industry. In connection with these
investigations, we have received subpoenas and requests for information from various regulators
including the U.S. Securities and Exchange Commission and the U.S. Attorney for the Southern
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