Annual Report 2005 - Chubb Group of Insurance Companies

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of SigniÑcant Accounting Policies Premiums and discounts arising from the purchase of (a) Basis of Presentation mortgage-backed securities are amortized using the interest method over the estimated remaining term of the The Chubb Corporation (Chubb) is a holding com- securities, adjusted for anticipated prepayments. pany with subsidiaries principally engaged in the property and casualty insurance business. The property and Equity securities include common stocks, non-redeemcasualty insurance subsidiaries (the P&C Group) under- able preferred stocks and private equity limited partnerwrite most lines of property and casualty insurance in the ships. Common and non-redeemable preferred stocks are United States, Canada, Europe, Australia and parts of carried at market value as of the balance sheet date. Latin America and Asia. The geographic distribution of Limited partnerships are carried at the Corporation's property and casualty business in the United States is equity in the estimated fair value of the investments held broad with a particularly strong market presence in the by the partnerships. Northeast. Unrealized appreciation or depreciation of investments Chubb Financial Solutions (CFS) was organized in carried at market value is excluded from net income and 2000 to develop and provide customized risk-Ñnancing credited or charged, net of applicable deferred income services through both the capital and insurance markets. tax, directly to a separate component of comprehensive CFS's non-insurance business was primarily structured income. Changes in the Corporation's equity in the credit derivatives, principally as a counterparty in portfolimited partnerships are included in income as realized lio credit default swaps. In the second quarter of 2003, investment gains or losses. the Corporation implemented a plan to exit the credit derivatives business and is running oÅ the Ñnancial prod- Realized gains and losses on the sale of investments are ucts portfolio of CFS. determined on the basis of the cost of the speciÑc The accompanying consolidated Ñnancial statements investments sold and are credited or charged to income. have been prepared in accordance with U.S. generally When the market value of any investment is lower than accepted accounting principles and include the accounts its cost, an assessment is made to determine whether the of Chubb and its subsidiaries (collectively, the Corporadecline is deemed to be other-than-temporary, the invest- decline is temporary or other-than-temporary. If the tion). SigniÑcant intercompany transactions have been eliminated in consolidation. ment is written down to market value and the amount of the writedown is charged to income as a realized invest- The consolidated Ñnancial statements include amounts ment loss. The market value of the investment becomes based on informed estimates and judgments of manage- its new cost basis. ment for those transactions that are not yet complete. Such estimates and judgments aÅect the reported The Corporation engages in a securities lending proamounts of assets and liabilities and disclosure of contin- gram to generate additional income, whereby certain gent assets and liabilities at the date of the Ñnancial securities from its portfolios are loaned to other institustatements and the reported amounts of revenues and tions for short periods of time. The Corporation's policy expenses during the reporting period. Actual results is to require initial collateral equal to at least 102% of the could diÅer from those estimates. market value of the loaned securities. In those instances where cash collateral is obtained from the borrower, the Certain amounts in the consolidated Ñnancial statecollateral is invested by the lending agent in accordance ments for prior years have been reclassiÑed to conform with the Corporation's guidelines. The cash collateral is with the 2005 presentation. recognized as an asset with a corresponding liability for (b) Invested Assets the obligation to return the collateral. In instances where non-cash collateral is obtained from the borrower, the Short term investments, which have an original matureral held by the lending agent or the obligation to return Corporation does not recognize the receipt of the collatity of one year or less, are carried at amortized cost, which approximates market value. the collateral as there exists no right to sell or repledge the collateral. The Corporation retains a portion of the Fixed maturities, which include bonds and redeemable income earned from the cash collateral or receives a fee preferred stocks, are purchased to support the invest- from the borrower. Under the terms of the securities ment strategies of the Corporation. These strategies are lending program, the lending agent indemniÑes the Cordeveloped based on many factors including rate of re- poration against borrower defaults. The Corporation turn, maturity, credit risk, tax considerations and regula- maintains eÅective control over securities loaned and tory requirements. Fixed maturities that may be sold therefore continues to report such securities as invested prior to maturity to support the investment strategies of assets. The market value of the loaned securities was the Corporation are classiÑed as available-for-sale and $2,801.2 million and $1,805.5 million at December 31, carried at market value as of the balance sheet date. 2005 and 2004, respectively. Of these amounts, Those Ñxed maturities that the Corporation has the $2,511.4 million and $1,798.0 million, respectively, comability and positive intent to hold to maturity are classi- prised available-for-sale Ñxed maturities and the balance Ñed as held-to-maturity and carried at amortized cost. comprised equity securities. F-7
(c) Premium Revenues and Related Expenses Insurance premiums are earned on a monthly pro rata basis over the terms of the policies and include estimates of audit premiums and premiums on retrospectively rated policies. Assumed reinsurance premiums are earned over the terms of the reinsurance contracts. Unearned premiums represent the portion of direct and assumed premiums written applicable to the unexpired terms of the insurance policies and reinsurance contracts in force. Ceded reinsurance premiums are charged to income over the terms of the reinsurance contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement premiums are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Acquisition costs that vary with and are primarily related to the production of business are deferred and amortized over the period in which the related premiums are earned. Such costs include commissions, premium taxes and certain other underwriting and policy issuance costs. Commissions received related to reinsurance premiums ceded are considered in determining net acquisition costs eligible for deferral. Deferred policy acquisition costs are reviewed to determine whether they are recoverable from future income. If such costs are deemed to be unrecoverable, they are expensed. Anticipated investment income is considered in the determination of the recoverability of deferred policy acquisition costs. (d) Unpaid Losses and Loss Expenses Unpaid losses and loss expenses (also referred to as loss reserves) include the accumulation of individual case estimates for claims that have been reported and estimates of claims that have been incurred but not reported as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Loss reserves are not discounted to present value. Reinsurance recoverable on unpaid losses and loss expenses represents an estimate of the portion of gross loss reserves that will be recovered from reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the gross losses associated with the reinsured policies. A provision for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers, changes in the credit standing of the reinsurers, coverage disputes and other relevant factors. Estimates are based upon past loss experience modiÑed for current trends as well as prevailing economic, legal and social conditions. Such estimates are regularly reviewed and updated. Any changes in estimates are re- Öected in operating results in the period in which the estimates are changed. (e) Financial Products Credit derivatives, principally portfolio credit default swaps, are carried at estimated fair value as of the balance sheet date. Changes in fair value are recognized in income in the period of the change and are included in other revenues. Assets and liabilities related to the credit derivatives are included in other assets and other liabilities. (f) Real Estate Real estate properties are carried at cost less accumu- lated depreciation and any writedowns for impairment. Real estate taxes, interest and other carrying costs incurred prior to completion of the assets for their in- tended use are capitalized. Also, costs incurred during the initial leasing of income producing properties are capitalized until the project is substantially complete, subject to a maximum time period subsequent to completion of major construction activity. Real estate properties are reviewed for impairment whenever events or circumstances indicate that the carrying value of such properties may not be recoverable. In performing the review for recoverability of carrying value, estimates are made of the future undiscounted cash Öows from each of the properties during the period the property will be held and upon its eventual disposi- tion. If the expected future undiscounted cash Öows are less than the carrying value of any property, an impairment loss is recognized, resulting in a writedown of the carrying value of the property. Measurement of such impairment is based on the fair value of the property. Rental revenues are recognized on a straight-line basis over the term of the lease. ProÑts on land, residential unit and commercial building sales are recognized at closing, subject to compliance with applicable accounting guidelines. (g) Investment in Partially Owned Company Investment in partially owned company includes the Corporation's 19% interest in a corporate joint venture, Allied World Assurance Holdings, Ltd. The equity method of accounting is used for this investment. (h) Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets of entities acquired. Goodwill is tested for impairment at least annually. F-8
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 82 and 83: The above table also excludes estim
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 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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