10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission file number 1-8661
THE CHUBB CORPORATION
 
(Exact name of registrant as specified in its charter)
     
NEW JERSEY   13-2595722
     
(State or other jurisdiction of   (I. R. S. Employer
incorporation or organization)   Identification No.)
     
15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY   07059
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (908) 903-2000
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ     NO o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):
             
Large accelerated filer þ   Accelerated filer o  Non-accelerated filer o  Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o     NO þ
     The number of shares of common stock outstanding as of September 30, 2008 was 355,701,526.
 
 

 


 

THE CHUBB CORPORATION
INDEX
         
    Page
    Number
       
       
    1  
    2  
    3  
    4  
    5  
    12  
    34  
       
    35  
    35  
    36  
    37  
    37  
 EX-10.1: OFFER LETTER
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION

 


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Page 1
Part I. FINANCIAL INFORMATION
Item 1 — Financial Statements
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
                                 
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
    (in millions)  
Revenues
                               
Premiums Earned
  $ 2,964     $ 2,978     $ 8,926     $ 8,927  
Investment Income
    439       446       1,316       1,291  
Other Revenues
    13       8       25       43  
Realized Investment Gains (Losses), Net
    (113 )     117       (121 )     328  
 
                       
 
                               
Total Revenues
    3,303       3,549       10,146       10,589  
 
                       
Losses and Expenses
                               
Losses and Loss Expenses
    2,006       1,541       5,339       4,693  
Amortization of Deferred Policy Acquisition Costs
    781       763       2,336       2,273  
Other Insurance Operating Costs and Expenses
    104       109       330       331  
Investment Expenses
    8       8       25       27  
Other Expenses
    13       7       30       44  
Corporate Expenses
    73       74       210       186  
 
                       
 
                               
Total Losses and Expenses
    2,985       2,502       8,270       7,554  
 
                       
 
                               
Income Before Federal and Foreign Income Tax
    318       1,047       1,876       3,035  
Federal and Foreign Income Tax
    54       309       479       878  
 
                       
 
                               
Net Income
  $ 264     $ 738     $ 1,397     $ 2,157  
 
                       
 
                               
Net Income Per Share
                               
 
                               
Basic
  $ .74     $ 1.90     $ 3.84     $ 5.42  
Diluted
    .73       1.87       3.78       5.33  
 
                               
Dividends Declared Per Share
    .33       .29       .99       .87  
See Notes to Consolidated Financial Statements.

 


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Page 2
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
                 
    Sept. 30,     Dec. 31,  
    2008     2007  
    (in millions)  
Assets
               
 
               
Invested Assets
               
Short Term Investments
  $ 2,380     $ 1,839  
Fixed Maturities
               
Tax Exempt (cost $18,365 and $18,208)
    18,135       18,559  
Taxable (cost $15,466 and $15,266)
    15,211       15,312  
Equity Securities (cost $1,660 and $1,907)
    1,702       2,320  
Other Invested Assets
    2,220       2,051  
 
           
 
               
TOTAL INVESTED ASSETS
    39,648       40,081  
 
               
Cash
    46       49  
Securities Lending Collateral
    150       1,247  
Accrued Investment Income
    442       440  
Premiums Receivable
    2,134       2,227  
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
    2,320       2,307  
Prepaid Reinsurance Premiums
    398       392  
Deferred Policy Acquisition Costs
    1,571       1,556  
Deferred Income Tax
    828       442  
Goodwill
    467       467  
Other Assets
    1,551       1,366  
 
           
 
               
TOTAL ASSETS
  $ 49,555     $ 50,574  
 
           
 
               
Liabilities
               
 
               
Unpaid Losses and Loss Expenses
  $ 23,282     $ 22,623  
Unearned Premiums
    6,525       6,599  
Securities Lending Payable
    150       1,247  
Long Term Debt
    3,975       3,460  
Dividend Payable to Shareholders
    118       110  
Accrued Expenses and Other Liabilities
    1,901       2,090  
 
           
 
               
TOTAL LIABILITIES
    35,951       36,129  
 
           
 
               
Contingent Liabilities (Note 6)
               
 
               
Shareholders’ Equity
               
 
               
Common Stock — $1 Par Value; 371,980,710 and 374,649,923 Shares
    372       375  
Paid-In Surplus
    233       346  
Retained Earnings
    14,220       13,280  
Accumulated Other Comprehensive Income (Loss)
    (409 )     444  
Treasury Stock, at Cost - 16,279,184 Shares in 2008
    (812 )      
 
           
 
               
TOTAL SHAREHOLDERS’ EQUITY
    13,604       14,445  
 
           
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 49,555     $ 50,574  
 
           
See Notes to Consolidated Financial Statements.


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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED SEPTEMBER 30
                                 
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
    (in millions)  
 
                               
Net Income
  $ 264     $ 738     $ 1,397     $ 2,157  
 
                       
 
                               
Other Comprehensive Income (Loss), Net of Tax
                               
Change in Unrealized Appreciation or Depreciation of Investments
    (350 )     220       (814 )     (3 )
Foreign Currency Translation Gains (Losses)
    (113 )     54       (57 )     88  
Amortization of Net Loss and Prior Service Cost Included in Net Postretirement Benefit Costs
    8       6       18       15  
 
                       
 
    (455 )     280       (853 )     100  
 
                       
 
                               
Comprehensive Income (Loss)
  $ (191 )   $ 1,018     $ 544     $ 2,257  
 
                       
See Notes to Consolidated Financial Statements.


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Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
                 
    2008     2007  
    (in millions)  
 
               
Cash Flows from Operating Activities
               
Net Income
  $ 1,397     $ 2,157  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
Increase in Unpaid Losses and Loss Expenses, Net
    793       360  
Decrease in Unearned Premiums, Net
    (43 )     (64 )
Decrease in Premiums Receivable
    93       140  
Change in Income Tax Recoverable or Payable
    (318 )     8  
Deferred Income Tax
    81       59  
Amortization of Premiums and Discounts on Fixed Maturities
    157       175  
Depreciation
    49       52  
Realized Investment Losses (Gains), Net
    121       (328 )
Other, Net
    (186 )     6  
 
           
 
               
Net Cash Provided by Operating Activities
    2,144       2,565  
 
           
 
               
Cash Flows from Investing Activities
               
Proceeds from Fixed Maturities
               
Sales
    2,893       2,519  
Maturities, Calls and Redemptions
    1,801       1,309  
Proceeds from Sales of Equity Securities
    267       243  
Purchases of Fixed Maturities
    (5,486 )     (5,752 )
Purchases of Equity Securities
    (163 )     (336 )
Investments in Other Invested Assets, Net
    (102 )     (68 )
Increase in Short Term Investments, Net
    (571 )     (244 )
Increase in Net Payable from Security Transactions Not Settled
    183       57  
Purchases of Property and Equipment, Net
    (35 )     (30 )
Other, Net
          10  
 
           
 
               
Net Cash Used in Investing Activities
    (1,213 )     (2,292 )
 
           
 
               
Cash Flows from Financing Activities
               
Proceeds from Issuance of Long Term Debt
    1,200       1,800  
Repayment of Long Term Debt
    (685 )     (125 )
Proceeds from Issuance of Common Stock Under Stock-Based Employee Compensation Plans
    103       106  
Repurchase of Shares
    (1,170 )     (1,679 )
Dividends Paid to Shareholders
    (353 )     (339 )
Other, Net
    (29 )     (32 )
 
           
 
               
Net Cash Used in Financing Activities
    (934 )     (269 )
 
           
 
               
Net Increase (Decrease) in Cash
    (3 )     4  
 
               
Cash at Beginning of Year
    49       38  
 
           
 
               
Cash at End of Period
  $ 46     $ 42  
 
           
See Notes to Consolidated Financial Statements.


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Page 5
THE CHUBB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
     The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of The Chubb Corporation (Chubb) and its subsidiaries (collectively, the Corporation). Significant intercompany transactions have been eliminated in consolidation.
     The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, that management considers necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in Chubb’s Annual Report on Form 10-K for the year ended December 31, 2007.
2) Adoption of New Accounting Pronouncements
     Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. The Statement does not expand the use of fair value to any new circumstances. The adoption of SFAS No. 157 did not have a significant effect on the Corporation’s financial position or results of operations.
3) Investments
     Short term investments, which have an original maturity of one year or less, are carried at amortized cost, which approximates fair value. Fixed maturities and equity securities, all of which are classified as available-for-sale, are carried at fair value as of the balance sheet date. Fair value is defined as the price that would be received to sell the security in an orderly transaction between market participants.
     Fair values of fixed maturities and equity securities 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 securities or other inputs, such as quoted prices for similar securities, that are observable, either directly or indirectly. Where observable inputs are not available, fair value estimates are derived from unobservable inputs. Unobservable inputs reflect the Corporation’s assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly 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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Page 6
     The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value 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 fair value of fixed maturities and equity securities at September 30, 2008 categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:
                                 
    Level 1   Level 2   Level 3   Total
    (in millions)
 
                               
Fixed maturities
  $     $ 32,958     $ 388     $ 33,346  
Equity securities
    1,669             33       1,702  
     The change in unrealized appreciation or depreciation of fixed maturities and equity securities was as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
    (in millions)  
 
                               
Change in unrealized appreciation or depreciation of fixed maturities
  $ (430 )   $ 407     $ (882 )   $ (90 )
Change in unrealized appreciation of equity securities
    (109 )     (67 )     (371 )     86  
 
                       
 
    (539 )     340       (1,253 )     (4 )
Deferred income tax (credit)
    (189 )     120       (439 )     (1 )
 
                       
 
                               
Change in unrealized appreciation or depreciation of investments, net
  $ (350 )   $ 220     $ (814 )   $ (3 )
 
                       
4) Debt
     Chubb repaid $460 million of outstanding 5.472% notes that were due August 16, 2008.
     Chubb repaid $225 million of outstanding 3.95% notes that were due April 1, 2008.
     In May 2008, Chubb issued $600 million of unsecured 5.75% senior notes due May 15, 2018 and $600 million of unsecured 6.5% senior notes due May 15, 2038.

 


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5) Segments Information
     The principal business of the Corporation is the sale of property and casualty insurance. The profitability of the property and casualty insurance business depends on the results of both underwriting and investment operations, which are viewed as two distinct operations. The underwriting operations are managed and evaluated separately from the investment function.
     The property and casualty insurance subsidiaries (P&C Group) underwrite most lines of property and casualty insurance. Underwriting operations consist of four separate business units: personal insurance, commercial insurance, specialty insurance and reinsurance assumed. The personal segment targets the personal insurance market. The personal classes include automobile, homeowners and other personal coverages. The commercial segment includes those classes of business that are generally available in broad markets and are of a more commodity nature. Commercial classes include multiple peril, casualty, workers’ compensation and property and marine. The specialty segment includes those classes of business that are available in more limited markets since they require specialized underwriting and claim settlement. Specialty classes include professional liability coverages and surety. The reinsurance assumed business is effectively in runoff following the sale, in December 2005, of the ongoing business to a Bermuda based reinsurance company, Harbor Point Limited.
     Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the results of the Corporation’s non-insurance subsidiaries.

 


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Page 8
     Revenues and income before income tax of the operating segments were as follows:
                                 
    Periods Ended September 30      
    Third Quarter     Nine Months   
    2008     2007     2008     2007  
    (in millions)  
Revenues
                               
Property and casualty insurance
                               
Premiums earned
                               
Personal insurance
  $ 950     $ 919     $ 2,837     $ 2,716  
Commercial insurance
    1,253       1,278       3,801       3,836  
Specialty insurance
    731       739       2,219       2,213  
 
                       
 
                               
Total insurance
    2,934       2,936       8,857       8,765  
 
                               
Reinsurance assumed    
    30       42       69       162  
 
                       
 
    2,964       2,978       8,926       8,927  
 
                               
Investment income
    418       413       1,254       1,201  
 
                               
Other revenues
          3       4       9  
 
                       
 
                               
Total property and casualty insurance
    3,382       3,394       10,184       10,137  
 
                               
Corporate and other
    34       38       83       124  
Realized investment gains (losses), net
    (113 )     117       (121 )     328  
 
                       
 
                               
Total revenues
  $ 3,303     $ 3,549     $ 10,146     $ 10,589  
 
                       
 
                               
Income before income tax
                               
Property and casualty insurance
                               
Underwriting
                               
Personal insurance
  $ (21 )   $ 135     $ 293     $ 448  
Commercial insurance
    (51 )     221       161       543  
Specialty insurance
    135       178       398       495  
 
                       
 
                               
Total insurance
    63       534       852       1,486  
 
                               
Reinsurance assumed
     13       24             37       86  
 
                       
 
    76       558       889       1,572  
 
                               
Increase (decrease) in deferred policy acquisition costs
    (7 )     11       29       64  
 
                       
 
                               
Underwriting income
    69       569       918       1,636  
 
                               
Investment income
    411       405       1,231       1,176  
 
                               
Other income (charges)
    4       (1 )     7       3  
 
                       
 
                               
Total property and casualty insurance
    484       973       2,156       2,815  
 
                               
Corporate and other loss
    (53 )     (43 )     (159 )     (108 )
Realized investment gains (losses), net
    (113 )     117       (121 )     328  
 
                       
 
                               
Total income before income tax
  $ 318     $ 1,047     $ 1,876     $ 3,035  
 
                       

 


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6) Contingent Liabilities
     Chubb and certain of its subsidiaries have been involved in the investigations of certain business practices in the property and casualty insurance industry by various Attorneys General and other regulatory authorities of several states, the U.S. Securities and Exchange Commission, the U.S. Attorney for the Southern District of New York and certain non-U.S. regulatory authorities with respect to, among other things, (1) potential conflicts of interest and anti-competitive behavior arising from the payment of contingent commissions to brokers and agents and (2) loss mitigation and finite reinsurance arrangements. In connection with these investigations, Chubb and certain of its subsidiaries have received subpoenas and other requests for information from various regulators. The Corporation has been cooperating fully with these investigations.
     In December 2006, the Corporation settled with the Attorneys General of New York, Connecticut and Illinois all issues arising out of their investigations and, among other things, agreed to the implementation of certain business reforms. In September 2008, the Corporation settled with the Indiana Department of Insurance all issues arising out of that Department’s investigation. As part of this settlement, the Corporation agreed to implement the same business reforms it has implemented as agreed to with the Attorneys General of New York, Connecticut and Illinois. The Indiana settlement did not require the Corporation to pay any fine, penalty, costs, expenses or any other amount.
     In August 2007, Chubb and certain of its subsidiaries were named as defendants in an action filed by the Ohio Attorney General against several insurers and one broker in the Court of Common Pleas in Cuyahoga County, Ohio. This action alleges violations of Ohio’s antitrust laws. In July 2008, the court denied the Corporation’s and the other defendants’ motions to dismiss the Attorney General’s complaint. In August 2008, the Corporation and the other defendants filed answers to the complaint and discovery has begun. Although no other Attorney General or regulator has initiated an action against the Corporation, it is possible that such an action may be brought against the Corporation with respect to some or all of the issues that are the focus of these investigations.
     Individual actions and purported class actions arising out of the investigations into the payment of contingent commissions to brokers and agents have been filed in a number of federal and state courts. In August  2005, Chubb and certain of its subsidiaries were named in a putative class action entitled In re Insurance Brokerage Antitrust Litigation in the U.S. District Court for the District of New Jersey. This action, brought against several brokers and insurers on behalf of a class of persons who purchased insurance through the broker defendants, asserts claims under the Sherman Act and state law and the Racketeer Influenced and Corrupt Organizations Act (RICO) arising from the alleged unlawful use of contingent commission agreements. Chubb and certain of its subsidiaries have also been named as defendants in two putative class actions relating to allegations of unlawful use of contingent commission arrangements that were originally filed in state court. The first was filed in February 2005 in Seminole County, Florida. The second was filed in May 2005 in Essex County, Massachusetts. Both cases were removed to federal court and then transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the District of New Jersey for consolidation with the In re Insurance Brokerage Antitrust Litigation. Since being transferred to the District of New Jersey, the plaintiff in the former action has been

 


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inactive, and that action currently is stayed. The latter action has been voluntarily dismissed. In September 2007, the U.S. District Court for the District of New Jersey dismissed the second amended complaint filed by the plaintiffs in the In re Insurance Brokerage Antitrust Litigation in its entirety. In so doing, the court dismissed the plaintiffs’ Sherman Act and RICO claims with prejudice for failure to state a claim, and it dismissed the plaintiffs’ state law claims without prejudice because it declined to exercise supplemental jurisdiction over them. The plaintiffs have appealed the dismissal of their second amended complaint to the U.S. Court of Appeals for the Third Circuit, and that appeal is currently pending.
     In December 2005, Chubb and certain of its subsidiaries were named in a putative class action similar to the In re Insurance Brokerage Antitrust Litigation. The action is pending in the U.S. District Court for the District of New Jersey and has been assigned to the judge who is presiding over the In re Insurance Brokerage Antitrust Litigation. The complaint has never been served in this matter. Separately, in April 2006, Chubb and one of its subsidiaries were named in an action similar to the In re Insurance Brokerage Antitrust Litigation. This action was filed in the U.S. District Court for the Northern District of Georgia and subsequently was transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the District of New Jersey for consolidation with the In re Insurance Brokerage Antitrust Litigation. This action currently is stayed. In May 2007, Chubb and one of its subsidiaries were named as defendants in another action similar to the In re Insurance Brokerage Antitrust Litigation. This action was filed in the U.S. District Court for the District of New Jersey and consolidated with the In re Insurance Brokerage Antitrust Litigation. This action currently is stayed.
     In October 2007, certain of Chubb’s subsidiaries were named as defendants in an action similar to the In re Insurance Brokerage Antitrust Litigation. This action was filed in the U.S. District Court for the Northern District of Georgia. This action has been identified to the Judicial Panel on Multidistrict Litigation as a potential “tag-along action” to the In re Insurance Brokerage Antitrust Litigation. The Corporation currently anticipates that this action will be transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the District of New Jersey and consolidated with the In re Insurance Brokerage Antitrust Litigation.
     In these actions, the plaintiffs generally allege that the defendants unlawfully used contingent commission agreements and conspired to reduce competition in the insurance markets. The actions seek treble damages, injunctive and declaratory relief, and attorneys’ fees. The Corporation believes it has substantial defenses to all of the aforementioned legal proceedings and intends to defend the actions vigorously.
     The Corporation cannot predict at this time the ultimate outcome of the aforementioned ongoing investigations and legal proceedings, including any potential amounts that the Corporation may be required to pay in connection with them. Nevertheless, management believes that it is likely that the outcome will not have a material adverse effect on the Corporation’s results of operations or financial condition.

 


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7) Earnings Per Share
     The following table sets forth the computation of basic and diluted earnings per share:
                                 
    Periods Ended September 30        
    Third Quarter     Nine Months   
    2008     2007     2008     2007  
    (in millions,  
    except for per share amounts)  
 
Basic earnings per share:
                               
Net income
  $ 264     $ 738     $ 1,397     $ 2,157  
 
                       
 
                               
Weighted average number of common shares outstanding
    356.8       387.5       363.6       397.8  
 
                       
 
                               
Basic earnings per share
  $ .74     $ 1.90     $ 3.84     $ 5.42  
 
                       
 
                               
Diluted earnings per share:
                               
Net income
  $ 264     $ 738     $ 1,397     $ 2,157  
 
                       
 
                               
Weighted average number of common shares outstanding
    356.8       387.5       363.6       397.8  
Additional shares from assumed exercise of stock-based compensation awards
    5.5       6.1       5.6       6.7  
 
                       
 
                               
Weighted average number of common shares and potential common
shares assumed outstanding for computing diluted earnings per share
    362.3       393.6       369.2       404.5  
 
                       
 
                               
Diluted earnings per share
  $ .73     $ 1.87     $ 3.78     $ 5.33  
 
                       

 


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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of September 30, 2008 compared with December 31, 2007 and the results of operations for the nine months and three months ended September 30, 2008 and 2007. 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, 2007.
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 impact of changes to our reinsurance program; premium volume, rates and terms and conditions of the policies we write; the impact of market disruptions on our opportunities to write new business; competition; the fourth quarter 2008 performance of our limited partnership investments; the repurchase of common stock under our share repurchase program; our capital adequacy and funding of liquidity needs; and the impact of widening credit spreads and equity market declines. 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 conditions and the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events;
  the effects of the outbreak or escalation of war or hostilities;
  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;
  the ability to retain existing business and attract new business;
  our expectations with respect to cash flow and investment income and with respect to other income;

 


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  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;
 
    the impact from the bankruptcy protection sought by various asbestos producers and other related businesses; and
 
    the effects of proposed asbestos liability legislation, including the impact of claims patterns arising from the possibility of legislation and those that may arise if legislation is not passed;
  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;
  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:
    claims and litigation arising out of stock option “backdating,” “spring loading” and other equity grant practices by public companies;
 
    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, in particular contingent commissions and loss mitigation and finite reinsurance arrangements, 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 and regulatory developments on our business, including those relating to terrorism, catastrophes and the financial markets;
  any downgrade in our claims-paying, financial strength or other credit ratings;
  the ability of our subsidiaries to pay us dividends;

 


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  general economic and market conditions including:
    changes in 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; 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. These estimates and judgments, which are discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 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.
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 $1.4 billion in the first nine months of 2008 and $264 million in the third quarter compared with $2.2 billion and $738 million, respectively, in the comparable periods of 2007. The lower net income in the 2008 periods was due primarily to two factors. First, underwriting income in our property and casualty insurance business was substantially lower in the 2008 periods compared with the same periods in 2007, due in large part to higher catastrophe losses. Second, we had realized investment losses in the 2008 periods compared with realized investment gains in the 2007 periods.

 


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    Underwriting results were highly profitable in the first nine months of 2008 and 2007, but more so in 2007. Underwriting results in the third quarter of 2008 were modestly profitable compared to highly profitable results in the same period of 2007. Results in the 2008 periods, particularly in the third quarter, were adversely affected by high catastrophe losses. Catastrophe losses were $616 million in the first nine months of 2008 and $402 million in the third quarter compared with $249 million and $58 million, respectively, in the corresponding periods in 2007. The combined loss and expense ratio was 90.2% in the first nine months of 2008 and 98.1% in the third quarter compared with 82.6% and 81.6% in the respective 2007 periods.
 
    During the first nine months and third quarter of 2008, we experienced overall favorable development of about $660 million and $210 million, respectively, on loss reserves established as of the previous year end, due primarily to favorable loss experience in certain professional liability and commercial liability classes and lower than expected emergence of losses in the homeowners and commercial property classes. During the first nine months and third quarter of 2007, we experienced overall favorable development of about $480 million and $150 million, respectively, primarily in the professional liability classes and the homeowners and commercial property classes as well as in the run-off of the reinsurance assumed business.
 
    In a highly competitive market environment, total net premiums written were flat in the first nine months of 2008 and decreased by 1% in the third quarter compared with the same periods in 2007. Net premiums written in the United States decreased by 3% in the first nine months of 2008 and 4% in the third quarter. Net premiums written outside the United States increased by 11% in the first nine months of 2008 and 8% in the third quarter; the growth was largely attributable to the impact of currency fluctuation due to the weakness of the U.S. dollar.
 
    Property and casualty investment income after tax increased 4% in the first nine months of 2008 and 1% in the third quarter compared with the same periods in 2007. The growth was due to an increase in invested assets over the past year. For more information on this non-GAAP financial measure, see “Property and Casualty Insurance - Investment Results.”
 
    Net realized investment losses were $121 million in the first nine months of 2008 and $113 million in the third quarter compared with net realized investment gains of $328 million and $117 million, respectively, in the comparable periods of 2007. The net realized losses in the first nine months and third quarter of 2008 were primarily attributable to other-than-temporary impairment losses. The net realized gains in the first nine months and third quarter of 2007 were primarily attributable to gains from investments in limited partnerships.

 


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     A summary of our consolidated net income is as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
            (in millions)          
 
                               
Property and Casualty Insurance
  $ 484     $ 973     $ 2,156     $ 2,815  
Corporate and Other
    (53 )     (43 )     (159 )     (108 )
Realized Investment Gains (Losses)
    (113 )     117       (121 )     328  
 
                       
Consolidated Income Before Income Tax
    318       1,047       1,876       3,035  
Federal and Foreign Income Tax
    54       309       479       878  
 
                       
 
                               
Consolidated Net Income
  $ 264     $ 738     $ 1,397     $ 2,157  
 
                       
Property and Casualty Insurance
     A summary of the results of operations of our property and casualty insurance business is as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
            (in millions)          
 
                               
Underwriting
                               
Net Premiums Written
  $ 2,900     $ 2,938     $ 8,883     $ 8,863  
Decrease in Unearned Premiums
    64       40       43       64  
 
                       
Premiums Earned
    2,964       2,978       8,926       8,927  
 
                       
Losses and Loss Expenses
    2,006       1,541       5,339       4,693  
Operating Costs and Expenses
    871       874       2,669       2,649  
Decrease (Increase) in Deferred Policy Acquisition Costs
    7       (11 )     (29 )     (64 )
Dividends to Policyholders
    11       5       29       13  
 
                       
 
                               
Underwriting Income
    69       569       918       1,636  
 
                       
 
                               
Investments
                               
Investment Income Before Expenses
    418       413       1,254       1,201  
Investment Expenses
    7       8       23       25  
 
                       
 
                               
Investment Income
    411       405       1,231       1,176  
 
                       
 
                               
Other Income (Charges)
    4       (1 )     7       3  
 
                       
 
                               
Property and Casualty Income Before Tax
  $ 484     $ 973     $ 2,156     $ 2,815  
 
                       
 
                               
Property and Casualty Investment Income After Tax
  $ 327     $ 324     $ 981     $ 942  
 
                       
     Property and casualty income before tax was much lower in the first nine months and third quarter of 2008 compared with the same periods in 2007. Underwriting income was substantially lower in the 2008 periods compared with the same periods in 2007. The decrease in underwriting income in 2008 was due in large part to higher catastrophe losses, particularly in the third quarter. Investment income grew in both 2008 periods compared with the same periods in 2007, but growth slowed considerably in the third quarter.

 


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     The profitability of the 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.
  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 $8.9 billion in the first nine months of 2008, nearly identical to the amount in the same period of 2007. Net premiums written in the third quarter of 2008 were $2.9 billion, a decrease of 1% compared with the same period of 2007.
     Net premiums written by business unit were as follows:
                                                 
    Quarter Ended           Nine Months Ended        
    Sept.  30     % Incr.     Sept. 30     % Incr.  
    2008     2007     (Decr.)     2008     2007     (Decr.)  
    (in millions)             (in millions)          
 
                                               
Personal insurance
  $ 995     $ 977       2 %   $ 2,887     $ 2,792       3 %
Commercial insurance
    1,178       1,204       (2 )     3,819       3,821        
Specialty insurance
    709       726       (2 )     2,123       2,150       (1 )
 
                                       
Total insurance
    2,882       2,907       (1 )     8,829       8,763       1  
Reinsurance assumed
    18       31       (42 )     54       100       (46 )
 
                                       
Total
  $ 2,900     $ 2,938       (1 )   $ 8,883     $ 8,863        
 
                                       
     Net premiums written from our insurance business increased 1% in the first nine months of 2008 and decreased by 1% in the third quarter compared with the corresponding periods in 2007. Premiums in the United States, which represented 75% of our insurance premiums in the first nine months of 2008, decreased by 2% in the first nine months and 3% in the third quarter. Premiums outside the U.S. increased by 11% in the first nine months and 8% in the third quarter. The growth outside the U.S. was largely attributable to the impact of currency fluctuation due to the weakness of the U.S. dollar in the 2008 periods compared with the 2007 periods; in local currencies, growth outside the U.S. was 4% in both periods.
     In a highly competitive market environment, we continued our emphasis on underwriting discipline. Rates continued to be under competitive pressure that varied by class of business and geographic area. The decline in rates in the third quarter of 2008 was somewhat less than we had experienced in recent quarters. We continued to retain a high percentage of our existing customers and to renew these accounts at acceptable prices relative to the exposure. However, there were fewer opportunities to write new business at acceptable rates in the first nine months of 2008 compared with the same period in 2007.

 


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     Over the past few months, the property and casualty insurance market has experienced significant disruption as a result of broader issues in the financial markets and the economies of the United States and other countries. The market disruption may result in an increase in opportunities for us to write new business, but competition for that new business may also be significant. Nonetheless, we currently expect the market environment to remain competitive for the balance of 2008.
     Net premiums written in the reinsurance assumed business, which is in runoff, were not significant in the first nine months or third quarter of 2008 or 2007.
  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 the reinsurance.
     Reinsurance rates for property risks have declined somewhat in 2008. However, capacity restrictions continued in some segments of the marketplace.
     We renewed our major property reinsurance treaties, which represent the most significant component of our reinsurance program, in April 2008.
     On our commercial property per risk treaty, we increased the reinsurance coverage in the top layer of the treaty. This treaty now provides approximately $560 million of coverage per risk in excess of our $25 million retention.
     The structure of our property catastrophe program for events in the United States was modified, but the overall coverage is similar to the previous program. We purchased $200 million of fully collateralized three-year reinsurance coverage in place of traditional reinsurance. This reinsurance was purchased from East Lane Re II Ltd., which financed the provision of reinsurance through the issuance of $200 million in catastrophe bonds to investors under three separate bond tranches. The current traditional catastrophe reinsurance treaty, in combination with the collateralized coverage, provides coverage of approximately 70% of losses (net of recoveries from other available reinsurance) between $350 million and $1.3 billion, with additional coverage of 60% of losses between $1.3 billion and $2.05 billion in the northeastern part of the United States, where we have our greatest concentration of catastrophe exposure.
     We have additional fully collateralized four-year reinsurance coverage, purchased in 2007, for homeowners-related losses sustained from qualifying hurricane loss events in the northeastern part of the United States. This reinsurance was purchased from East Lane Re Ltd., which financed the provision of reinsurance through the issuance of $250 million in catastrophe bonds to investors under two separate bond tranches. This reinsurance provides coverage in 2008 of approximately 30% of covered losses between $1.35 billion and $2.2 billion.
     We have additional reinsurance from the Florida Hurricane Catastrophe Fund, which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this program limits our initial retention in Florida for homeowners related losses to approximately $185 million.

 


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     On our property catastrophe treaty for events outside the United States, we increased the reinsurance coverage in the top layer of the treaty by $50 million and modestly increased our participation in the program. The treaty now provides coverage of approximately 85% of losses (net of recoveries from other available reinsurance) between $75 million and $325 million.
     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.
     The overall cost of our property reinsurance program in the first nine months of 2008 was modestly lower than that in the comparable period in 2007. We do not expect the changes we made to our reinsurance program during 2008 to have a material effect on the Corporation’s results of operations, financial condition or liquidity.
  Profitability
     The combined loss and expense 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, 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.
     Underwriting results were highly profitable in the first nine months of 2008 and 2007. Underwriting results in the third quarter of 2008 were modestly profitable compared to highly profitable results in the same period in 2007. The combined loss and expense ratio for our overall property and casualty business was as follows:
                                 
    Periods Ended September 30
    Third Quarter   Nine Months
    2008   2007   2008   2007
 
                               
Loss ratio
    67.9 %     51.8 %     60.0 %     52.7 %
Expense ratio
    30.2       29.8       30.2       29.9  
 
                               
Combined ratio
    98.1 %     81.6 %     90.2 %     82.6 %
 
                               

 


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     The loss ratio was significantly higher in both the first nine months and third quarter of 2008 compared with the respective periods in 2007. The increase, particularly in the third quarter, was due in large part to higher catastrophe losses. Excluding the impact of catastrophes, the loss ratio in both years remained relatively low, reflecting our disciplined underwriting in recent years as well as favorable reserve development. However, the loss ratio in the 2008 periods was adversely affected by declining earned premium rates and several large non-catastrophe losses.
     Catastrophe losses were $616 million in the first nine months of 2008, which represented 6.9 percentage points of the loss ratio, compared with $249 million or 2.8 percentage points in the same period of 2007. Catastrophe losses were $402 million in the third quarter of 2008, which represented 13.6 percentage points of the loss ratio, compared with $58 million or 2.0 percentage points in the same period in 2007. Of the catastrophe losses in the third quarter of 2008, about $340 million related to Hurricane Ike, including our estimated share of an assessment from the Texas Windstorm Insurance Association, a windstorm insurance entity created by the State of Texas. The estimated loss from Hurricane Ike does not reflect any reinsurance recoveries from our catastrophe reinsurance treaties since the aggregate gross loss was within our initial retention of $350 million.
     The expense ratio was slightly higher in the first nine months and third quarter of 2008 compared to the same periods of 2007, due to an increase in commissions, which more than offset lower operating costs related to the run-off of our reinsurance business. The increase in commissions was due to premium growth outside the United States in countries where commission rates are higher than in the United States as well as modestly higher commission rates in the United States in certain classes of business.
     In lieu of paying contingent commissions, beginning in 2007, we implemented a new guaranteed supplemental compensation program for agents and brokers in the United States with whom we previously had contingent commission agreements. Under this arrangement, agents and brokers are paid a percentage of written premiums on eligible lines of business in a calendar year based upon their prior performance. The change in our commission arrangements created a difference in the timing of expense recognition, which resulted in a one-time benefit to income during the 2007 transition year. The impact of the change in the first nine months and third quarter of 2007 was to increase deferred policy acquisition costs by approximately $60 million and $20 million, respectively. The change had no effect on the expense ratio.

 


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  Review of Underwriting Results by Business Unit
  Personal Insurance
     Net premiums written from personal insurance, which represented 33% of our premiums written in the first nine months of 2008, increased by 3% in the first nine months of 2008 and 2% in the third quarter compared with the same periods in 2007. Net premiums written for the classes of business within the personal insurance segment were as follows:
                                                 
    Quarter Ended           Nine Months Ended        
    Sept. 30     % Incr.     Sept. 30     % Incr.  
    2008     2007     (Decr.)     2008     2007     (Decr.)  
    (in millions)             (in millions)          
 
                                               
Automobile
  $ 154     $ 161       (4 )%   $ 457     $ 472       (3 )%
Homeowners
    646       657       (2 )     1,859       1,831       2  
Other
    195       159       23       571       489       17  
 
                                       
Total personal
  $ 995     $ 977       2     $ 2,887     $ 2,792       3  
 
                                       
     Personal automobile premiums decreased in the 2008 periods due to a highly competitive U.S. marketplace. Premium growth in our homeowners business was constrained in 2008 due to an increasingly competitive market. The growth in the first nine months of 2008 was due to increased insurance-to-value. The in-force policy count for this class decreased slightly during the first nine months of 2008. Our other personal business includes insurance for excess liability, yacht and accident coverages. The substantial growth in this business was due to a significant increase in accident premiums.
     Our personal insurance business produced highly profitable underwriting results in the first nine months of both 2008 and 2007, but more so in 2007. Results in the third quarter of 2008 were near breakeven compared with highly profitable results in the same period of 2007. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
 
                               
Automobile
    85.7 %     91.1 %     88.5 %     89.6 %
Homeowners
    102.9       76.8       85.8       77.2  
Other
    105.8       99.0       100.5       95.3  
 
                       
Total personal
    100.7 %     83.3 %     89.1 %     82.6 %
 
                       
     The less profitable results in the 2008 periods were due in large part to the adverse impact of higher catastrophe losses, particularly in the third quarter, primarily from Hurricane Ike. Catastrophe losses represented 7.5 percentage points of the combined ratio for the personal insurance segment for the first nine months of 2008 and 16.3 percentage points for the third quarter compared with 4.9 and 5.2 percentage points, respectively, in the same periods of 2007.
     Our personal automobile business produced highly profitable results in the first nine months and third quarter of both 2008 and 2007. Our non-U.S. personal automobile business experienced significant improvement in the 2008 periods.

 


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     Homeowners results were highly profitable in the first nine months of 2008 and 2007, but more so in 2007. Results in the third quarter of 2008 were unprofitable compared to highly profitable results in the same period in 2007. The less profitable results in the 2008 periods were due to higher catastrophe losses, primarily related to Hurricane Ike in the third quarter, as well as the higher severity of large non-catastrophe losses. Catastrophe losses represented 11.0 percentage points of the combined ratio for this class in the first nine months of 2008 and 23.8 percentage points in the third quarter compared with 7.4 and 8.0 percentage points, respectively, in the corresponding periods of 2007.
     Other personal results were near breakeven in the first nine months of 2008 compared with profitable results in the same period of 2007. Results in the third quarter of 2008 were unprofitable compared with near breakeven results in the same period of 2007. Our accident business was profitable in the first nine months and third quarter of 2008 compared with highly profitable results in both periods in 2007. Our yacht business was highly unprofitable in the first nine months of 2008, compared to highly profitable results in the comparable period in 2007. Yacht results were highly unprofitable in the third quarter of 2008 compared with unprofitable results in the same period of 2007. Yacht results in the 2008 periods were adversely affected by several large non-catastrophe losses as well as $10 million of losses related to Hurricane Ike. Our excess liability results improved somewhat in 2008 but remained unprofitable. Results in both years were adversely affected by inadequate pricing and, in 2007, by unfavorable prior year loss development. Excess liability rates have increased modestly in the past year.
  Commercial Insurance
     Net premiums written from commercial insurance, which represented 43% of our premiums written in the first nine months of 2008, were flat in the first nine months of 2008 and decreased by 2% in the third 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:
                                                 
    Quarter Ended           Nine Months Ended        
    Sept. 30     % Incr.     Sept. 30     % Incr.  
    2008     2007     (Decr.)     2008     2007     (Decr.)  
    (in millions)             (in millions)          
 
                                               
Multiple peril
  $ 308     $ 313       (2 )%   $ 915     $ 926       (1 )%
Casualty
    385       403       (4 )     1,281       1,300       (1 )
Workers’ compensation
    205       205             666       686       (3 )
Property and marine
    280       283       (1 )     957       909       5  
 
                                       
Total commercial
  $ 1,178     $ 1,204       (2 )   $ 3,819     $ 3,821        
 
                                       

 


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     Premium growth in the first nine months of 2008 was constrained due to a highly competitive marketplace, particularly for new business. Growth in the first nine months in the property and marine classes was due to selective initiatives. Overall, rates in the first nine months of 2008 were down modestly. Certain classes of business, such as workers’ compensation and large property risks, experienced more competitive pressure than others. Competitive pressure also varied among geographic areas. Retention levels of our existing customers remained strong, slightly higher than those in the first nine months of 2007. However, new business volume in the first nine months of 2008 was down from 2007 levels as it has become more difficult to find new opportunities at acceptable rates. We have continued to maintain our underwriting discipline in the highly competitive market, renewing business and writing new business only where we believe we are securing acceptable rates and appropriate terms and conditions for the exposures. We expect continued pressure on rates for the balance of 2008.
     Our commercial insurance business produced profitable underwriting results in the first nine months of 2008, but unprofitable results in the third quarter. Results in both periods in 2007 were highly profitable. The combined loss and expense ratios for the classes of business within the commercial insurance segment were as follows:
                                 
    Periods Ended September 30
    Third Quarter   Nine Months
    2008   2007   2008   2007
 
                               
Multiple peril
    103.6 %     73.4 %     87.0 %     81.1 %
Casualty
    99.8       98.4       94.6       95.1  
Workers’ compensation
    81.3       79.4       80.5       76.0  
Property and marine
    133.3       79.5       116.0       85.4  
 
                               
Total commercial
    106.0 %     84.4 %     95.6 %     85.9 %
 
                               
     The less profitable results in the 2008 periods were due in large part to higher catastrophe losses in the property and marine and multiple peril classes, particularly in the third quarter, primarily from Hurricane Ike. Catastrophe losses represented 10.6 percentage points of the combined ratio for the commercial insurance segment for the first nine months of 2008 and 19.9 percentage points for the third quarter compared with 3.0 and 0.8 percentage points, respectively, in the same periods of 2007. Results in both years benefited from favorable loss experience, disciplined risk selection and appropriate terms and conditions in recent years.
     Multiple peril results were highly profitable in the first nine months of 2008 but were modestly unprofitable in the third quarter. Results in the comparable 2007 periods were highly profitable, exceptionally so in the third quarter. The less profitable results in the 2008 periods were in the property component of this business due to higher catastrophe losses. Catastrophe losses represented 12.1 percentage points of the combined ratio for this class in the first nine months of 2008 and 28.2 percentage points in the third quarter compared with 2.5 and zero percentage points, respectively, for the comparable periods in 2007. Results in the property component benefited in both years from favorable non-catastrophe loss experience, particularly outside the United States in 2008. The liability component of this business was highly profitable in the first nine months of both years, but more so in 2008, due to favorable prior year loss development.

 


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     Our casualty business produced similarly profitable results in the first nine months of 2008 and 2007. Results in the third quarter of 2008 were near breakeven compared to modestly profitable results in the same period of 2007. The automobile component of this business was highly profitable in both years. The primary liability component was highly profitable in the first nine months of both years but was less profitable in the third quarter of both years. The excess liability component produced profitable results in the first nine months and third quarter of 2008 and 2007. Excess liability results in both years, but more so in 2008, benefited from favorable prior year loss development. Casualty results in the first nine months and third quarter of 2008 were adversely affected by incurred losses of $50 million and $25 million, respectively, related to toxic waste claims. Casualty results in the first nine months and third quarter of 2007 were adversely affected by incurred losses of $63 million and $20 million, respectively, related to asbestos and toxic waste claims. Our analysis of asbestos and toxic waste exposures in the relevant periods of 2008 and 2007 resulted in increases in the estimate of our ultimate liabilities.
     Workers’ compensation results were highly profitable in the first nine months and third quarter of 2008 and 2007. Results in both years benefited from our disciplined risk selection during the past several years as well as the positive effect of reforms in California. The modestly less profitable results in 2008 were primarily due to lower earned premiums, which were due to rate reductions associated with state reforms and increased competition.
     Property and marine results were highly unprofitable in the first nine months and third quarter of 2008 compared with highly profitable results in the comparable periods of 2007. The deterioration in the 2008 periods was due primarily to higher catastrophe losses, and, to a lesser extent, an increase in the frequency and severity of large non-catastrophe losses. Catastrophe losses represented 29.5 percentage points of the combined ratio for these classes in the first nine months of 2008 and 49.0 percentage points in the third quarter compared with 9.6 and 1.7 percentage points, respectively, in the corresponding periods of 2007.
  Specialty Insurance
     Net premiums written from specialty insurance, which represented 24% of our premiums written in the first nine months of 2008, decreased by 1% in the first nine months of 2008 and 2% in the third quarter compared with the same periods a year ago. Net premiums written for the classes of business within the specialty insurance segment were as follows:
                                                 
    Quarter Ended             Nine Months Ended        
    Sept. 30     % Incr.     Sept. 30     % Incr.  
    2008     2007     (Decr.)     2008     2007     (Decr.)  
    (in millions)             (in millions)          
 
                                               
Professional liability
  $ 617     $ 647       (5 )%   $ 1,847     $ 1,893       (2 )%
Surety
    92       79       16       276       257       7  
 
                                       
Total specialty
  $ 709     $ 726       (2 )   $ 2,123     $ 2,150       (1 )
 
                                       

 


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     Our ability to grow premiums in the professional liability classes was constrained due to the continuing competitive pressure on rates, particularly in the directors and officers liability component, and our commitment to maintain underwriting discipline in this environment. While professional liability rates generally decreased in the first nine months of 2008, rates increased with respect to directors and officers liability insurance for public financial institutions, particularly for those companies that have been directly implicated in the current crisis in the financial markets. Retention levels in the professional liability classes remained strong in the first nine months of 2008, comparable to those in the same period in 2007. New business volume in 2008 was somewhat lower than in 2007. We continued to get what we believe are acceptable rates and appropriate terms and conditions on both new business and renewals. While we expect the overall market to remain competitive for the remainder of 2008, we anticipate that the pace of rate decreases, specifically with regard to directors and officers liability insurance, will slow.
     Although premiums grew significantly in our surety business in the third quarter of 2008 compared with the same period in 2007, the timing of premium writings in the surety business is linked to the project timing of our insureds and is not consistent among quarters.
     Our specialty insurance business produced highly profitable underwriting results in the first nine months and third quarter of 2008 and 2007, but more so in 2007. The combined loss and expense ratios for the classes of business within the specialty insurance segment were as follows:
                                 
    Periods Ended September 30
    Third Quarter   Nine Months
    2008   2007   2008   2007
 
                               
Professional liability
    84.3 %     81.8 %     84.0 %     83.7 %
Surety
    65.0       30.8       76.1       31.5  
 
                               
Total specialty
    82.3 %     76.3 %     83.2 %     78.3 %
 
                               
     Our professional liability business produced highly profitable results in the first nine months and third quarter of 2008 and 2007. Results in the fiduciary liability and employment practices liability classes were highly profitable in both years. The directors and officers liability class was also profitable in the first nine months of both years, but more so in 2007. Profitability in this class was particularly strong outside the United States in 2008. Results in the errors and omissions liability class were modestly unprofitable in the first nine months of 2008 compared with modestly profitable results in the same period of 2007. Collectively, these professional liability classes benefited from a significant amount of favorable prior year loss development in the relevant periods of 2008 and 2007, due to the recognition of the positive loss trends we have been experiencing related to accident years 2005 and prior. These trends were largely the result of a favorable business climate, lower policy limits and better terms and conditions. The fidelity class was highly profitable in the 2008 and 2007 periods due to favorable loss experience. The expected loss ratio for the current accident year in our professional liability business is slightly above breakeven, and higher than last year, due in part to the uncertainty surrounding the ongoing crisis in the financial markets.
     Surety results were highly profitable in the first nine months and third quarter of 2008. Results were exceptionally profitable in the comparable periods of 2007. Results in 2008 were adversely impacted by one large loss. Our surety business tends to be characterized by infrequent but potentially high severity losses.

 


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  Reinsurance Assumed
     Net premiums written from our reinsurance assumed business, which is in runoff, were not significant in the first nine months and third quarter of 2008 or 2007.
     Reinsurance assumed results were profitable in the first nine months and third quarter of 2008 and 2007. Results in both years, but more so in 2007, benefited from significant favorable prior year loss development.
  Loss Reserves
     Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability of our business.
     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.

 


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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  
September 30, 2008   Case     IBNR     Total     Recoverable     Reserves  
    (in millions)  
 
                                       
Personal insurance
                                       
Automobile
  $ 222     $ 201     $ 423     $ 14     $ 409  
Homeowners
    455       404       859       30       829  
Other
    415       621       1,036       206       830  
 
                             
Total personal
    1,092       1,226       2,318       250       2,068  
 
                             
 
                                       
Commercial insurance
                                       
Multiple peril
    603       1,105       1,708       40       1,668  
Casualty
    1,575       4,619       6,194       419       5,775  
Workers’ compensation
    845       1,367       2,212       234       1,978  
Property and marine
    916       545       1,461       536       925  
 
                             
Total commercial
    3,939       7,636       11,575       1,229       10,346  
 
                             
 
                                       
Specialty insurance
                                       
Professional liability
    1,779       6,140       7,919       498       7,421  
Surety
    102       51       153       10       143  
 
                             
Total specialty
    1,881       6,191       8,072       508       7,564  
 
                             
 
                                       
Total insurance
    6,912       15,053       21,965       1,987       19,978  
 
                                       
Reinsurance assumed
    374       943       1,317       333       984  
 
                             
 
                                       
Total
  $ 7,286     $ 15,996     $ 23,282     $ 2,320     $ 20,962  
 
                             
                                         
                                    Net  
    Gross Loss Reserves     Reinsurance     Loss  
December 31, 2007   Case     IBNR     Total     Recoverable     Reserves  
    (in millions)  
 
                                       
Personal insurance
                                       
Automobile
  $ 226     $ 200     $ 426     $ 15     $ 411  
Homeowners
    432       305       737       32       705  
Other
    452       526       978       230       748  
 
                             
Total personal
    1,110       1,031       2,141       277       1,864  
 
                             
 
                                       
Commercial insurance
                                       
Multiple peril
    646       1,010       1,656       37       1,619  
Casualty
    1,640       4,302       5,942       402       5,540  
Workers’ compensation
    842       1,323       2,165       255       1,910  
Property and marine
    814       395       1,209       532       677  
 
                             
Total commercial
    3,942       7,030       10,972       1,226       9,746  
 
                             
 
                                       
Specialty insurance
                                       
Professional liability
    2,079       5,999       8,078       552       7,526  
Surety
    33       52       85       14       71  
 
                             
Total specialty
    2,112       6,051       8,163       566       7,597  
 
                             
 
                                       
Total insurance
    7,164       14,112       21,276       2,069       19,207  
 
                                       
Reinsurance assumed
    400       947       1,347       238       1,109  
 
                             
 
                                       
Total
  $ 7,564     $ 15,059     $ 22,623     $ 2,307     $ 20,316  
 
                             

 


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     Loss reserves, net of reinsurance recoverable, increased by $646 million during the first nine months of 2008. Loss reserves related to our insurance business increased by $771 million. The increase includes approximately $345 million related to catastrophe losses. The change in loss reserves also includes a decrease of approximately $150 million related to currency fluctuation due to the strength of the U.S. dollar at September 30, 2008 compared with December 31, 2007. Loss reserves related to our reinsurance assumed business, which is in runoff, decreased by $125 million.
     The significant increase in gross loss reserves related to our homeowners business during the first nine months of 2008 was due in large part to losses related to Hurricane Ike that remained unpaid at September 30. The significant increase in gross loss reserves for the commercial property and marine business was due to losses related to Hurricane Ike as well as several large non-catastrophe losses incurred during the period that remained unpaid at September 30. Gross loss reserves for our professional liability classes decreased in the first nine months of 2008 due to generally low reported loss activity as well as settlements related to previously established case reserves. The significant increase in gross surety loss reserves related to a large loss that remained unpaid at September 30.
     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 September 30, 2008 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, 2007, 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 September 30, 2008 may change, which could have a material effect on the Corporation’s results of operations and financial condition.
     Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that actual results can differ from expectations 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 $660 million during the first nine months of 2008 and $210 million in the third quarter compared with favorable prior year development of about $480 million and $150 million, respectively, in the comparable periods of 2007.
     The favorable development in the first nine months of 2008 was primarily in certain professional liability and commercial liability classes, due to favorable loss trends related mainly to accident years 2005 and prior, and in the short tail homeowners and commercial property classes, largely related to the lower than expected emergence of losses in the 2007 accident year. The favorable development in the first nine months of 2007 was primarily in the professional liability classes and the homeowners and commercial property classes, as well as in the run-off of the reinsurance assumed business.

 


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  Investment Results
     Property and casualty investment income before taxes increased by 5% in the first nine months of 2008 and 1% in the third quarter compared with the same periods in 2007. Growth for the first nine months of 2008 was due to an increase in average invested assets compared with the same period in 2007. The slowdown in the growth of property and casualty investment income in the third quarter of 2008 was due to a slight decrease in the average yield compared with the same period in 2007.
     The effective tax rate on investment income was 20.3% in the first nine months of 2008 compared with 19.9% in the same period of 2007. The effective tax rate fluctuates as a result of our holding a different proportion of our investment portfolio in tax exempt securities during different periods.
     On an after-tax basis, property and casualty investment income increased by 4% in the first nine months of 2008 and 1% in the third quarter compared with the same periods in 2007. The after-tax annualized yield on the investment portfolio that supports the property and casualty insurance business was 3.49% and 3.47% in the first nine months of 2008 and 2007, respectively. Management uses property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment performance 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.
Corporate and Other
     Corporate and other includes 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 $159 million in the first nine months of 2008 compared with a loss of $108 million in the same period of 2007. The higher loss in the first nine months of 2008 was primarily due to lower investment income and higher interest expense compared with the same period in 2007. Investment income was lower due to lower average corporate invested assets during the first nine months of 2008, due primarily to the repurchase of Chubb’s common stock. The higher interest expense was the result of higher average debt outstanding during the 2008 period.

 


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Realized Investment Gains and Losses
     Net investment gains and losses realized were as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2008     2007     2008     2007  
    (in millions)  
 
                               
Net realized gains (losses)
                               
Equity securities
  $ (52 )   $ 39     $     $ 83  
Fixed maturities
    30       (13 )     27       (32 )
Other invested assets
    5       98       69       288  
 
                       
 
    (17 )     124       96       339  
 
                       
 
                               
Other-than-temporary impairment losses
                               
Equity securities
    (53 )     (7 )     (143 )     (11 )
Fixed maturities
    (43 )           (74 )      
 
                       
 
    (96 )     (7 )     (217 )     (11 )
 
                       
 
                               
Realized investment gains (losses) before tax
  $ (113 )   $ 117     $ (121 )   $ 328  
 
                       
 
                               
Realized investment gains (losses) after tax
  $ (74 )   $ 76     $ (79 )   $ 213  
 
                       
     The net realized gains and losses on other invested assets represent the aggregate of distributions to us from the limited partnerships in which we have an interest and changes in our equity in the net assets of the 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 reported on a one quarter lag. As a result, we have not yet received third quarter 2008 valuations from many of the limited partnerships. Based on limited preliminary information about the performance of the limited partnerships during the third quarter, we expect to report a decline in our equity in the net assets of these partnerships in our fourth quarter results. We cannot precisely quantify the amount of the loss that we will report; however, we currently expect that the loss before tax will be about $100 million, but it is possible the loss could exceed that amount.
     We regularly review those invested assets whose fair value is less than cost to determine if an other-than-temporary decline in value has occurred. In evaluating whether a decline in value of any investment is temporary or other-than-temporary, we consider various quantitative criteria and qualitative factors including 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, our intent and ability to hold the investment for a period of time sufficient to allow us to recover our cost, general market conditions and industry or sector specific factors. If a decline in the fair value of an individual security is deemed to be other-than-temporary, the difference between cost and estimated fair value is charged to income as a realized investment loss. The fair value of the investment becomes its new cost basis. 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.

 


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     During the first nine months of 2008, our investments in certain equity and fixed maturity securities were deemed to be other-than-temporarily impaired. We determined that the equity investments, about half of which are in the financial services sector, were not likely to recover to our cost basis over a near term period. We also determined that we could not assert an intent to hold the fixed maturities issued by certain companies in the financial services sector for a period of time sufficient to allow us to recover our cost.
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 September 30, 2008, the Corporation had shareholders’ equity of $13.6 billion and total debt of $4.0 billion.
     In April 2008, Chubb repaid $225 million of outstanding 3.95% notes when due. In August 2008, Chubb repaid $460 million of outstanding 5.472% notes when due.
     In May 2008, Chubb issued $600 million of unsecured 5.75% senior notes due in 2018 and $600 million of unsecured 6.5% senior notes due in 2038.
     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 and/or equity securities.
     In December 2007, the Board of Directors authorized the repurchase of up to 28,000,000 shares of Chubb’s common stock. The authorization has no expiration date. During the first nine months of 2008, we repurchased 22,711,788 shares of Chubb’s common stock in open market transactions at a cost of $1.1 billion. As of September 30, 2008, 3,400,882 shares remained under the share repurchase authorization. We expect to repurchase all of the shares remaining under the authorization by the end of 2008, subject to market conditions.
  Ratings
     Chubb and its 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.
     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.

 


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     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 generally have been met by funds from operations. We expect that our liquidity requirements in the future will be met by funds from operations or borrowings from our credit facility or the issuance of debt and equity securities.
     Our property and casualty operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient 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 and thereby increase future investment income.
     Our strong underwriting results continued to generate substantial new cash. New cash from operations available for investment by our property and casualty subsidiaries was approximately $800 million in the first nine months of 2008 compared with $1.8 billion in the same period in 2007. New cash available was lower in the first nine months of 2008 compared with the same period in 2007 due primarily to a $750 million increase in dividends paid by the property and casualty subsidiaries to Chubb and, to a lesser extent, modestly lower premium receipts and higher loss payments.
     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.
     Chubb has a revolving credit agreement with a group of banks that provides for up to $500 million of unsecured borrowings. This agreement has a termination date of October 19, 2012. In August 2008, the agreement was amended to allow Chubb to request on two occasions at any time during the remaining term of the agreement an extension of the maturity date for an additional one year period. Prior to this amendment, Chubb was permitted to request an extension in 2008 and again in 2009. There have been no borrowings under this agreement.

 


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     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. Our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount of dividends they may pay 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 maximum dividend distribution that may be made by the property and casualty subsidiaries to Chubb during 2008 without prior approval is approximately $2.4 billion. During the first nine months of 2008, these subsidiaries paid dividends to Chubb totaling $1.4 billion compared with $650 million during the same period of 2007.
Invested Assets
     The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to 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 the applicable operating companies.
     Our investment portfolio is primarily comprised of high quality bonds, principally tax exempt securities, mortgage-backed securities, corporate issues and U.S. Treasuries, 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 September 30, 2008, 68% of our U.S. fixed maturity portfolio was invested in tax exempt bonds, compared with 67% at the prior year end. About 85% of our tax exempt bonds are rated AA or better with about 40% rated AAA. The average rating of our tax exempt bonds is AA. About 40% of our tax exempt bonds are insured and have an average rating of AA. Without the benefit of the insurance, the average credit rating of the insured bonds is slightly lower within the AA category. The insured tax exempt bonds in our portfolio have been selected based on the quality of the underlying credit and not the value of the credit insurance enhancement.
     At September 30, 2008, we held $4.1 billion of mortgage-backed securities, which comprised about 25% of our taxable bond portfolio. About 98% of the mortgage-backed securities are rated AAA and the remaining 2% are all investment grade. Of the AAA rated securities, about 60% are residential mortgage-backed securities, consisting of pass-through securities guaranteed by a government agency or government sponsored enterprise (GSE), GSE collateralized mortgage obligations (CMOs) and other AAA rated CMOs, all backed by single family home mortgages. The majority of the CMOs are actively traded in liquid markets. The other 40% of the AAA rated securities are call protected, commercial mortgage-backed securities.

 


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     At September 30, 2008, only about 1% of our bond portfolio was below investment grade and our investment portfolio did not have any direct exposure to either sub-prime mortgages or collateralized debt obligations.
     The net unrealized depreciation before tax of investments carried at fair value, which consist of fixed maturities and equity securities classified as available-for-sale, was $443 million at September 30, 2008 compared with net unrealized appreciation of $96 million at June 30, 2008 and $810 million at December 31, 2007. Such unrealized appreciation and depreciation is reflected in comprehensive income, net of applicable deferred income tax.
     Credit spreads, which refer to the difference between a risk-free yield (the yield on U.S. Treasury securities) and the actual yields on all other fixed maturity investments, increased significantly during the first nine months of 2008, due to the disruptions in the financial markets. This resulted in a decline in the fair value of many of our fixed maturity investments.
     Since September 30, 2008, credit spreads have increased and equity markets have declined. If these conditions continue during the remainder of the year, we would expect to experience additional unrealized depreciation of our fixed maturity and equity security portfolios.
Item 4 — Controls and Procedures
     As of September 30, 2008, an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) was performed under the supervision and with the participation of the Corporation’s management, including the chief executive officer and chief financial officer. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2008.
     During the quarter ended September 30, 2008, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 


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PART II. OTHER INFORMATION
Item 1 — Legal Proceedings
     As previously disclosed, Chubb and certain of its subsidiaries are defendants in an action filed on August 24, 2007 by the Ohio Attorney General against several insurers and one broker in the Court of Common Pleas in Cuyahoga County, Ohio. This action alleges that the defendants unlawfully used contingent commission agreements and conspired to reduce competition in the insurance markets, in violation of Ohio’s antitrust laws. The action seeks, among other things, treble damages and injunctive and declaratory relief. In July 2008, the court denied the Corporation’s and the other defendants’ motions to dismiss the Attorney General’s complaint. In August 2008, the Corporation and the other defendants filed answers to the complaint and discovery has begun. The Corporation believes that it has substantial defenses to the allegations included in this action and intends to defend the action vigorously.
Item 1A — Risk Factors
     Our business is subject to a number of risks, including those identified in Item 1A of our 2007 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission as supplemented below, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from fiscal period to fiscal period. The risks described in our Annual Report on Form 10-K and Quarterly Reports, as supplemented below, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material effect on our business, results of operations, financial condition and/or liquidity.
     The continuing volatility in the financial markets and the ongoing economic downturn could have a material adverse effect on our results of operations or financial condition.
     The significant financial market volatility experienced worldwide during the third quarter of 2008 has continued in the fourth quarter of 2008 and the impact on the U.S. and foreign economies appears to be worsening. Although the U.S. and other foreign governments have taken various actions to try to stabilize the financial markets, it is unclear whether those actions will be effective. Therefore, the financial market volatility and the resulting negative economic impact could continue and it is possible that it may be prolonged.
     Although we continue to monitor market conditions, we cannot predict future market conditions or their impact on our investment portfolio. Depending on market conditions, we could incur additional realized and unrealized losses in future fiscal periods, which could have a material adverse effect on our results of operations or financial condition. In addition, the continuing financial market volatility and economic downturn could have a material adverse affect on third parties that we do business with, including insureds, reinsurers and co-sureties. We cannot predict the impact that this would have on our business or results of operations.

 


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     Certain of the actions the U.S. government has taken or may take in response to the financial market turmoil have impacted, or may impact, certain participants in the property and casualty insurance industry. It is possible that additional governmental measures will be enacted which could further affect the property and casualty insurance industry and its competitive landscape. We cannot predict the impact that such government intervention would have on our business.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
     The following table summarizes Chubb’s stock repurchased each month in the quarter ended September 30, 2008.
                                 
                    Total Number of   Maximum Number of
                    Shares Purchased   Shares that May
    Total Number   Average   as Part of   Yet Be Purchased
    of Shares   Price Paid   Publicly Announced   Under the
Period   Purchased (a)   Per Share   Plans or Programs   Plans or Programs (b)
July 2008
    3,158,524     $ 48.27       3,158,524       6,156,682  
 
                               
August 2008
    2,425,600       47.81       2,425,600       3,731,082  
 
                               
September 2008
    330,200       47.76       330,200       3,400,882  
 
                               
 
                               
Total
    5,914,324       48.05       5,914,324          
 
                               
 
(a)   The stated amounts exclude 2,163 shares and 17,703 shares delivered to Chubb during the months of July 2008 and September 2008, respectively, by employees of the Corporation to cover option exercise prices and withholding taxes in connection with the Corporation’s stock-based compensation plans.
 
(b)   On December 13, 2007, the Board of Directors authorized the repurchase of up to 28,000,000 shares of common stock. The authorization has no expiration date.

 


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Item 6 — Exhibits
     
Exhibit    
Number   Description
 
  - Material Contracts
10.1
    Offer Letter, dated as of September 5, 2008, from The Chubb Corporation to Richard G. Spiro filed herewith.
 
   
 
  - Rule 13a-14(a)/15d-14(a) Certifications
31.1
    Certification by John D. Finnegan filed herewith.
31.2
    Certification by Michael O’Reilly filed herewith.
 
   
 
  - Section 1350 Certifications
32.1
    Certification by John D. Finnegan filed herewith.
32.2
    Certification by Michael O’Reilly filed herewith.
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  THE CHUBB CORPORATION
(Registrant)
 
 
  By:   /s/ John J. Kennedy  
    John J. Kennedy   
    Senior Vice-President and Chief Accounting Officer   
 
Date: November 10, 2008