Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses the financial condition of the Corporation as of June 30,
2012 compared with December 31, 2011 and the results of operations for the six
months and three months ended June 30, 2012 and 2011. This discussion should be
read in conjunction with the condensed consolidated financial statements and
related notes contained in this report and the consolidated financial statements
and related notes and management's discussion and analysis of financial
condition and results of operations included in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2011.
Cautionary Statement Regarding Forward-Looking Information
Certain statements in this document are "forward-looking statements" as that
term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA).
These forward-looking statements are made pursuant to the safe harbor provisions
of the PSLRA and include statements regarding our loss reserve and reinsurance
recoverable estimates; the cost of our property reinsurance program in 2012;
market conditions in 2012, including premium volume, rate trends, the pricing
environment and competition; 2012 full year property and casualty investment
income; the value of our limited partnership investments in the third quarter of
2012; the repurchase of common stock under our share repurchase program; our
financial position, capital adequacy and funding of liquidity needs; and the
impact of a downgrade in our credit or financial strength ratings.
Forward-looking statements frequently can be identified by words such as
"believe," "expect," "anticipate," "intend," "plan," "will," "may," "should,"
"could," "would," "likely," "estimate," "predict," "potential," "continue," or
other similar expressions. Forward-looking statements are made based upon
management's current expectations and beliefs concerning trends and future
developments and their potential effects on us. These statements are not
guarantees of future performance. Actual results may differ materially from
those suggested by forward-looking statements as a result of risks and
uncertainties, which include, among others, those discussed or identified from
time to time in our public filings with the Securities and Exchange Commission
and those associated with:
• global political, economic and market conditions, particularly in the
jurisdictions in which we operate and/or invest, including:
- changes in credit ratings, interest rates, market credit spreads and the
performance of the financial markets;
- currency fluctuations;
- the effects of inflation;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the inability to reinsure certain risks economically; and
- changes in the litigation environment;
• the effects of the outbreak or escalation of war or hostilities;
• the occurrence of terrorist attacks, including any nuclear, biological,
chemical or radiological events;
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• premium pricing and profitability or growth estimates overall or by lines of
business or geographic area, and related expectations with respect to the
timing and terms of any required regulatory approvals;
• adverse changes in loss cost trends;
• our ability to retain existing business and attract new business at acceptable
rates;
• our expectations with respect to cash flow and investment income and with
respect to other income;
• the adequacy of our loss reserves, including:
- our expectations relating to reinsurance recoverables;
- the willingness of parties, including us, to settle disputes;
- developments in judicial decisions or regulatory or legislative actions
relating to coverage and liability, in particular, for asbestos, toxic
waste and other mass tort claims;
- development of new theories of liability;
- our estimates relating to ultimate asbestos liabilities; and
- the impact from the bankruptcy protection sought by various asbestos
producers and other related businesses;
• the availability and cost of reinsurance coverage;
• the occurrence of significant weather-related or other natural or human-made
disasters, particularly in locations where we have concentrations of risk or
changes to our estimates (or the assessments of rating agencies and other
third parties) of our potential exposure to such events;
• the impact of economic factors on companies on whose behalf we have issued
surety bonds, and in particular, on those companies that file for bankruptcy
or otherwise experience deterioration in creditworthiness;
• the effects of disclosures by, and investigations of, companies relating to
possible accounting irregularities, practices in the financial services
industry, investment losses or other corporate governance issues, including:
- the effects on the capital markets and the markets for directors and
officers and errors and omissions insurance;
- claims and litigation arising out of actual or alleged accounting or other
corporate malfeasance by other companies;
- claims and litigation arising out of practices in the financial services
industry;
- claims and litigation relating to uncertainty in the credit and broader
financial markets; and
- legislative or regulatory proposals or changes;
• the effects of changes in market practices in the U.S. property and casualty
insurance industry arising from any legal or regulatory proceedings, related
settlements and industry reform, including changes that have been announced
and changes that may occur in the future;
• the impact of legislative, regulatory and similar developments on our
business, including those relating to terrorism, catastrophes, the financial
markets, solvency standards, capital requirements and accounting guidance;
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• any downgrade in our claims-paying, financial strength or other credit
ratings;
• the ability of our subsidiaries to pay us dividends; and
• our ability to implement management's strategic plans and initiatives.
Chubb assumes no obligation to update any forward-looking information set forth
in this document, which speak as of the date hereof.
Critical Accounting Estimates and Judgments
The consolidated financial statements include amounts based on informed
estimates and judgments of management for transactions that are not yet
complete. Such estimates and judgments affect the reported amounts in the
financial statements. Those estimates and judgments that were most critical to
the preparation of the financial statements involved the determination of loss
reserves and the recoverability of related reinsurance recoverables and the
evaluation of whether a decline in value of any investment is temporary or other
than temporary. These estimates and judgments, which are discussed in Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2011 as
supplemented within the following analysis of our results of operations, require
the use of assumptions about matters that are highly uncertain and therefore are
subject to change as facts and circumstances develop. If different estimates and
judgments had been applied, materially different amounts might have been
reported in the financial statements.
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Overview
The following highlights do not address all of the matters covered in the other
sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations or contain all of the information that may be important to
Chubb's shareholders or the investing public. This overview should be read in
conjunction with the other sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
• Net income was $910 million in the first six months of 2012 and $404
million in the second quarter compared with $928 million and $419 million,
respectively, in the same periods of 2011. Net income was lower in the
first six months of 2012 compared to the same period of 2011 as higher
operating income in the first six months of 2012 was more than offset by
significantly lower net realized investment gains. Net income was also
lower in the second quarter of 2012 compared with the same period of 2011 due to lower net realized investment gains. We define operating income as
net income excluding realized investment gains and losses after tax.
• Operating income was $843 million in the first six months of 2012 compared
with $779 million in the same period of 2011. The higher operating income
in the first six months of 2012 was due to higher underwriting income in
our property and casualty business. Property and casualty investment
income decreased modestly in the first six months of 2012 compared with
the same period in 2011. Operating income was $374 million in the second
quarter of both 2012 and 2011 as higher underwriting income in our property and casualty business in the second quarter of 2012 was offset by
a decrease in property and casualty investment income. Management uses
operating income, a non-GAAP financial measure, among other measures, to
evaluate its performance because the realization of investment gains and
losses in any period could be discretionary as to timing and can fluctuate
significantly, which could distort the analysis of operating trends.
• Underwriting results were profitable in the first six months and second quarter of 2012 and 2011, but more so in the 2012 periods. Our combined
loss and expense ratio was 92.0% in the first six months of 2012 and 93.8%
in the second quarter compared with 94.3% and 94.9% in the respective
periods of 2011. The more profitable results in the 2012 periods were due
to a lower impact from catastrophes, offset in part by a lower amount of
favorable prior year loss development. The impact of catastrophes
accounted for 4.2 percentage points of the combined ratio in the first six
months of 2012 and 7.5 percentage points in the second quarter, compared
with 10.4 and 11.3 percentage points, respectively, in the same periods of
2011.
• During the first six months and second quarter of 2012, we estimate that
we experienced overall favorable development of about $265 million and
$165 million, respectively, on loss reserves established as of the
previous year end. During the first six months and second quarter of 2011,
we estimate that we experienced overall favorable development of about
$425 million and $205 million, respectively. The overall favorable
development in both years was due primarily to favorable loss experience
in the commercial liability, professional liability and personal insurance
classes.
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• Total net premiums written increased by 2% in the first six months of 2012
and 1% in the second quarter compared with the same periods in 2011,
driven by growth in the United States. Net premiums written in the United
States increased by 4% in the first six months of 2012 and 3% in the
second quarter. The growth in net premiums written in the United States reflected continued positive pricing trends in the commercial market as
well as in personal lines. Net premiums written outside the United States
decreased by 2% in the first six months of 2012 and 3% in the second
quarter in U.S. dollars but increased slightly in both periods when
measured in local currencies.
• Property and casualty investment income after tax decreased by 3% in the
first six months of 2012 and 5% in the second quarter compared with the
same periods in 2011, in what continued to be a low yield investment
environment. Management uses property and casualty investment income after
tax, a non-GAAP financial measure, to evaluate its investment results
because it reflects the impact of any change in the proportion of the investment portfolio invested in tax exempt securities and is therefore
more meaningful for analysis purposes than investment income before income
tax.
• Net realized investment gains before tax were $103 million ($67 million
after tax) in the first six months of 2012 and $47 million ($30 million
after tax) in the second quarter compared with $229 million ($149 million after tax) and $69 million ($45 million after tax) in the comparable
periods of 2011. The net realized gains in the first six months of 2012
were primarily related to investments in limited partnerships, which generally are reported on a quarter lag, and sales of fixed maturity
securities. The net realized gains in the first six months of 2011 and
second quarters of 2012 and 2011 were primarily related to investments in
limited partnerships.
A summary of our consolidated net income is as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
(in millions)
Property and casualty insurance $ 1,220 $ 1,128 $ 538 $ 540
Corporate and other (117 ) (126 ) (58 ) (63 )
Consolidated operating income before income tax 1,103 1,002
480 477
Federal and foreign income tax 260 223
106 103
Consolidated operating income 843 779 374 374
Realized investment gains after income tax 67 149 30 45
Consolidated net income $ 910 $ 928 $ 404 $ 419
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Property and Casualty Insurance
A summary of the results of operations of our property and casualty insurance
business is as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
(in millions)
Underwriting
Net premiums written $ 6,049 $ 5,914 $ 3,100 $ 3,055
Increase in unearned premiums (115 ) (147 ) (117 ) (142 )
Premiums earned 5,934 5,767 2,983 2,913
Losses and loss expenses 3,567 3,612 1,860 1,847
Operating costs and expenses 1,913 1,859 966 955
Increase in deferred policy acquisition costs (24 ) (57 ) (10 ) (32 )
Dividends to policyholders 16 16 8 8
Underwriting income 462 337 159 135
Investments
Investment income before expenses 772 796 381 405
Investment expenses 19 21 8 11
Investment income 753 775 373 394
Other income 5 16 6 11
Property and casualty income before tax $ 1,220 $ 1,128 $ 538$ 540
Property and casualty investment income after tax $ 611$ 628
$ 303$ 318
Property and casualty income before tax was higher in the first six months of
2012 compared to the same period in 2011. The higher income in 2012 was due to
an increase in underwriting income, attributable to a lower impact of
catastrophes in 2012 offset in part by a lower amount of favorable prior year
loss development. Property and casualty income before tax was similar in the
second quarter of 2012 and 2011. The increase in underwriting income in the
second quarter of 2012, attributable to a lower impact of catastrophes in 2012
offset in part by a lower amount of favorable prior year loss development, was
offset primarily by a decrease in investment income.
The profitability of our property and casualty insurance business depends on the
results of both our underwriting and investment operations. We view these as two
distinct operations since the underwriting functions are managed separately from
the investment function. Accordingly, in assessing our performance, we evaluate
underwriting results separately from investment results.
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Underwriting Results
We evaluate the underwriting results of our property and casualty insurance
business in the aggregate and also for each of our separate business units.
Net Premiums Written
Net premiums written were $6.0 billion in the first six months of 2012 and $3.1
billion in the second quarter, compared with $5.9 billion and $3.1 billion,
respectively, in the same periods of 2011. Net premiums written by business unit
were as follows:
Six Months Ended Quarter Ended
June 30 % Incr. June 30 % Incr.
2012 2011 (Decr.) 2012 2011 (Decr.)
(in millions) (in millions)
Personal insurance $ 2,049 $ 1,957 5 % $ 1,109 $ 1,063 4 %
Commercial insurance 2,758 2,636 5 1,353 1,310 3
Specialty insurance 1,240 1,319 (6 ) 638 680 (6 )
Total insurance 6,047 5,912 2 3,100 3,053 2
Reinsurance assumed 2 2 * - 2 *
Total $ 6,049 $ 5,914 2 $ 3,100 $ 3,055 1
* The change in net premiums written is not presented since the business is in
runoff.
Net premiums written increased by 2% in the first six months of 2012 and 1% in
the second quarter compared with the same periods in 2011. Net premiums written
in the United States, which represented 74% of our total net premiums written in
the first six months of 2012, increased by 4% in the first six months of 2012
and 3% in the second quarter. Net premiums written outside the United States,
expressed in U.S. dollars, decreased by 2% in the first six months of 2012 and
3% in the second quarter. The decrease in net premiums written outside the
United States in the first six months and second quarter of 2012 was due to the
negative impact of foreign currency translation, reflecting the impact of the
stronger U.S. dollar relative to several currencies in which we wrote business
in the first six months and second quarter of 2012 compared to the same periods
in 2011. Net premiums written outside the United States grew slightly in the
first six months and second quarter of 2012 when measured in local currencies.
We classify business as written in the United States or outside the United
States based on the location of the risk associated with the underlying
policies. The method of determining location of risk varies by class of
business. Location of risk for property lines is typically based on the physical
location of the covered property, while location of risk for liability lines may
be based on the main location of the insured, or in the case of the workers'
compensation line, the primary work location of the covered employee.
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Net premiums written in the United States grew in the first six months and
second quarter of 2012 in our personal and commercial insurance segments. Net
premiums written in the United States for our specialty insurance segment,
including its predominant professional liability insurance business component,
decreased in the first six months and second quarter of 2012 when compared with
the same periods of 2011. Growth in our personal insurance business was
attributable to new business, strong retention of existing business as well as
higher rates and insured exposures upon renewal. While there was improvement
during the first six months of 2012 in the commercial and professional liability
insurance pricing environment, continuing a trend that began during 2011, the
positive trend had a more significant impact on growth in our commercial
insurance business.
Overall, average renewal rates in the first six months of 2012 in the United
States were up in both our commercial and professional liability businesses in
comparison to expiring rates. The rate of increase was higher in the second
quarter of 2012 than in the first quarter of the year for both of these
segments, but more so in our professional liability business. The amounts of
coverage purchased or the insured exposures, both of which are bases upon which
we calculate the premiums we charge, were generally near flat, although exposure
amounts were up in select lines of business. We continued to retain a high
percentage of our existing commercial and professional liability business, but
renewal retention levels in the first six months and second quarter of 2012 were
lower than those in the same periods of 2011, as we continued to seek renewal
rate increases in most of the classes within these segments and as we took
underwriting actions to improve portions of the business, particularly some of
the professional liability classes. The overall level of new business in the
United States in our commercial and professional liability businesses was also
down in the first six months and second quarter of 2012, reflecting both the
competitive market as well as our underwriting discipline.
Net premiums written outside the United States, excluding the impact of foreign
currency translation, increased slightly in the first six months and second
quarter of 2012. In both periods, the most significant growth occurred in the
accident and health component of our personal insurance business. Commercial
insurance and professional liability premiums outside the United States were
both down modestly in the first six months and the second quarter of 2012.
Average renewal rates in our commercial business written outside the United
States were up slightly in the first six months and second quarter of 2012.
Average renewal rates for professional liability insurance business written
outside the United States were near flat in the first six months and second
quarter of 2012 compared to the same periods last year. Retention levels and
levels of new business outside the United States were generally lower than those
in the same periods of 2011.
We expect our net written premiums for the full year 2012 will increase at a
rate similar to the rate in the first half of the year, including a slight
negative impact from foreign currency translation, assuming average foreign
currency to U.S dollar exchange rates for the remainder of the year remain
similar to June 30, 2012 levels. We expect that the positive pricing environment
in most classes, particularly in the United States, will continue through the
remainder of 2012, in a market that will remain competitive.
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Reinsurance Ceded
Our premiums written are net of amounts ceded to reinsurers who assume a portion
of the risk under the insurance policies we write that are subject to
reinsurance.
The most significant component of our ceded reinsurance program is property
reinsurance. We purchase two main types of property reinsurance: catastrophe and
property per risk.
For property risks in the United States and Canada, we purchase traditional
catastrophe reinsurance, including our primary treaty which we refer to as our
North American catastrophe treaty, as well as supplemental catastrophe
reinsurance that provides additional coverage for our exposures in the
northeastern United States. For certain exposures in the United States, we have
also arranged for the purchase of multi-year, collateralized reinsurance funded
through the issuance of collateralized risk-linked securities, known as
catastrophe bonds. For events outside the United States, we also purchase
traditional catastrophe reinsurance.
We renewed our primary traditional property catastrophe treaties and our
commercial property per risk treaty in April 2012. While the overall changes in
these coverages were modest, we increased our participation in the lower layers
of coverage and purchased additional coverage in the higher layers. In March
2012, we also arranged for the purchase of reinsurance through the issuance of a
catastrophe bond. This replaced a catastrophe bond arrangement that expired in
March 2012 and extended the jurisdictions and perils subject to coverage. The
supplemental catastrophe reinsurance that provides coverage for exposures in the
northeastern United States was renewed in June 2012 on terms similar to the
expiring coverage.
The North American catastrophe treaty has an initial retention of $500 million
and provides coverage for exposures in the United States and Canada of
approximately 59% of losses (net of recoveries from other available reinsurance)
between $500 million and $1.65 billion. For certain catastrophic events in the
northeastern part of the United States or along the southern U.S. coastline, the
combination of the North American catastrophe treaty, supplemental catastrophe
reinsurance and/or the catastrophe bond arrangements provide additional
coverages as discussed below.
The catastrophe bond arrangements provide reinsurance coverage for specific
types of losses in specific geographic locations. They are generally designed to
supplement coverage provided under the North American catastrophe treaty. We
currently have two catastrophe bond arrangements in effect. We have a $475
million reinsurance arrangement, a portion of which expires in March 2014 and
the remainder in March 2015, that provides coverage for homeowners and
commercial exposure to certain hurricane, earthquake, severe thunderstorm and
winter storm loss events in twelve states in the northeastern United States and
the District of Columbia. We also have a $150 million reinsurance arrangement
that expires in March 2016 that provides coverage for homeowners-related
hurricane and severe thunderstorm losses in eight states along the southern U.S.
coastline.
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For the indicated catastrophic events in the northeastern United States, the
combination of the North American catastrophe treaty, the supplemental
catastrophe reinsurance and the $475 million catastrophe bond arrangement
provides additional coverage of approximately 65% of losses (net of recoveries
from other available reinsurance) between $1.65 billion and $3.65 billion.
For hurricane and severe thunderstorm events along the southern U.S. coastline,
the $150 million catastrophe bond arrangement provides additional coverage of
approximately 50% of homeowners-related hurricane and severe thunderstorm losses
between $850 million and $1.15 billion.
For hurricane events in Florida, in addition to the coverage provided by the
North American catastrophe treaty and the $150 million catastrophe bond
arrangement discussed above, we have reinsurance from the Florida Hurricane
Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse
insurers for a portion of their residential catastrophic hurricane losses. Our
participation in this mandatory program limits our initial retention in Florida
for homeowners-related losses to approximately $170 million and provides
coverage of 90% of covered losses between approximately $170 million and $610
million.
Our primary property catastrophe treaty for events outside the United States,
including Canada, provides coverage of approximately 75% of losses (net of
recoveries from other available reinsurance) between $100 million and $350
million. For catastrophic events in Australia and Canada, additional reinsurance
provides coverage of 80% of losses (net of recoveries from other available
reinsurance) between $350 million and $475 million.
In addition to catastrophe treaties, we also have a commercial property per risk
treaty. This treaty provides coverage per risk of approximately $600 million to
$800 million (depending upon the currency in which the insurance policy was
issued) in excess of our initial retention. Our initial retention is generally
between $25 million and $35 million.
In addition to our major property catastrophe and property per risk treaties, we
purchase several smaller property treaties that only cover specific classes of
business or locations having potential concentrations of risk.
Recoveries under our property reinsurance treaties are subject to certain
coinsurance requirements that affect the interaction of some elements of our
reinsurance program.
Our property reinsurance treaties generally contain terrorism exclusions for
acts perpetrated by foreign terrorists, and for nuclear, biological, chemical
and radiological loss causes whether such acts are perpetrated by foreign or
domestic terrorists.
Overall, rates related to the renewal of our property reinsurance program in
2012 were higher than those in 2011 due in large part to the significant
worldwide catastrophe losses incurred by the industry in 2011. However, based on
the changes in coverage we made upon renewal of the major components of our
program, we expect that the overall cost of our property reinsurance program
will be modestly lower in 2012 than in 2011.
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Profitability
The combined loss and expense ratio (or combined ratio), expressed as a
percentage, is the key measure of underwriting profitability traditionally used
in the property and casualty insurance business. Management evaluates the
performance of our underwriting operations and of each of our business units
using, among other measures, the combined loss and expense ratio calculated in
accordance with statutory accounting principles. It is the sum of the ratio of
losses and loss expenses to premiums earned (loss ratio) plus the ratio of
statutory underwriting expenses to premiums written (expense ratio) after
reducing both premium amounts by dividends to policyholders. When the combined
ratio is under 100%, underwriting results are generally considered profitable;
when the combined ratio is over 100%, underwriting results are generally
considered unprofitable.
Statutory accounting principles applicable to property and casualty insurance
companies differ in certain respects from generally accepted accounting
principles (GAAP). Under statutory accounting principles, policy acquisition and
other underwriting expenses are recognized immediately, not at the time premiums
are earned. Management uses underwriting results determined in accordance with
GAAP, among other measures, to assess the overall performance of our
underwriting operations. To convert statutory underwriting results to a GAAP
basis, certain policy acquisition expenses are deferred and amortized over the
period in which the related premiums are earned. Underwriting income determined
in accordance with GAAP is defined as premiums earned less losses and loss
expenses incurred and GAAP underwriting expenses incurred.
An accident year is the calendar year in which a loss is incurred or, in the
case of claims-made policies, the calendar year in which a loss is reported. The
total losses and loss expenses incurred for a particular calendar year include
current accident year losses and loss expenses as well as any increases or
decreases to our estimates of losses and loss expenses that occurred in all
prior accident years, which we refer to as prior year loss development.
Underwriting results were profitable in the first six months and second quarter
of both 2012 and 2011, but more so in 2012. The combined loss and expense ratio
for our overall property and casualty business was as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
Loss ratio 60.3 % 62.8 % 62.5 % 63.6 %
Expense ratio 31.7 31.5 31.3 31.3
Combined ratio 92.0 % 94.3 % 93.8 % 94.9 %
The loss ratio was lower in the first six months and second quarter of 2012
compared with the same periods in 2011 due to a lower impact of catastrophes
offset in part by a lower amount of favorable prior year loss development. The
current accident year loss ratio excluding catastrophes was nearly the same in
the first six months and second quarter of 2012 compared with the respective
2011 periods, with a higher loss ratio in specialty insurance and to a lesser
extent in commercial insurance almost entirely offset by a lower loss ratio in
personal insurance. The overall loss ratio excluding catastrophes in the first
six months and second quarter of each year reflected favorable loss experience
that we believe resulted from our disciplined underwriting in recent years as
well as relatively moderate loss trends in several classes of business.
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The impact of catastrophes in the first six months of 2012 was $247 million,
which represented 4.2 percentage points of the combined ratio. This compares
with an impact of catastrophes in the first six months of 2011 of $599 million,
which represented 10.4 percentage points of the combined ratio. The impact of
catastrophes in the second quarter of 2012 was $223 million, which represented
7.5 percentage points of the combined ratio. This compares with an impact of
catastrophes in the second quarter of 2011 of $329 million, which represented
11.3 percentage points of the combined ratio. A significant portion of the
catastrophe losses in the first six months of 2012 related to several severe
hail and wind storms in the United States, primarily in the second quarter. A
significant portion of the catastrophe losses in the first six months of 2011
related to tornadoes and other storms in the United States, primarily in the
second quarter, and flooding in Australia and earthquakes in New Zealand and
Japan in the first quarter.
The expense ratio was slightly higher in the first six months of 2012 compared
with the same period of 2011, and was the same in the second quarter of 2012 and
2011.
Review of Underwriting Results by Business Unit
Personal Insurance
Net premiums written from personal insurance, which represented 34% of our
premiums written in the first six months of 2012, increased by 5% in the first
six months of 2012 and 4% in the second quarter compared with the same periods
in 2011. Net premiums written for the classes of business within the personal
insurance segment were as follows:
Six Months Ended Quarter Ended
June 30 June 30
2012 2011 % Incr. 2012 2011 % Incr.
(in millions) (in millions)
Automobile $ 349 $ 343 2 % $ 185 $ 181 2 %
Homeowners 1,261 1,214 4 706 681 4
Other 439 400 10 218 201 8
Total personal $ 2,049 $ 1,957 5 $ 1,109 $ 1,063 4
Overall growth in net premiums written in our personal insurance business in the
first six months and second quarter of 2012 occurred primarily inside the United
States. Growth in our personal insurance business was attributable to new
business, strong retention of existing business as well as higher rates and
insured exposures upon renewal. Personal automobile premiums increased in the
first six months and second quarter of 2012 compared with the same periods in
2011, primarily in the United States, in what remained a highly competitive
marketplace. Premiums for personal automobile business written outside the
United States decreased slightly in the first six months and second quarter of
2012, due to the negative impact of foreign currency translation. Premiums in
our homeowners business grew in the United States, reflecting increases in
coverage on existing policies and higher renewal rates. Homeowners premiums
outside the United States decreased slightly in the first six months and second
quarter of 2012 compared to the same periods in 2011, due to the negative impact
of foreign currency translation. Premiums from our other personal business,
which includes accident and health, excess liability and yacht coverages,
increased in the first six months and second quarter of 2012 compared with the
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same periods in 2011, with growth occurring both inside and outside the United
States. Significant growth occurred in our accident and health business both
inside and outside the United States and in our excess liability business in the
United States. In recent years, an increasing portion of our accident and health
business has been written outside the United States.
Our personal insurance business produced profitable underwriting results in the
first six months and second quarter of 2012 and 2011, but more so in 2012. The
combined loss and expense ratios for the classes of business within the personal
insurance segment were as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
Automobile 92.2 % 92.4 % 93.2 % 92.0 %
Homeowners 85.0 96.1 90.3 97.7
Other 94.8 95.4 92.6 98.6
Total personal 88.3 95.3 91.2 96.9
The more profitable results in the first six months and second quarter of 2012
compared with the same periods in 2011 were partly attributable to the lower
impact of catastrophes. The impact of catastrophes represented 6.4 percentage
points of the combined ratio of our personal insurance business in the first six
months of 2012 and 11.5 percentage points in the second quarter compared with
11.2 and 14.5 percentage points, respectively, in the same periods of 2011.
Personal insurance results in the first six months and second quarter of 2012
also benefited from a lower current accident year loss ratio excluding
catastrophes, due to lower non-catastrophe weather-related losses, offset in
part by a lower amount of favorable prior year loss development.
Our personal automobile business produced similarly profitable results in the
first six months and second quarter of 2012 and 2011. Results in all periods
benefited from moderate claim frequency and favorable prior year loss
development.
Homeowners results were highly profitable in the first six months and second
quarter of 2012 compared with profitable results in the same periods of 2011.
The more profitable results in the 2012 periods were primarily due to a lower
impact of catastrophes and a lower current accident year loss ratio excluding
catastrophes, due in part to lower non-catastrophe weather-related losses.
Catastrophe losses represented 10.0 and 18.0 percentage points of the combined
ratio for this class in the first six months and second quarter of 2012,
respectively, compared with 17.4 and 22.5 percentage points, respectively, in
the same periods in 2011.
Other personal results were similarly profitable in the first six months of 2012
and 2011. Results in the second quarter of both years were also profitable, but
more so in 2012. The more profitable results in the second quarter of 2012 were
due to an improvement in results for the accident and health component of this
business. Our accident and health business produced profitable results in the
first six months and second quarter of 2012 compared with unprofitable results
in the same periods of 2011. Results were unprofitable in the 2011 periods due,
in part, to a greater number of large losses. Our personal excess liability
business produced profitable results in the first six months and second quarter
of both years, but less so in 2012,
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reflecting a lower amount of favorable prior year loss development. Our yacht
business produced highly profitable results in the first six months of both
years. Yacht results were also highly profitable in the second quarter of 2012
compared with profitable results in the same period of 2011.
Commercial Insurance
Net premiums written from commercial insurance, which represented 46% of our
premiums written in the first six months of 2012, increased by 5% in the first
six months of 2012 and 3% in the second quarter compared with the same periods a
year ago. Net premiums written for the classes of business within the commercial
insurance segment were as follows:
Six Months Ended Quarter Ended
June 30 % Incr. June 30 % Incr.
2012 2011 (Decr.) 2012 2011 (Decr.)
(in millions) (in millions)
Multiple peril $ 553 $ 562 (2 )% $ 292 $ 295 (1 )%
Casualty 870 855 2 420 419 -
Workers' compensation 547 463 18 249 220 13
Property and marine 788 756 4 392 376 4
Total commercial $ 2,758 $ 2,636 5 $ 1,353 $ 1,310 3
Growth in net premiums written in our commercial insurance business in the first
six months and second quarter of 2012 was driven by an increase in business
written in the United States. Net premiums written for commercial business
outside the United States decreased in the first six months and second quarter
of 2012 compared to the same periods of 2011 due in large part to the effect of
foreign currency translation. Overall, premium growth reflected improved pricing
as well as higher audit and endorsement premiums, in a market that offered
limited attractive new business opportunities and continued to be highly
competitive. The improvement in the overall rate environment, which began in
2011, continued in the first six months of 2012, particularly in the United
States. Average renewal rates in the United States increased in the first six
months of 2012 in all major classes of our commercial business. Average renewal
rates outside the United States increased slightly in the first six months of
2012. Retention levels of our existing policyholders remained strong, but were
down from those in the first six months of 2011, both inside and outside the
United States. The decline in retention was due to both our effort to increase
rates in several classes of business and our non-renewal of some property
business in catastrophe exposed areas. In the first six months of 2012, the
average renewal exposure change was flat, both inside and outside the United
States. The amount of new business was down in the first six months of 2012
compared with the same period in 2011, both inside and outside the United
States, as we continued to maintain our underwriting discipline in the
competitive market. Despite the competitive conditions in the market, we expect
that a positive rate environment will continue for the remainder of this year.
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Our commercial insurance business produced profitable underwriting results in
the first six months and second quarter of 2012 compared with modestly
unprofitable results in the same periods of 2011. The combined loss and expense
ratios for the classes of business within the commercial insurance segment were
as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
Multiple peril 97.0 % 114.1 % 100.9 % 122.2 %
Casualty 92.9 83.7 92.1 84.0
Workers' compensation 95.4 91.8 95.8 93.9
Property and marine 97.8 119.1 102.0 113.2
Total commercial 95.4 101.6 97.5 102.5
The more profitable results in our commercial insurance business in the first
six months and second quarter of 2012 compared with the same periods in 2011
were due primarily to the lower impact of catastrophes. The impact of
catastrophes represented 4.6 percentage points of the combined ratio for our
commercial insurance business in the first six months of 2012 and 8.2 percentage
points in the second quarter compared with 15.7 and 15.2 percentage points,
respectively, in the comparable periods in 2011. Results in all periods
benefited from our disciplined risk selection and appropriate policy terms and
conditions in recent years.
Multiple peril results were profitable in the first six months of 2012 and near
breakeven in the second quarter compared with highly unprofitable results in the
same periods of 2011. The improved results in the 2012 periods were due to a
significant improvement in the property component of this business, primarily
due to the lower impact of catastrophes in the 2012 periods. The impact of
catastrophes in the multiple peril class was 9.2 percentage points of the
combined ratio in the first six months of 2012 and 14.0 percentage points in the
second quarter compared with 27.2 and 37.2 percentage points, respectively, in
the same periods of 2011. The liability component of this business produced
profitable results in the first six months and second quarter of both years.
Results for our casualty business were profitable in the first six months and
second quarter of 2012 compared with highly profitable results in the same
periods of 2011. The less profitable results in the 2012 periods were primarily
due to deterioration in the results for the primary liability and automobile
components of this business. Results for the primary liability component were
unprofitable in the first six months and second quarter of 2012 compared with
profitable results in the same periods of 2011, partly due to a higher volume of
large reported losses, many of which related to prior accident years. The
automobile component of the casualty business produced modestly unprofitable
results in the first six months and second quarter of 2012 compared with highly
profitable results in the same periods of 2011. The automobile results in the
2011 periods benefited from favorable prior year loss development. Results for
the excess liability component were highly profitable in the first six months
and second quarter of both 2012 and 2011, as results in all periods benefited
from substantial favorable prior year loss development. Results for our casualty
business were adversely affected by incurred losses related to asbestos and
toxic waste claims in the first six months and second quarter of both years. Our
analysis of these exposures resulted in increases in the estimate of our
ultimate liabilities. Such losses represented 1.5 and 3.7 percentage points of
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the combined ratio for the casualty business in the first six months of 2012 and
2011, respectively, and 1.7 and 3.7 percentage points in the second quarter of
2012 and 2011, respectively.
Workers' compensation results were profitable in the first six months and second
quarter of both 2012 and 2011, but more so in the 2011 periods. The less
profitable results in the first six months of 2012 were due partly to a lower
amount of favorable prior year loss development and partly to a higher current
accident year combined ratio compared to the first six months of 2011. Results
in all periods benefited from our disciplined risk selection during the past
several years.
Property and marine results were modestly profitable in the first six months of
2012 and modestly unprofitable in the second quarter compared with highly
unprofitable results in the same periods of 2011. The improved results in the
2012 periods were primarily due to significantly lower catastrophe losses.
Catastrophe losses represented 8.2 percentage points of the combined ratio for
this class in the first six months of 2012 and 16.6 percentage points in the
second quarter compared with 33.7 and 24.0 percentage points, respectively, in
the same periods of 2011.
Specialty Insurance
Net premiums written from specialty insurance, which represented 20% of our
premiums written in the first six months of 2012, decreased by 6% in both the
first six months and second quarter of 2012 compared with the same periods in
2011. Net premiums written for the classes of business within the specialty
insurance segment were as follows:
Six Months Ended Quarter Ended
June 30 June 30
2012 2011 % Decr. 2011 2010 % Decr.
(in millions) (in millions)
Professional liability $ 1,093 $ 1,146 (5 )% $ 555 $ 595 (7 )%
Surety 147 173 (15 ) 83 85 (2 )
Total specialty $ 1,240 $ 1,319 (6 ) $ 638 $ 680 (6 )
Net premiums written in our professional liability business decreased in the
first six months and second quarter of 2012 compared with the same periods of
2011. Net premiums written decreased both in the United States and outside the
United States. Premium growth in this business remained constrained by the
continuing effect of the economic downturn in recent years and our focus on
profitability rather than premium volume in what remains a highly competitive
marketplace. Nevertheless, there was improvement in the overall rate
environment, particularly in the United States. We continued to pursue rate
increases on our professional liability business renewals to address margin
compression experienced in these classes of business in recent years. Average
renewal rates for our professional liability business in the United States
increased in the first six months and second quarter of 2012 compared with those
in the same periods of 2011, with increases occurring in all major classes of
this business, particularly directors and officers liability and employment
practices liability insurance. Overall renewal rates outside the United States
were close to flat in the first six months and second quarter of 2012. Retention
levels and new business volume were lower in the first six months and second
quarter of 2012 compared with those in the same periods of 2011, both inside and
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outside the United States, consistent with our desire to selectively reduce our
exposure in some customer segments where current rate levels are not attractive.
Net premiums written in our surety business decreased significantly in the first
six months of 2012 and decreased slightly in the second quarter compared with
the same periods in 2011. The decrease in both periods occurred in our U.S.
business. Current economic conditions have resulted in fewer contracts requiring
a surety bond being awarded to our existing customers that operate in the
construction industry. The timing of contract awards can also vary. As a result,
premium growth in our surety business varies from period to period.
Our specialty insurance business produced profitable underwriting results in the
first six months and second quarter of 2012 compared with highly profitable
results in the same periods of 2011. The combined loss and expense ratios for
the classes of business within the specialty insurance segment were as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
Professional liability 98.2 % 85.6 % 97.9 % 84.6 %
Surety 49.1 47.5 42.8 44.5
Total specialty 92.5 81.2 91.4 80.0
Our professional liability business produced profitable results in the first six
months and second quarter of 2012 compared with highly profitable results in the
same periods of 2011. The less profitable results in the 2012 periods were due
to a lower amount of favorable prior year loss development, particularly outside
the United States, and to a higher current accident year combined ratio,
compared to the comparable periods of 2011.
Results in the directors and officers liability class were profitable in the
first six months and second quarter of 2012 compared with highly profitable
results in the same periods of 2011. Results in the fidelity class were
profitable in the first six months of 2012 and unprofitable in the second
quarter compared with highly profitable results in the same periods of 2011.
Results in the employment practices liability class were highly unprofitable in
the first six months of 2012 compared with profitable results in the same period
of 2011. Results for this class were also highly unprofitable in the second
quarter of 2012 compared with slightly unprofitable results in the same period
of 2011. Results in the 2012 periods reflect a higher current accident year
combined ratio and unfavorable prior year loss development. Employment practices
claims have been more numerous and protracted due to the effect of the economic
downturn and higher unemployment levels in recent years. Results in the errors
and omissions liability class were highly unprofitable and reflected unfavorable
prior year loss development in the first six months and second quarter of both
years. Results in the fiduciary liability class were highly profitable and
reflected favorable prior year loss development in the first six months and
second quarter of both 2012 and 2011.
Our surety business produced highly profitable results in the first six months
and second quarter of both 2012 and 2011 due to favorable loss experience. Our
surety business tends to be characterized by losses that are infrequent but have
the potential to be highly severe.
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Reinsurance Assumed
Net premiums written from our reinsurance assumed business, which is in runoff,
were not significant in the first six months and second quarter of 2012 and
2011.
Reinsurance assumed results were profitable in the first six months and second
quarter of 2012 and 2011. Results in all periods benefited from favorable prior
year loss development.
Catastrophe Risk Management
Our property and casualty subsidiaries have exposure to losses caused by natural
perils such as hurricanes and other windstorms, earthquakes, severe winter
weather and brush fires as well as from man-made catastrophic events such as
terrorism. The frequency and severity of catastrophes are inherently
unpredictable.
The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in an area affected by the event and the severity of the
event. We regularly assess our concentration of risk exposure in catastrophe
exposed areas globally and have strategies and underwriting standards to manage
this exposure through individual risk selection, subject to regulatory
constraints, and through the purchase of catastrophe reinsurance coverage. We
use catastrophe modeling and a risk concentration management tool to monitor and
control our accumulations of potential losses in catastrophe exposed areas in
the United States, such as California and the gulf and east coasts, as well as
in catastrophe exposed areas in certain other countries. The information
provided by the catastrophe modeling and the risk concentration management tool
has resulted in our non-renewing some accounts and refraining from writing
others.
Catastrophe modeling generally relies on multiple inputs based on experience,
science, engineering and history, and the selection of those inputs requires a
significant amount of judgment. The modeling results may also fail to account
for risks that are outside the range of normal probability or are otherwise
unforeseen. Because of this, actual results may differ materially from those
derived from our modeling exercises.
We also continue to actively explore and analyze credible scientific evidence,
including the potential impact of global climate change, that may affect our
ability to manage exposure under the insurance policies we issue as well as the
impact that laws and regulations intended to combat climate change could have on
us.
Despite our efforts to manage our catastrophe exposure, the occurrence of one or
more severe catastrophic events could have a material effect on the
Corporation's results of operations, financial condition or liquidity.
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Loss Reserves
Unpaid losses and loss expenses, also referred to as loss reserves, are the
largest liability of our property and casualty subsidiaries.
Our loss reserves include case estimates for claims that have been reported and
estimates for claims that have been incurred but not reported at the balance
sheet date 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. Estimates are based upon past loss
experience modified for current trends as well as prevailing economic, legal and
social conditions. Our loss reserves are not discounted to present value.
We regularly review our loss reserves using a variety of actuarial techniques.
We update the reserve estimates as historical loss experience develops,
additional claims are reported and/or settled and new information becomes
available. Any changes in estimates are reflected in operating results in the
period in which the estimates are changed.
Incurred but not reported (IBNR) reserve estimates are generally calculated by
first projecting the ultimate cost of all claims that have occurred and then
subtracting reported losses and loss expenses. Reported losses include
cumulative paid losses and loss expenses plus case reserves. The IBNR reserve
includes a provision for claims that have occurred but have not yet been
reported to us, some of which are not yet known to the insured, as well as a
provision for future development on reported claims. A relatively large
proportion of our net loss reserves, particularly for long tail liability
classes, are reserves for IBNR losses. In fact, about 70% of our aggregate net
loss reserves at June 30, 2012 were for IBNR losses.
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Our gross case and incurred but not reported (IBNR) loss reserves and related
reinsurance recoverable by class of business were as follows:
Net
Gross Loss Reserves Reinsurance Loss
June 30, 2012 Case IBNR Total Recoverable Reserves
(in millions)
Personal insurance
Automobile $ 266 $ 154 $ 420 $ 19 $ 401
Homeowners 378 426 804 10 794
Other 349 675 1,024 126 898
Total personal 993 1,255 2,248 155 2,093
Commercial insurance
Multiple peril 600 1,223 1,823 30 1,793
Casualty 1,427 5,304 6,731 351 6,380
Workers' compensation 936 1,757 2,693 198 2,495
Property and marine 824 607 1,431 314 1,117
Total commercial 3,787 8,891 12,678 893 11,785
Specialty insurance
Professional liability 1,425 6,121 7,546 399 7,147
Surety 25 57 82 6 76
Total specialty 1,450 6,178 7,628 405 7,223
Total insurance 6,230 16,324 22,554 1,453 21,101
Reinsurance assumed 232 413 645 216 429
Total $ 6,462 $ 16,737 $ 23,199 $ 1,669 $ 21,530
Net
Gross Loss Reserves Reinsurance Loss
December 31, 2011 Case IBNR Total Recoverable Reserves
(in millions)
Personal insurance
Automobile $ 269 $ 151 $ 420 $ 16 $ 404
Homeowners 431 349 780 11 769
Other 392 649 1,041 139 902
Total personal 1,092 1,149 2,241 166 2,075
Commercial insurance
Multiple peril 600 1,169 1,769 34 1,735
Casualty 1,388 5,229 6,617 343 6,274
Workers' compensation 913 1,669 2,582 190 2,392
Property and marine 896 558 1,454 336 1,118
Total commercial 3,797 8,625 12,422 903 11,519
Specialty insurance
Professional liability 1,498 6,098 7,596 416 7,180
Surety 27 54 81 6 75
Total specialty 1,525 6,152 7,677 422 7,255
Total insurance 6,414 15,926 22,340 1,491 20,849
Reinsurance assumed 240 488 728 248 480
Total $ 6,654 $ 16,414 $ 23,068 $ 1,739 $ 21,329
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Loss reserves, net of reinsurance recoverable, increased by $201 million during
the first six months of 2012. Loss reserves related to our insurance business
increased by $252 million during the first six month of 2012, which included a
decrease of approximately $78 million related to the effect of foreign currency
translation due to the stronger U.S. dollar at June 30, 2012 compared to
December 31, 2011. Loss reserves related to our reinsurance assumed business,
which is in runoff, decreased by $51 million.
The decreases in our homeowners and property and marine gross case reserves
during the first six months of 2012 were due largely to payments during the
first six months of 2012 on catastrophe-related claims that were unpaid at
December 31, 2011. The increase in IBNR reserves in our commercial insurance
business occurred primarily in the workers' compensation class, the multiple
peril class and the casualty class, largely related to primary general liability
coverage, reflecting premium growth as well as some margin compression
experienced in these classes in recent periods. The decrease in our professional
liability gross case reserves during the first six months of 2012 was due
largely to the settlement of several large claims that were unpaid as of
December 31, 2011.
In establishing the loss reserves of our property and casualty subsidiaries, we
consider facts currently known and the present state of the law and coverage
litigation. Based on all information currently available, we believe that the
aggregate loss reserves at June 30, 2012 were adequate to cover claims for
losses that had occurred as of that date, including both those known to us and
those yet to be reported. However, as discussed in Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2011, there are significant
uncertainties inherent in the loss reserving process. It is therefore possible
that management's estimate of the ultimate liability for losses that had
occurred as of June 30, 2012 may change, which could have a material effect on
the Corporation's results of operations and financial condition.
Changes in loss reserve estimates are unavoidable because such estimates are
subject to the outcome of future events. Loss trends vary and time is required
for changes in trends to be recognized and confirmed. Reserve changes that
increase previous estimates of ultimate cost are referred to as unfavorable or
adverse development or reserve strengthening. Reserve changes that decrease
previous estimates of ultimate cost are referred to as favorable development or
reserve releases.
We estimate that we experienced overall favorable prior year development of
about $265 million during the first six months of 2012 and $165 million in the
second quarter compared with favorable prior year development of about $425
million and $205 million, respectively, in the comparable periods of 2011.
The favorable development in the first six months of 2012 was primarily in the
commercial liability and professional liability classes due to continued
favorable loss experience related mainly to accident years 2008 and prior, and
in the personal insurance classes. The favorable development in the first six
months of 2011 occurred primarily in the commercial liability and professional
liability classes related mainly to accident years 2007 and prior and, to a
lesser extent, in the personal insurance classes.
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Investment Results
Property and casualty investment income before taxes decreased 3% in the first
six months of 2012 and 5% in the second quarter compared with the same periods
in 2011. The decrease was due to a modest decline in average yields on our
investment portfolio and a decrease in our average invested assets. The average
yield on the fixed maturity investment portfolio of the property and casualty
subsidiaries decreased for the first six months of 2012 compared to the same
period of 2011 due to the continuing impact of lower reinvestment yields
compared to the yields on fixed maturity securities that matured, were redeemed
by the issuer or were sold since the second quarter of 2011. The average
invested assets of the property and casualty subsidiaries were lower during the
first six months of 2012 compared with the same period of 2011 due to the
substantial dividend distributions made by the property and casualty
subsidiaries to Chubb during 2011 and the first quarter of 2012.
The effective tax rate on our investment income was 18.9% in the first six
months of 2012 compared with 19.0% in the same period of 2011. The effective tax
rate fluctuates as the proportion of tax exempt investment income relative to
total investment income changes from period to period.
On an after-tax basis, property and casualty investment income decreased by 3%
in the first six months of 2012 and decreased 5% in the second quarter compared
with the same periods in 2011. The after-tax annualized yield on the investment
portfolio that supports our property and casualty insurance business was 3.18%
and 3.22% in the first six months of 2012 and 2011, respectively.
We expect that property and casualty investment income after taxes for the full
year 2012 will decline modestly from the full year 2011 amount if both
investment yields and average foreign currency to U.S. dollar exchange rates
remain about the same as June 30, 2012 levels. This expected decline results, in
large part, from the effect of investing funds from securities that matured or
were redeemed in 2011 and 2012 in securities with yields lower than the yields
of the maturing or redeemed securities, and the expectation that this pattern
will continue during the remainder of 2012. To a lesser extent, the expected
decline also reflects the lower amount of average invested assets estimated to
be held during 2012, based on expectations of cash flows during the year.
Other Income and Charges
Other income and charges, which includes miscellaneous income and expenses of
the property and casualty subsidiaries, was not significant in the first six
months of 2012 and 2011.
Corporate and Other
Corporate and other comprises investment income earned on corporate invested
assets, interest expense and other expenses not allocated to our operating
subsidiaries and the results of our non-insurance subsidiaries.
Corporate and other produced a loss before taxes of $117 million in the first
six months of 2012 compared to a loss of $126 million for the same period of
2011. The lower loss in the first six months of 2012 was primarily due to lower
interest expense resulting from the repayment of $400 million of outstanding
notes upon maturity in November 2011.
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Realized Investment Gains and Losses
Net realized investment gains and losses were as follows:
Periods Ended June 30
Six Months Second Quarter
2012 2011 2012 2011
(in millions)
Net realized gains
Fixed maturities $ 52 $ 8 $ 17 $ 6
Equity securities 25 28 6 9
Other invested assets 63 209 55 68
140 245 78 83
Other-than-temporary impairment losses
Fixed maturities (2 ) - (1 ) -
Equity securities (35 ) (16 ) (30 ) (14 )
(37 ) (16 ) (31 ) (14 )
Realized investment gains before tax $ 103 $ 229 $ 47 $ 69
Realized investment gains after tax $ 67 $ 149 $ 30 $ 45
The net realized gains of our other invested assets represent primarily the
aggregate of realized gain distributions to us from the limited partnerships in
which we have an interest and changes in our equity in the net assets of those
partnerships based on valuations provided to us by the manager of each
partnership. Due to the timing of our receipt of valuation data from the
investment managers, these investments are generally reported on a one quarter
lag.
The net realized gains of the limited partnerships reported in the first six
months of 2012 primarily reflected the strong performance of the U.S. equity and
high yield investment markets in the first quarter of 2012 partially offset by
the negative performance of several non-U.S. equity markets, particularly in
Asia, in the fourth quarter of 2011. The net realized gains of the limited
partnerships reported in the first six months of 2011 reflected the strong
performance of the U.S. equity and high yield investment markets in the first
quarter of 2011 and the fourth quarter of 2010.
We have not received second quarter 2012 valuations from many of the limited
partnerships. Based on the limited preliminary information we have received
about the performance of some of the limited partnerships and the weak
performance in the global equity markets in the second quarter of 2012, we may
experience an overall decline in our equity in the net assets of these limited
partnership investments which would be included in our third quarter 2012
results.
We regularly review the invested assets that have a fair value less than cost to
determine if an other-than-temporary decline in value has occurred. We have a
monitoring process overseen by a committee of investment and accounting
professionals that is responsible for identifying those securities to be
specifically evaluated for a potential other-than-temporary impairment.
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The determination of whether a decline in value of any investment is temporary
or other than temporary requires the judgment of management. The assessment of
other-than-temporary impairment of fixed maturities and equity securities is
based on both quantitative criteria and qualitative information and also
considers a number of factors including, but not limited to, the length of time
and the extent to which the fair value has been less than the cost, the
financial condition and near term prospects of the issuer, whether the issuer is
current on contractually obligated interest and principal payments, general
market conditions and industry or sector specific factors. The decision to
recognize a decline in the value of a security carried at fair value as other
than temporary rather than temporary has no impact on shareholders' equity.
In determining whether fixed maturities are other than temporarily impaired, we
are required to recognize an other-than-temporary impairment loss for a fixed
maturity when we conclude that we have the intent to sell or it is more likely
than not that we will be required to sell an impaired fixed maturity before the
security recovers to its amortized cost value or it is likely we will not
recover the entire amortized cost value of an impaired security. If we have the
intent to sell or it is more likely than not we will be required to sell an
impaired fixed maturity before the security recovers to its amortized cost
value, the security is written down to fair value and the entire amount of the
writedown is included in net income as a realized investment loss. For all other
impaired fixed maturities, the impairment loss is separated into the amount
representing the credit loss and the amount representing the loss related to all
other factors. The amount of the impairment loss that represents the credit loss
is included in net income as a realized investment loss and the amount of the
impairment loss that relates to all other factors is included in other
comprehensive income.
In determining whether equity securities are other than temporarily impaired, we
consider our intent and ability to hold a security for a period of time
sufficient to allow us to recover our cost. If a decline in the fair value of an
equity security is deemed to be other than temporary, the security is written
down to fair value and the amount of the writedown is included in net income as
a realized investment loss.
Capital Resources and Liquidity
Capital resources and liquidity represent a company's overall financial strength
and its ability to generate cash flows, 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 financial
strength to support the business of underwriting insurance risks and facilitate
continued business growth. At June 30, 2012, the Corporation had shareholders'
equity of $15.6 billion and total debt of $3.6 billion.
Management regularly monitors the Corporation's capital resources. In connection
with our long term capital strategy, Chubb from time to time contributes capital
to its property and casualty subsidiaries. In addition, in order to satisfy
capital needs as a result of any rating agency capital adequacy or other future
rating issues, or in the event we were to need additional capital to make
strategic investments in light of market opportunities, we may take a variety of
actions, which could include the issuance of additional debt
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and/or equity securities. We believe that our strong financial position and
current debt level provide us with the flexibility and capacity to obtain funds
externally through debt or equity financings on both a short term and long term
basis.
In December 2010, the Board of Directors authorized the repurchase of up to
30,000,000 shares of Chubb's common stock. We repurchased shares under this
authorization through January 2012, at which time all repurchases allowed under
the authorization were completed. In January 2012, the Board of Directors
authorized the repurchase of up to $1.2 billion of Chubb's common stock. Under
these authorizations, during the first six months of 2012, we repurchased
8,648,468 shares of Chubb's common stock in open market transactions at a cost
of $606 million. As of June 30, 2012, $658 million remained under the January
2012 share repurchase authorization. We expect to complete the repurchase of
shares under this authorization by the end of January 2013, subject to market
conditions.
Ratings
Chubb and its property and casualty insurance subsidiaries are rated by major
rating agencies. These ratings reflect the rating agency's opinion of our
financial strength, operating performance, strategic position and ability to
meet our obligations to policyholders.
Credit ratings assess a company's ability to make timely payments of interest
and principal on its debt. Financial strength ratings assess an insurer's
ability to meet its financial obligations to policyholders.
Ratings are an important factor in establishing our competitive position in the
insurance markets. There can be no assurance that our ratings will continue for
any given period of time or that they will not be changed.
It is possible that one or more of the rating agencies may raise or lower our
existing ratings in the future. If our credit ratings were downgraded, we might
incur higher borrowing costs and might have more limited means to access
capital. A downgrade in our financial strength ratings could adversely affect
the competitive position of our insurance operations, including a possible
reduction in demand for our products in certain markets.
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash flows
to meet the short and long term cash requirements of its business operations.
The Corporation's liquidity requirements in the past have generally been met by
funds from operations and we expect that in the future funds from operations
will continue to be sufficient to meet such requirements. Liquidity requirements
could also be met by funds received upon the maturity or sale of marketable
securities in our investment portfolio. The Corporation also has the ability to
borrow under its existing $500 million credit facility and we believe we could
issue debt or equity securities.
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Our property and casualty operations provide liquidity in that insurance
premiums are generally received months or even years before losses are paid
under the policies purchased by such premiums. Cash receipts from operations,
consisting of insurance premiums and investment income, provide funds to pay
losses, operating expenses and dividends to Chubb. After satisfying our cash
requirements, excess cash flows are used to build the investment portfolio, with
the expectation of generating increased future investment income.
Our underwriting and investment results generated substantial positive operating
cash flows in the six months ended June 30, 2012 and 2011. The cash provided by
the property and casualty subsidiaries' operating activities was similar in the
first six months of 2012 and 2011. The positive impact of modestly higher
premium collections and lower tax payments was mostly offset by the impact of
higher loss payments in the first six months of 2012 compared to the same period
of 2011. During the first six months of 2012, the cash provided by the property
and casualty subsidiaries' operating activities exceeded the cash used for
financing activities (primarily the payment of dividends to Chubb) by
approximately $130 million. During the first six months of 2011, cash provided
by operating activities of the property and casualty subsidiaries exceeded cash
used for financing activities (primarily the payment of dividends) by
approximately $140 million. In the first six months of 2012, dividends paid to
Chubb by the property and casualty subsidiaries were $830 million compared to
$800 million in the comparable period of 2011.
Our property and casualty subsidiaries maintain substantial investments in
highly liquid, short term marketable securities. Accordingly, we do not
anticipate selling long term fixed maturity investments to meet any liquidity
needs.
Chubb's liquidity requirements primarily include the payment of dividends to
shareholders and interest and principal on debt obligations. The declaration and
payment of future dividends to Chubb's shareholders will be at the discretion of
Chubb's Board of Directors and will depend upon many factors, including our
operating results, financial condition, capital requirements and any regulatory
constraints.
As a holding company, Chubb's ability to continue to pay dividends to
shareholders and to satisfy its debt obligations relies on the availability of
liquid assets, which is dependent in large part on the dividend paying ability
of its property and casualty subsidiaries. The timing and amount of dividends
paid by the property and casualty subsidiaries to Chubb may vary from year to
year. Our property and casualty subsidiaries are subject to laws and regulations
in the jurisdictions in which they operate that restrict the amount and timing
of dividends they may pay within twelve consecutive months without the prior
approval of regulatory authorities. The restrictions are generally based on net
income and on certain levels of policyholders' surplus as determined in
accordance with statutory accounting practices. Dividends in excess of such
thresholds are considered "extraordinary" and require prior regulatory approval.
The $830 million of dividends paid by the property and casualty subsidiaries to
Chubb during the first six months of 2012 were deemed to be extraordinary under
applicable insurance regulations due to the limitation on the amount of
dividends that may be paid within twelve consecutive months. Regulatory approval
was required and obtained for the payment of these dividends. Whether any
dividend payments during the remainder of 2012 require regulatory approval will
depend on the amount and timing of such dividend
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payments by the subsidiaries to Chubb. As of June 30, 2012, the maximum
aggregate dividend distribution that may be made by the subsidiaries to Chubb
during the remainder of 2012 without prior regulatory approval was approximately
$930 million.
Invested Assets
The main objectives in managing our investment portfolios are to maximize
after-tax investment income and total investment return while minimizing credit
risk and managing interest rate risk in order to ensure that funds will be
available to meet our insurance obligations. Investment strategies are developed
based on many factors including underwriting results and our resulting tax
position, regulatory requirements, fluctuations 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 of Chubb and its respective operating
companies.
Our investment portfolio primarily comprises high quality bonds, principally tax
exempt securities, corporate bonds, mortgage-backed securities and U.S. Treasury
securities, as well as foreign government and corporate bonds that support our
operations outside the United States. The portfolio also includes equity
securities, primarily publicly traded common stocks, and other invested assets,
primarily private equity limited partnerships, all of which are held with the
primary objective of capital appreciation.
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
June 30, 2012, 67% of our fixed maturity portfolio that supports our U.S.
operations was invested in tax exempt securities. At June 30, 2012, about 80% of
our tax exempt securities were rated Aa or better, with about 20% of our tax
exempt securities rated Aaa. The average rating of our tax exempt securities was
Aa. While about 30% of our tax exempt securities were insured, the effect of
insurance on the average credit rating of these securities was insignificant.
The insured tax exempt securities in our portfolio have been selected based on
the quality of the underlying credit and not the value of the credit insurance
enhancement.
At June 30, 2012, 6% of our taxable fixed maturity portfolio was invested in
U.S. government and government agency and authority obligations other than
mortgage-backed securities and had an average rating of Aa. About 65% of the
U.S. government and government agency and authority obligations other than
mortgage-backed securities were U.S. Treasury securities with an average rating
of Aaa and the remainder were taxable bonds issued by states, municipalities and
political subdivisions within the United States with an average rating of Aa.
At June 30, 2012, 41% of our taxable fixed maturity portfolio consisted of
corporate bonds other than mortgage-backed securities, which were issued by a
diverse group of U.S. and foreign issuers and had an average rating of A. About
60% of our corporate bonds other than mortgage-backed securities were issued by
U.S. companies and about 40% were issued by foreign companies. Our foreign
corporate bonds included $86 million, $43 million and $25 million issued by
companies, including banks, in Italy, Ireland and Spain, respectively. We held
no bonds issued by companies in Greece or Portugal.
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At June 30, 2012, 39% of our taxable fixed maturity portfolio was invested in
foreign government and government agency obligations, which had an average
rating of Aa. The foreign government and government agency obligations consisted
of high quality securities, primarily issued by national governments and, to a
lesser extent, government agencies, regional governments and supranational
organizations. The five largest issuers within this portfolio were Canada, the
United Kingdom, Germany, Australia and Brazil, which collectively accounted for
about 75% of our total foreign government and government agency obligations.
Another 8% of our total foreign government and government agency obligations
were issued by supranational organizations. We held no sovereign securities
issued by Greece, Portugal, Ireland or Italy and held only $13 million of
sovereign securities issued by Spain. We held an insignificant amount of foreign
government or government agency fixed maturities that have a third party
guarantee.
At June 30, 2012, 14% of our taxable fixed maturity portfolio was invested in
mortgage-backed securities. About 95% of the mortgage-backed securities were
rated Aaa. About half of the remaining 5% were below investment grade. Of the
Aaa rated securities, 22% were residential mortgage-backed securities,
consisting of government agency pass-through securities guaranteed by a
government agency or a government sponsored enterprise (GSE), GSE collateralized
mortgage obligations (CMOs) and other CMOs, all backed by single family home
mortgages. The majority of our CMOs are actively traded in liquid markets. The
other 78% of the Aaa rated securities were call protected, commercial
mortgage-backed securities (CMBS). About 96% of our CMBS were senior securities
with the highest level of subordination. The remainder of our CMBS were seasoned
securities that were issued in 1998 or earlier.
The net unrealized appreciation before tax of our fixed maturities and equity
securities carried at fair value was $2.9 billion at June 30, 2012 compared with
net unrealized appreciation before tax of $2.7 billion at December 31, 2011.
Such unrealized appreciation is reflected in accumulated other comprehensive
income, net of applicable deferred income tax.
Fair Values of Financial Instruments
Fair values of financial instruments are determined using valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable
inputs. Fair values are generally measured using quoted prices in active markets
for identical assets or liabilities or other inputs, such as quoted prices for
similar assets or liabilities, that are observable either directly or
indirectly. In those instances where observable inputs are not available, fair
values are measured using unobservable inputs for the asset or liability.
Unobservable inputs reflect our own assumptions about the assumptions that
market participants would use in pricing the asset or liability and are
developed based on the best information available in the circumstances. Fair
value estimates derived from unobservable inputs are affected by the assumptions
used, including the discount rates and the estimated amounts and timing of
future cash flows. The derived fair value estimates cannot be substantiated by
comparison to independent markets and are not necessarily indicative of the
amounts that would be realized in a current market exchange.
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The fair value hierarchy prioritizes the inputs to valuation techniques used to
measure the fair values of our fixed maturities and equity securities into three
broad levels as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets.
Level 2 Other inputs that are observable for the asset, either directly or
- indirectly.
Level 3 - Inputs that are unobservable.
The methods and assumptions used to estimate the fair values of financial
instruments are as follows:
Fair values for fixed maturities are determined by management, utilizing prices
obtained from a third party, nationally recognized pricing service or, in the
case of securities for which prices are not provided by a pricing service, from
a third party broker. For fixed maturities that have quoted prices in active
markets, market quotations are provided. For fixed maturities that do not trade
on a daily basis, the pricing service and brokers provide fair value estimates
using a variety of inputs including, but not limited to, benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference
data, prepayment rates and measures of volatility. Management reviews on an
ongoing basis the reasonableness of the methodologies used by the relevant
pricing service and brokers. In addition, management, using the prices received
for the securities from the pricing service and brokers, determines the
aggregate portfolio price performance and reviews it against applicable indices.
If management believes that significant discrepancies exist, it will discuss
these with the relevant pricing service or broker to resolve the discrepancies.
Fair values of equity securities are based on quoted market prices.
The carrying value of short term investments approximates fair value due to the
short maturities of these investments.
Fair values of long term debt issued by Chubb are determined by management,
utilizing prices obtained from a third party, nationally recognized pricing
service.
We use a pricing service to estimate fair value measurements for approximately
99% of our fixed maturities. The prices we obtain from a pricing service and
brokers generally are non-binding, but are reflective of current market
transactions in the applicable financial instruments.
At June 30, 2012 and December 31, 2011, we held an insignificant amount of
financial instruments in our investment portfolio for which a lack of market
liquidity impacted our determination of fair value.
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Change in Accounting Principle
Effective January 1, 2012, we adopted new guidance issued by the Financial
Accounting Standards Board related to the accounting for costs associated with
acquiring or renewing insurance contracts. The guidance identifies those costs
relating to the successful acquisition of new or renewal insurance contracts
that should be capitalized. The Corporation elected retrospective application of
this guidance under which deferred policy acquisition costs and related deferred
income tax liabilities were reduced as of the beginning of the earliest period
presented in the financial statements, offset by a cumulative effect adjustment
that reduced retained earnings. The adoption of this guidance decreased deferred
policy acquisition costs by $420 million, decreased deferred income tax
liabilities by $147 million and decreased shareholders' equity by $273 million
as of December 31, 2011. The effect of the adoption of the new guidance on net
income for the six months ended June 30, 2012 and June 30, 2011 was not
material. The change in accounting is discussed further in Note (2) of the Notes
to Consolidated Financial Statements.
