Annual Report 2001 - Chubb Group of Insurance Companies

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than temporary, the diÅerence between cost and estimated fair value is charged to income as a realized investment loss. ties and land parcels under lease. We are continuing to explore the sale of certain of our remaining properties. In 2001, realized gains on sales of equity securities and Ñxed maturities of $46 million and $34 million, respectively, were substantially oÅset by writedowns due to the Loans receivable, which amounted to $98 million at December 31, 2001, are primarily purchase money mortgages. Such loans, which were issued in connection with our joint venture activities and other property sales, are generally collateralized by buildings and, in some recognition of other than temporary impairment on cases, land. We continually evaluate the ultimate collec- certain securities. Sales of equity securities in 1999 tibility of such loans and establish appropriate reserves. resulted in net realized investment gains due primarily to the signiÑcant appreciation in United States equity The recoverability of the carrying value of our real estate markets. A primary reason for the sale of Ñxed assets is assessed based on our ability to fully recover maturities in each of the last three years has been to costs through a future revenue stream. The assumptions improve our after-tax portfolio return without sacriÑcing used reÖect a continued improvement in demand for quality where market opportunities have existed to do oÇce space, an increase in rental rates and the ability so. and intent to obtain Ñnancing in order to hold and develop such remaining properties and protect our Fixed maturity securities which the Corporation and its interests over the long term. Management believes that it insurance subsidiaries have the ability and intent to hold has made adequate provisions for impairment of real to maturity are classiÑed as held-to-maturity. The estate assets. However, if the assets are not sold or remaining Ñxed maturities, which may be sold prior to developed as presently contemplated, it is possible that maturity to support our investment strategies, such as in additional impairment losses may be recognized. response to changes in interest rates and the yield curve Investment Gains and Losses or to maximize after-tax returns, are classiÑed as available-for-sale. Fixed maturities classiÑed as held-to-maturity Net investment gains realized by the Corporation and its are carried at amortized cost, while Ñxed maturities property and casualty subsidiaries were as follows: classiÑed as available-for-sale are carried at market value. Years Ended December 31 2001 2000 1999 (in millions) Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $(1) $63 Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) 8 24 At December 31, 2001, 8% of the Ñxed maturity portfolio was classiÑed as held-to-maturity compared with 10% at December 31, 2000 and 12% at December 31, 1999. Sale of AAU ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 45 Ì The unrealized appreciation or depreciation of investments Realized investment gains before tax ÏÏÏÏÏÏÏÏ $ 1 $52 $87 carried at market value, which includes equity Realized investment gains after taxÏÏÏÏÏÏÏÏÏÏ $ 1 $34 $56 securities and Ñxed maturities classiÑed as available-forsale, is reÖected in a separate component of other Decisions to sell securities are governed principally by comprehensive income, net of applicable deferred considerations of investment opportunities and tax income tax. consequences. Thus, realized investment gains and losses on the sale of investments may vary signiÑcantly from The unrealized market appreciation before tax of those year to year. Ñxed maturities carried at amortized cost was $64 million, $69 million and $59 million at December 31, 2001, We periodically review the value of our invested assets 2000 and 1999, respectively. Such unrealized appreciafor other than temporary impairment. If a decline in the tion was not reÖected in the consolidated Ñnancial fair value of an individual security is deemed to be other statements. 38
Changes in unrealized market appreciation or depreciation of Ñxed maturities were due primarily to Öuctuations in interest rates. 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 exposes the Corporation and its property and casualty subsidiaries to risks related to 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 credit derivatives business and our debt obligations. Analytical tools and monitoring systems are in place to assess each of these elements of market risk. INVESTMENTS guidelines established by management and approved by the boards of directors. The main objectives in managing the investment portfolios of the Corporation and its property and casualty subsidiaries 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 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 and its property and casualty subsidiaries. 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, 2001 and 2000. 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, 2001 Total Estimated There- Amortized Market 2002 2003 2004 2005 2006 after Cost Value (in millions) Tax-exempt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 753 $ 528 $ 826 $1,308 $ 737 $5,120 $ 9,272 $ 9,656 Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.2% 5.9% 5.8% 5.6% 5.5% 5.3% Ì Ì Taxable Ì other than mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 295 353 407 550 459 2,233 4,297 4,395 Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.5% 6.2% 6.5% 6.4% 6.4% 6.2% Ì Ì Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310 337 226 142 126 971 2,112 2,130 Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.1% 6.8% 6.4% 6.4% 6.5% 7.0% Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,358 $1,218 $1,459 $2,000 $1,322 $8,324 $15,681 $16,181 39
Page 1 and 2: THE CHUBB CORPORATION Annual Report
Page 3 and 4: Dean R. O’Hare, Chairman and Chie
Page 5 and 6: work in urban areas. Clearly, the a
Page 7 and 8: We will increase our presence in th
Page 9 and 10: • Our integrated 31-country branc
Page 11 and 12: DEFINING THE CHUBB BRAND Branding i
Page 13 and 14: CHUBB = GLOBAL REACH When you manuf
Page 15 and 16: CHUBB = THE MASTERPIECE POLICY Many
Page 17 and 18: CHUBB = STABILITY When the National
Page 19 and 20: CHUBB = FINANCIAL STRENGTH Protecti
Page 21 and 22: From southern Europe to Latin Ameri
Page 23 and 24: SUPPLEMENTARY FINANCIAL DATA Proper
Page 25 and 26: MANAGEMENT'S DISCUSSION AND ANALYSI
Page 27 and 28: The pre-tax costs of $645 million r
Page 29 and 30: the wake of heavy insurance industr
Page 31 and 32: a dramatic proliferation of water d
Page 33 and 34: underwriting results were proÑtabl
Page 35 and 36: In spite of the inherent imprecisio
Page 37 and 38: occurred, including both those know
Page 39: other marketable securities to prov
Page 43 and 44: At December 31, 2001 Total Estimate
Page 45 and 46: In November 2001, the Corporation s
Page 47 and 48: 1998 1997 1996 1995 1994 1993 1992
Page 49 and 50: 1998 1997 1996 1995 1994 1993 1992
Page 51 and 52: THE CHUBB CORPORATION Consolidated
Page 53 and 54: THE CHUBB CORPORATION Consolidated
Page 55 and 56: (d) Premium Revenues and Related Ex
Page 57 and 58: (3) Acquisitions and Dispositions (
Page 59 and 60: The change in unrealized appreciati
Page 61 and 62: Hazardous waste sites are another s
Page 63 and 64: (c) Interest costs of $55.0 million
Page 65 and 66: (13) Stock-Based Compensation Plans
Page 67 and 68: (14) Employee BeneÑts The weighted
Page 69 and 70: (17) Earnings Per Share Basic earni
Page 71 and 72: (19) Fair Values of Financial Instr
Page 73 and 74: In the event that any person or gro
Page 75 and 76: QUARTERLY FINANCIAL DATA Summarized
Page 77 and 78: CHUBB & SON, a division of Federal
Page 79 and 80: Subsidiaries Property and Casualty

Annual Report 2001 - Chubb Group of Insurance Companies

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