Annual Report 2005 - Chubb Group of Insurance Companies

The writedowns of Ñxed maturities in 2003 were primarily due to collateral deterioration of
several asset-backed securities and price declines of a few corporate credits in the airline and energy
sectors.
Information related to investment securities in an unrealized loss position at December 31, 2005
and 2004 is included in Note (3)(b) of the Notes to Consolidated Financial Statements.
INCOME TAXES
We establish deferred income taxes on the undistributed earnings of foreign subsidiaries.
Similarly, we establish deferred tax assets related to the expected future U.S. tax beneÑt of losses and
foreign taxes incurred by our foreign subsidiaries. To evaluate the realization of the future tax beneÑt
of these deferred tax assets, management must consider whether it is more likely than not that
suÇcient taxable income will be generated. Management's judgment is based on its assessment of
business plans and related projections of future taxable income as well as available tax planning
strategies. The tax loss carryforwards and foreign tax credits have no expiration. However, we are
required under generally accepted accounting principles to consider a relatively near term horizon
when we evaluate the likelihood of realizing future tax beneÑts.
During the years 2000 through 2002, Chubb Insurance Company of Europe (Chubb Europe)
incurred substantial losses. During 2002, we established a valuation allowance of $40 million for the
portion of deferred income tax assets related to the expected future U.S. tax beneÑt of the losses and
foreign taxes incurred by Chubb Europe that we could not recognize for accounting purposes due to
the requirement to evaluate realization over a near term horizon. Due to proÑtable results in Chubb
Europe during 2003, we concluded that it was more likely than not that the deferred tax assets would
be realized over a near term horizon and we eliminated the valuation allowance.
In connection with the sale of a subsidiary a number of years ago, we agreed to indemnify the
buyer for certain pre-closing tax liabilities. During the Ñrst quarter of 2005, we settled this obligation
with the purchaser. As a result, we reduced our income tax liability, which resulted in the recognition
of a beneÑt of $22 million.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall Ñnancial strength of the Corporation and its
ability to generate cash Öows from its operating subsidiaries, borrow funds at competitive rates and
raise new capital to meet operating and growth needs.
Capital Resources
Capital resources provide protection for policyholders, furnish the Ñnancial strength to support
the business of underwriting insurance risks and facilitate continued business growth. At December 31,
2005, the Corporation had shareholders' equity of $12.4 billion and total debt of $2.5 billion.
In 2002, Chubb issued $600 million of unsecured 4% senior notes due in 2007 and 24 million
mandatorily exercisable warrants to purchase its common stock. The notes and warrants were issued
together in the form of 7% equity units, each of which initially represented $25 principal amount of
notes and one warrant. In August 2005, the notes were successfully remarketed as required by their
terms. The interest rate on the notes was reset to 4.934%, eÅective August 16, 2005. The remarketed
notes mature on November 16, 2007. Each warrant obligated the holder to purchase, on or before
November 16, 2005, for a settlement price of $25, a variable number of shares of Chubb's common
stock. The number of shares purchased was determined based on a formula that considered the market
price of Chubb's common stock immediately prior to the time of settlement in relation to the
$56.64 per share sale price of the common stock at the time the equity units were oÅered. Upon
settlement of the warrants, Chubb issued 8,683,117 shares of common stock and received proceeds of
$600 million.
In June 2003, Chubb issued $460 million of unsecured 2.25% senior notes due in 2008 and
18.4 million purchase contracts to purchase its common stock. The notes and purchase contracts
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