Annual Report 2005 - Chubb Group of Insurance Companies

the year, the fair value of our obligations related to these two swaps increased by $70 million. Then, in
the fourth quarter, CFS paid $50 million to terminate the two asset-backed portfolio credit default
swaps and simultaneously entered into a new contract under which CFS guaranteed principal and
interest obligations on a notional amount of referenced securities. CFS established a liability of
$186 million related to the new principal and interest contract, which represented the estimated fair
value of the guarantee at its inception. At the same time, CFS eliminated the carried liability of
$140 million on the two swaps that were terminated. The aggregate loss in the fourth quarter related to
the termination of the two swaps was $96 million. The losses during 2003 related to these two assetbacked
swaps were partially oÅset by mark-to-market gains on our corporate credit default swaps.
The loss in 2004 was primarily related to the termination during the year of CFS's obligations
under several portfolio credit default swaps.
The loss in 2005 was due to the termination of the principal and interest guarantee contract. CFS
paid the counterparty $198 million to terminate the contract, at which time the $186 million liability
was eliminated. The loss related to the termination of this contract was partially oÅset by gains on the
termination during the period of CFS's obligations under certain portfolio credit default swaps.
Revenues from the non-insurance business of CFS, primarily consisting of the change in fair value
of derivatives contracts, were virtually nil in 2005 and 2004 and negative $62 million in 2003. Revenues
were negative in 2003 due to the adverse impact of changes in fair value and the impact of the
agreement to terminate the two asset-backed portfolio credit default swaps and replace them with a
principal and interest guarantee.
CFS's aggregate exposure, or retained risk, from each of its in-force portfolio credit default swaps
is referred to as notional amount. Notional amounts are used to express the extent of involvement in
swap transactions. These amounts are used to calculate the exchange of contractual cash Öows and are
not necessarily representative of the potential for gain or loss. The notional amounts are not recorded
on the balance sheet.
During each of the past three years, CFS terminated certain portfolio credit default swaps with
the original counterparties at negotiated settlement amounts. CFS also entered into credit default
swaps with third parties that eÅectively oÅset existing credit default swaps. As of December 31, 2005,
the notional amount of such oÅsetting credit default swaps was approximately $1.5 billion.
The notional amount of CFS's credit default swaps was $1.0 billion at December 31, 2005. Our
realistic loss exposure is a very small portion of the $1.0 billion notional amount as our position is
senior to subordinated interests of $537 million in the aggregate. In addition, using our internal ratings
models, we estimate that the credit ratings of the individual portfolio credit default swaps at
December 31, 2005 were AAA.
In addition to portfolio credit default swaps, CFS entered into a derivative contract linked to an
equity market index that terminates in 2012 and a few other insigniÑcant non-insurance transactions.
The notional amount and fair value of our future obligations under derivative contracts by type of
risk were as follows:
December 31
Notional
Amount Fair Value
2005 2004 2005 2004
(in billions) (in millions)
Credit default swaps
Corporate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.2 $1.3 $1 $5
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .8 7.4 1 9
1.0 8.7 2 14
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .3 .3 7 8
$1.3 $9.0 $9 $22
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