Annual Report 2005 - Chubb Group of Insurance Companies

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The above table also excludes estimated future cash Öows related to our carried loss reserves at December 31, 2005. There is typically no stated contractual commitment associated with property and casualty insurance loss reserves. The obligation to pay a claim arises only when a covered loss event occurs and a settlement is reached. The vast majority of our loss reserves relate to claims for which settlements have not yet been reached. Our loss reserves therefore represent estimates of future payments. These estimates are dependent on the outcome of future events. Accordingly, the payment of the loss reserves is not Ñxed as to either amount or timing. Our gross liability for unpaid losses and loss expenses was $22.5 billion at December 31, 2005. Of this $22.5 billion liability, we estimate that approximately $6.3 billion will be paid in 2006, an aggregate $6.8 billion will be paid in 2007 and 2008, and an aggregate $3.4 billion will be paid in 2009 and 2010. The estimate is based on our historical loss payment patterns. The ultimate amount and timing of loss payments will likely vary materially from our estimate. We expect that these loss payments will be funded, in large part, by future cash receipts from operations. The Corporation does not have any material oÅ-balance sheet arrangements, except as disclosed in Note (13) of the Notes to Consolidated Financial Statements. INVESTED ASSETS The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, regulatory requirements, Öuctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors. Our investment portfolio is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury and government agency, mortgage-backed securities and corporate issues as well as foreign bonds that support our international operations. In addition, the portfolio includes equity securities, primarily publicly traded common stocks and private equity limited partnerships, held with the objective of capital appreciation. In 2005, 2004 and 2003, we invested new cash in tax-exempt bonds and taxable bonds and, to a lesser extent, equity securities. In 2005, the taxable bonds we invested in were primarily mortgagebacked securities and corporate bonds. In 2004, the taxable bonds were primarily U.S. Treasury securities, foreign government bonds and corporate bonds. In 2003, the taxable bonds were primarily U.S. Treasury securities, mortgage-backed securities and foreign government bonds. Our objective is to achieve the appropriate mix of taxable and tax-exempt securities in our portfolio to balance both investment and tax strategies. At December 31, 2005, 52% of our Ñxed maturity portfolio was invested in tax-exempt bonds compared with 51% at December 31, 2004 and 2003. Fixed maturity securities that we have the ability and intent to hold to maturity are classiÑed as held-to-maturity. The remaining Ñxed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classiÑed as available-for-sale. Fixed maturities classiÑed as held-tomaturity are carried at amortized cost while Ñxed maturities classiÑed as available-for-sale are carried at market value. At December 31, 2005 and 2004, 1% of the Ñxed maturity portfolio was classiÑed as held-to-maturity compared with 2% at December 31, 2003. Changes in the general interest rate environment aÅect the returns available on new Ñxed maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing Ñxed maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new investments but 56
increases the market value of existing investments, creating the opportunity for realized investment gains on disposition. The unrealized appreciation before tax of investments carried at market value, which includes Ñxed maturities classiÑed as available-for-sale and equity securities, was $478 million, $961 million and $1,036 million at December 31, 2005, 2004 and 2003, respectively. Such unrealized appreciation is reÖected in a separate component of other comprehensive income, net of applicable deferred income tax. The unrealized market appreciation before tax of those Ñxed maturities carried at amortized cost was $11 million, $21 million and $35 million at December 31, 2005, 2004 and 2003, respectively. Such unrealized appreciation was not reÖected in the consolidated Ñnancial statements. Changes in unrealized market appreciation or depreciation of Ñxed maturities were due primarily to Öuctuations in interest rates. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the potential for loss due to adverse changes in the fair value of Ñnancial instruments. Our primary exposure to market risks relates to our investment portfolio, which is sensitive to changes in interest rates and, to a lesser extent, credit quality, prepayment, foreign currency exchange rates and equity prices. We also have exposure to market risks through our debt obligations. Analytical tools and monitoring systems are in place to assess each of these elements of market risk. Investment Portfolio Interest rate risk is the price sensitivity of a security that promises a Ñxed return to changes in interest rates. Changes in market interest rates directly aÅect the market value of our Ñxed income securities. We view the potential changes in price of our Ñxed income investments within the overall context of asset and liability management. Our actuaries estimate the payout pattern of our liabilities, primarily our property and casualty loss reserves, to determine their duration, which is the present value of the weighted average payments expressed in years. We set duration targets for our Ñxed income investment portfolios after consideration of the duration of these liabilities and other factors, which we believe mitigates the overall eÅect of interest rate risk for the Corporation. The following table provides information about our Ñxed maturity investments, which are sensitive to changes in interest rates. The table presents cash Öows of principal amounts and related weighted average interest rates by expected maturity dates at December 31, 2005 and 2004. The cash Öows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected payment patterns. Actual cash Öows could diÅer from the expected amounts. At December 31, 2005 Total Estimated There- Amortized Market 2006 2007 2008 2009 2010 after Cost Value (in millions) Tax-exempt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 742 $ 715 $ 942 $1,031 $1,092 $11,131 $15,653 $15,965 Average interest rate ÏÏÏÏÏÏÏÏ 5.5% 5.3% 5.1% 5.1% 4.8% 4.1% Ì Ì Taxable Ì other than mortgagebacked securities ÏÏÏÏÏÏÏÏÏÏÏÏ 912 1,261 1,415 1,659 1,257 3,662 10,166 10,267 Average interest rate ÏÏÏÏÏÏÏÏ 4.6% 4.5% 4.6% 4.4% 4.8% 5.0% Ì Ì Mortgage-backed securitiesÏÏÏÏÏ 411 446 704 579 539 1,671 4,350 4,302 Average interest rate ÏÏÏÏÏÏÏÏ 4.8% 4.6% 5.2% 4.7% 4.6% 4.9% Ì Ì TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,065 $2,422 $3,061 $3,269 $2,888 $16,464 $30,169 $30,534 57
Page 1 and 2:
THE CHUBB CORPORATION Annual Report
Page 3 and 4:
Letter to Shareholders John D. Finn
Page 5 and 6:
Letter to Shareholders John J. Degn
Page 7 and 8:
Letter to Shareholders With the imp
Page 9 and 10:
Letter to Shareholders • In Janua
Page 11 and 12:
Featured in this year’s report ar
Page 13 and 14:
California From the moment they dec
Page 15:
Pennsylvania Among acoustic guitari
Page 18 and 19:
Canada Ellen Moore, Canada Aglobal
Page 20 and 21:
Nebraska Timothy Szerlong, U.S. Nor
Page 22 and 23:
Employee Profiles Meet six Chubb ma
Page 24 and 25:
Chubb & Son, a division of Federal
Page 26 and 27:
The Chubb Corporation Directors Zo
Page 28 and 29:
CONTENTS ITEM DESCRIPTION PAGE PART
Page 30 and 31:
Indemnity), Executive Risk Specialt
Page 32 and 33: those reinsurers with strong balanc
Page 34 and 35: ANALYSIS OF LOSS AND LOSS ADJUSTMEN
Page 36 and 37: that is of value to the insured. Th
Page 38 and 39: Another area of potential regulatio
Page 40 and 41: However, there are inherent limitat
Page 42 and 43: Intense competition for our product
Page 44 and 45: Purported class actions arising out
Page 46 and 47: PART II. Item 5. Market for the Reg
Page 48 and 49: Item 7. Management's Discussion and
Page 50 and 51: ‚the eÅects of disclosures by, a
Page 52 and 53: PROPERTY AND CASUALTY INSURANCE A s
Page 54 and 55: Net premiums written by business un
Page 56 and 57: loss ratio. Losses from catastrophe
Page 58 and 59: premiums, multiple peril premiums w
Page 60 and 61: Our specialty insurance business pr
Page 62 and 63: District of New York. We are cooper
Page 64 and 65: Our loss reserves include signiÑca
Page 66 and 67: We regularly review the loss reserv
Page 68 and 69: theory, insurance coverage is deeme
Page 70 and 71: The following table presents the nu
Page 72 and 73: alance sheets and superior underwri
Page 74 and 75: On an after-tax basis, property and
Page 76 and 77: CORPORATE AND OTHER Corporate and o
Page 78 and 79: The writedowns of Ñxed maturities
Page 80 and 81: Ratings Chubb and its insurance sub
Page 84 and 85: At December 31, 2004 Total Estimate
Page 86 and 87: Item 8. Consolidated Financial Stat
Page 88 and 89: PART III. Item 10. Directors and Ex
Page 90 and 91: SIGNATURES Pursuant to the requirem
Page 92 and 93: THE CHUBB CORPORATION INDEX TO FINA
Page 94 and 95: THE CHUBB CORPORATION Consolidated
Page 96 and 97: THE CHUBB CORPORATION Consolidated
Page 98 and 99: NOTES TO CONSOLIDATED FINANCIAL STA
Page 100 and 101: In 2005, the Corporation transferre
Page 102 and 103: (b) The components of unrealized ap
Page 104 and 105: (7) Unpaid Losses and Loss Expenses
Page 106 and 107: In establishing toxic waste reserve
Page 108 and 109: (b) Interest costs of $134.8 millio
Page 110 and 111: (11) Stock-Based Employee Compensat
Page 112 and 113: The following table sets forth the
Page 114 and 115: (13) Commitments and Contingent Lia
Page 116 and 117: Revenues, income before income tax
Page 118 and 119: (17) Fair Values of Financial Instr
Page 120 and 121: In the event that any person or gro
Page 122 and 123: THE CHUBB CORPORATION Schedule I CO
Page 124 and 125: THE CHUBB CORPORATION Schedule II (
Page 126 and 127: THE CHUBB CORPORATION Schedule III
Page 128 and 129: Exhibit Number THE CHUBB CORPORATIO
Page 130 and 131: Exhibit Number Description 10.18 Am
Page 132 and 133:
Exhibit Number Description 10.44 Fo
Page 134 and 135:
Exhibit 23.1 THE CHUBB CORPORATION
Page 136 and 137:
Exhibit 31.2 I, Michael O'Reilly, c
Page 138 and 139:
Exhibit 32.2 CERTIFICATION OF PERIO
Page 140:
The Chubb Corporation • Annual Re
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Annual Report 2005 - Chubb Group of Insurance Companies

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