e10vq
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, 2011
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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, 2011 was 278,071,725.
 
 


 

THE CHUBB CORPORATION
INDEX
         
    Page Number  
       
 
       
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    18  
 
       
    46  
 
       
       
 
       
    47  
 
       
    47  
 
       
    47  
 
       
    48  
 
       
    48  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

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  
    2011     2010     2011     2010  
    (in millions)  
 
                               
Revenues
                               
Premiums Earned
  $ 2,932     $ 2,798     $ 8,699     $ 8,379  
Investment Income
    415       412       1,235       1,248  
Other Revenues
    2       3       6       10  
Realized Investment Gains (Losses), Net
                               
Total Other-Than-Temporary Impairment Losses on Investments
    (6 )           (22 )     (6 )
Other-Than-Temporary Impairment Losses on Investments Recognized in Other Comprehensive Income
    (1 )           (1 )     (3 )
Other Realized Investment Gains, Net
    78       54       323       280  
 
                       
Total Realized Investment Gains, Net
    71       54       300       271  
 
                       
 
                               
Total Revenues
    3,420       3,267       10,240       9,908  
 
                       
 
                               
Losses and Expenses
                               
Losses and Loss Expenses
    2,054       1,522       5,666       4,912  
Amortization of Deferred Policy Acquisition Costs
    817       774       2,408       2,279  
Other Insurance Operating Costs and Expenses
    100       105       311       327  
Investment Expenses
    8       9       31       27  
Other Expenses
    2       3       7       11  
Corporate Expenses
    73       70       220       218  
 
                       
 
                               
Total Losses and Expenses
    3,054       2,483       8,643       7,774  
 
                       
 
                               
Income Before Federal and Foreign Income Tax
    366       784       1,597       2,134  
Federal and Foreign Income Tax
    68       212       371       580  
 
                       
 
                               
Net Income
  $ 298     $ 572     $ 1,226     $ 1,554  
 
                       
 
                               
Net Income Per Share
                               
 
                               
Basic
  $ 1.04     $ 1.82     $ 4.19     $ 4.80  
Diluted
    1.04       1.80       4.16       4.76  
 
                               
Dividends Declared Per Share
    .39       .37       1.17       1.11  
See Notes to Consolidated Financial Statements.


Table of Contents

Page 2

THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
                 
    Sept. 30,     Dec. 31,  
    2011     2010  
    (in millions)  
Assets
               
 
               
Invested Assets
               
Short Term Investments
  $ 2,289     $ 1,905  
Fixed Maturities
               
Tax Exempt (cost $18,879 and $19,072)
    20,134       19,774  
Taxable (cost $16,337 and $15,989)
    17,271       16,745  
Equity Securities (cost $1,271 and $1,285)
    1,366       1,550  
Other Invested Assets
    2,313       2,239  
 
           
 
               
TOTAL INVESTED ASSETS
    43,373       42,213  
 
               
Cash
    55       70  
Accrued Investment Income
    459       447  
Premiums Receivable
    1,997       2,098  
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
    1,754       1,817  
Prepaid Reinsurance Premiums
    295       325  
Deferred Policy Acquisition Costs
    1,644       1,562  
Deferred Income Tax
          98  
Goodwill
    467       467  
Other Assets
    1,451       1,152  
 
           
 
               
TOTAL ASSETS
  $ 51,495     $ 50,249  
 
           
 
               
Liabilities
               
 
               
Unpaid Losses and Loss Expenses
  $ 23,538     $ 22,718  
Unearned Premiums
    6,307       6,189  
Long Term Debt
    3,975       3,975  
Dividend Payable to Shareholders
    110       112  
Deferred Income Tax
    191        
Accrued Expenses and Other Liabilities
    1,736       1,725  
 
           
 
               
TOTAL LIABILITIES
    35,857       34,719  
 
           
 
               
Contingent Liabilities (Note 6)
               
 
               
Shareholders’ Equity
               
 
               
Common Stock — $1 Par Value; 371,980,460 Shares
    372       372  
Paid-In Surplus
    173       208  
Retained Earnings
    18,831       17,943  
Accumulated Other Comprehensive Income
    1,245       790  
Treasury Stock, at Cost — 93,908,735 and 74,707,547 Shares
    (4,983 )     (3,783 )
 
           
 
               
TOTAL SHAREHOLDERS’ EQUITY
    15,638       15,530  
 
           
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 51,495     $ 50,249  
 
           
See Notes to Consolidated Financial Statements.


Table of Contents

Page 3

THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED SEPTEMBER 30
                                 
    Third Quarter     Nine Months  
    2011     2010     2011     2010  
    (in millions)  
 
                               
Net Income
  $ 298     $ 572     $ 1,226     $ 1,554  
 
                       
 
                               
Other Comprehensive Income (Loss), Net of Tax
                               
Change in Unrealized Appreciation of Investments
    131       457       363       620  
Change in Unrealized Other-Than- Temporary Impairment Losses on Investments
    1       3       2       7  
Foreign Currency Translation Gains (Losses)
    (29 )     32       56       (62 )
Amortization of Net Actuarial Loss and Prior Service Cost Included in Net Postretirement Benefit Costs
    12       10       34       29  
 
                       
 
    115       502       455       594  
 
                       
 
                               
Comprehensive Income
  $ 413     $ 1,074     $ 1,681     $ 2,148  
 
                       
See Notes to Consolidated Financial Statements.


Table of Contents

Page 4

THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
                 
    2011     2010  
    (in millions)  
 
               
Cash Flows from Operating Activities
               
Net Income
  $ 1,226     $ 1,554  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
Increase in Unpaid Losses and Loss Expenses, Net
    728       213  
Increase in Unearned Premiums, Net
    94       4  
Decrease in Premiums Receivable
    101       127  
Change in Income Tax Payable or Recoverable
    (193 )     216  
Amortization of Premiums and Discounts on Fixed Maturities
    111       116  
Depreciation
    41       47  
Realized Investment Gains, Net
    (300 )     (271 )
Other, Net
    (118 )     (128 )
 
           
 
               
Net Cash Provided by Operating Activities
    1,690       1,878  
 
           
 
               
Cash Flows from Investing Activities
               
Proceeds from Fixed Maturities
               
Sales
    1,184       1,793  
Maturities, Calls and Redemptions
    2,450       2,079  
Proceeds from Sales of Equity Securities
    103       93  
Purchases of Fixed Maturities
    (3,660 )     (3,950 )
Purchases of Equity Securities
    (67 )     (108 )
Investments in Other Invested Assets, Net
    198       66  
Increase in Short Term Investments, Net
    (378 )     (109 )
Increase in Net Payable from Security Transactions Not Settled
    91       112  
Purchases of Property and Equipment, Net
    (30 )     (38 )
Other, Net
          (1 )
 
           
 
               
Net Cash Used in Investing Activities
    (109 )     (63 )
 
           
 
               
Cash Flows from Financing Activities
               
Increase in Funds Held Under Deposit Contracts
    8       23  
Proceeds from Issuance of Common Stock Under Stock-Based Employee Compensation Plans
    63       54  
Repurchase of Shares
    (1,327 )     (1,509 )
Dividends Paid to Shareholders
    (340 )     (357 )
 
           
 
               
Net Cash Used in Financing Activities
    (1,596 )     (1,789 )
 
           
 
               
Net Increase (Decrease) in Cash
    (15 )     26  
 
               
Cash at Beginning of Year
    70       51  
 
           
 
               
Cash at End of Period
  $ 55     $ 77  
 
           
See Notes to Consolidated Financial Statements.


Table of Contents

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 (GAAP) 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 in the Notes to Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.
2) Accounting Pronouncements Not Yet Adopted
(a) In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance related to the presentation of comprehensive income. The guidance provides that an entity has the option to present the components of net income and the components of other comprehensive income either in a single statement of comprehensive income or in two separate, but consecutive, statements. The guidance does not change whether items are reported in net income or in other comprehensive income and does not change whether or when items of other comprehensive income are reclassified to net income. This guidance is to be applied retrospectively and is effective for the Corporation for the year beginning January 1, 2012. The adoption of this guidance will not have an effect on the Corporation’s financial position or results of operations. The Corporation is in the process of evaluating the presentation options permitted by the guidance.
(b) In October 2010, the FASB issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies those costs relating to the successful acquisition of new or renewal insurance contracts that should be capitalized. This guidance is effective for the Corporation for the year beginning January 1, 2012 and may be applied prospectively or retrospectively. The Corporation is continuing to assess the effect that implementation of the new guidance will have on its financial position and results of operations. The Corporation expects to elect retrospective application of the guidance. Under retrospective application, deferred policy acquisition costs and related deferred taxes would be reduced as of the beginning of the earliest period presented in the financial statements with a corresponding reduction to shareholders’ equity. The adoption of the new guidance during the first quarter of 2012 is currently expected to reduce the Corporation’s deferred policy acquisition costs as of December 31, 2011 by approximately 22% to 27% and shareholders’ equity by approximately $250 million to $300 million.


Table of Contents

Page 6

3) Invested Assets
     (a) The amortized cost and fair value of fixed maturities and equity securities were as follows:
                                 
    September 30, 2011  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Appreciation     Depreciation     Value  
    (in millions)  
Fixed maturities
                               
Tax exempt
  $ 18,879     $ 1,297     $ 42     $ 20,134  
 
                       
Taxable
                               
U.S. Government and government agency and authority obligations
    812       50       2       860  
Corporate bonds
    6,420       449       31       6,838  
Foreign government and government agency obligations
    6,293       372       6       6,659  
Residential mortgage-backed securities
    937       47       5       979  
Commercial mortgage-backed securities
    1,875       62       2       1,935  
 
                       
 
    16,337       980       46       17,271  
 
                       
 
                               
Total fixed maturities
  $ 35,216     $ 2,277     $ 88     $ 37,405  
 
                       
 
                               
Equity securities
  $ 1,271     $ 232     $ 137     $ 1,366  
 
                       
                                 
    December 31, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Appreciation     Depreciation     Value  
    (in millions)  
Fixed maturities
                               
Tax exempt
  $ 19,072     $ 824     $ 122     $ 19,774  
 
                       
Taxable
                               
U.S. Government and government agency and authority obligations
    807       31       9       829  
Corporate bonds
    6,258       411       21       6,648  
Foreign government and government agency obligations
    5,943       231       13       6,161  
Residential mortgage-backed securities
    1,293       63       6       1,350  
Commercial mortgage-backed securities
    1,688       70       1       1,757  
 
                       
 
    15,989       806       50       16,745  
 
                       
 
                               
Total fixed maturities
  $ 35,061     $ 1,630     $ 172     $ 36,519  
 
                       
 
                               
Equity securities
  $ 1,285     $ 340     $ 75     $ 1,550  
 
                       
At September 30, 2011 and December 31, 2010, the gross unrealized depreciation of fixed maturities included $2 million and $4 million, respectively, of unrealized other-than-temporary impairment losses recognized in accumulated other comprehensive income.


Table of Contents

Page 7

    The amortized cost and fair value of fixed maturities at September 30, 2011 by contractual maturity were as follows:
                 
    Amortized     Fair  
    Cost     Value  
    (in millions)  
Due in one year or less
  $ 2,069     $ 2,101  
Due after one year through five years
    11,635       12,274  
Due after five years through ten years
    11,595       12,626  
Due after ten years
    7,105       7,490  
 
           
 
    32,404       34,491  
Residential mortgage-backed securities
    937       979  
Commercial mortgage-backed securities
    1,875       1,935  
 
           
 
               
 
  $ 35,216     $ 37,405  
 
           
     Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations.
     The Corporation’s equity securities comprise a diversified portfolio of primarily U.S. publicly-traded common stocks.
     The Corporation is involved in the normal course of business with variable interest entities (VIEs) primarily as a passive investor in residential mortgage-backed securities, commercial mortgage-backed securities and private equity limited partnerships issued by third party VIEs. The Corporation is not the primary beneficiary of these VIEs. The Corporation’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the Corporation’s consolidated balance sheet and any unfunded partnership commitments.
(b)   The components of unrealized appreciation or depreciation, including unrealized other-than-temporary impairment losses, of investments carried at fair value were as follows:
                 
    September 30     December 31  
    2011     2010  
    (in millions)  
Fixed maturities
               
Gross unrealized appreciation
  $ 2,277     $ 1,630  
Gross unrealized depreciation
    88       172  
 
           
 
    2,189       1,458  
 
           
Equity securities
               
Gross unrealized appreciation
    232       340  
Gross unrealized depreciation
    137       75  
 
           
 
    95       265  
 
           
 
    2,284       1,723  
Deferred income tax liability
    799       603  
 
           
 
  $ 1,485     $ 1,120  
 
           


Table of Contents

Page 8

     When the fair value of an investment is lower than its cost, an assessment is made to determine whether the decline is temporary or other than temporary. The assessment of other-than-temporary impairment of fixed maturities and equity securities is based on both quantitative criteria and qualitative information and also considers a number of other factors including, but not limited to, the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, general market conditions and industry or sector specific factors.
     In determining whether fixed maturities are other than temporarily impaired, the Corporation is required to recognize an other-than-temporary impairment loss when it concludes it has the intent to sell or it is more likely than not it will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely it will not recover the entire amortized cost value of an impaired debt security. If the Corporation has the intent to sell or it is more likely than not that the Corporation will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value, the security is written down to fair value and the entire amount of the writedown is included in net income as a realized investment loss. For all other impaired fixed maturities, the impairment loss is separated into the amount representing the credit loss and the amount representing the loss related to all other factors. The amount of the impairment loss that represents the credit loss is included in net income as a realized investment loss and the amount of the impairment loss that relates to all other factors is included in other comprehensive income.
     For fixed maturities, the split between the amount of other-than-temporary impairment losses that represents credit losses and the amount that relates to all other factors is principally based on assumptions regarding the amount and timing of projected cash flows. For fixed maturities other than mortgage-backed securities, cash flow estimates are based on assumptions regarding the probability of default and estimates regarding the timing and amount of recoveries associated with a default. For mortgage-backed securities, cash flow estimates are based on assumptions regarding future prepayment rates, default rates, loss severity and timing of recoveries. The Corporation has developed the estimates of projected cash flows using information based on historical market data, industry analyst reports and forecasts and other data relevant to the collectability of a security.
     In determining whether equity securities are other than temporarily impaired, the Corporation considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost. If the decline in the fair value of an equity security is deemed to be other than temporary, the security is written down to fair value and the amount of the writedown is included in net income as a realized investment loss.


Table of Contents

Page 9

     The following table summarizes, for all investment securities in an unrealized loss position at September 30, 2011, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position:
                                                 
    Less Than 12 Months     12 Months or More     Total  
            Gross             Gross             Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Depreciation     Value     Depreciation     Value     Depreciation  
    (in millions)  
Fixed maturities
                                               
Tax exempt
  $ 292     $ 3     $ 270     $ 39     $ 562     $ 42  
 
                                   
Taxable
                                               
U.S. Government and government agency and authority obligations
    62       1       49       1       111       2  
Corporate bonds
    753       23       176       8       929       31  
Foreign government and government agency obligations
    486       5       43       1       529       6  
Residential mortgage-backed securities
    69       1       21       4       90       5  
Commercial mortgage-backed securities
    73       1       2       1       75       2  
 
                                   
 
    1,443       31       291       15       1,734       46  
 
                                   
 
                                               
Total fixed maturities
    1,735       34       561       54       2,296       88  
 
                                               
Equity securities
    322       72       160       65       482       137  
 
                                   
 
  $ 2,057     $ 106     $ 721     $ 119     $ 2,778     $ 225  
 
                                   
     At September 30, 2011, approximately 595 individual fixed maturity and equity securities were in an unrealized loss position, of which approximately 540 were fixed maturities. The Corporation does not have the intent to sell and it is not more likely than not that the Corporation will be required to sell these fixed maturities before the securities recover to their amortized cost value. In addition, the Corporation believes that none of the declines in the fair values of these fixed maturities relate to credit losses. The Corporation has the intent and ability to hold the equity securities in an unrealized loss position for a period of time sufficient to allow for the recovery of cost. The Corporation believes that none of the declines in the fair value of these fixed maturities and equity securities were other than temporary at September 30, 2011.


Table of Contents

Page 10

     The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2010, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position:
                                                 
    Less Than 12 Months     12 Months or More     Total  
            Gross             Gross             Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Depreciation     Value     Depreciation     Value     Depreciation  
    (in millions)  
Fixed maturities
                                               
Tax exempt
  $ 2,498     $ 79     $ 284     $ 43     $ 2,782     $ 122  
 
                                   
Taxable
                                               
U.S. Government and government agency and authority obligations
    111       3       45       6       156       9  
Corporate bonds
    474       12       166       9       640       21  
Foreign government and government agency obligations
    990       12       27       1       1,017       13  
Residential mortgage-backed securities
    9       1       41       5       50       6  
Commercial mortgage-backed securities
    38       1                   38       1  
 
                                   
 
    1,622       29       279       21       1,901       50  
 
                                   
Total fixed maturities
    4,120       108       563       64       4,683       172  
 
                                               
Equity securities
    69       14       299       61       368       75  
 
                                   
 
  $ 4,189     $ 122     $ 862     $ 125     $ 5,051     $ 247  
 
                                   
     The change in unrealized appreciation or depreciation of investments carried at fair value, including the change in unrealized other-than-temporary impairment losses, was as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2011     2010     2011     2010  
    (in millions)  
Change in unrealized appreciation of fixed maturities
  $ 478     $ 589     $ 731     $ 1,031  
Change in unrealized appreciation of equity securities
    (276 )     118       (170 )     (67 )
 
                       
 
    202       707       561       964  
Deferred income tax
    70       247       196       337  
 
                       
 
                               
 
  $ 132     $ 460     $ 365     $ 627  
 
                       


Table of Contents

Page 11

     (c) Realized investment gains and losses were as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2011     2010     2011     2010  
    (in millions)  
 
                               
Fixed maturities
                               
Gross realized gains
  $ 25     $ 14     $ 48     $ 71  
Gross realized losses
    (10 )     (6 )     (25 )     (17 )
Other-than-temporary impairment losses
    (1 )           (1 )     (3 )
 
                       
 
    14       8       22       51  
 
                       
 
                               
Equity securities
                               
Gross realized gains
    16       18       45       30  
Gross realized losses
                (1 )     (1 )
Other-than-temporary impairment losses
    (6 )           (22 )     (6 )
 
                       
 
    10       18       22       23  
 
                       
 
                               
Other invested assets
    47       28       256       197  
 
                       
 
  $ 71     $ 54     $ 300     $ 271  
 
                       
 
  (d) As of September 30, 2011 and December 31, 2010, fixed maturities still held by the Corporation for which a portion of their other-than-temporary impairment losses were recognized in other comprehensive income had cumulative credit-related losses of $20 million and $21 million, respectively, recognized in net income.
4) Fair Values of Financial Instruments
     Fair values of financial instruments are determined using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical assets or liabilities or other inputs, such as quoted prices for similar assets or liabilities, that are observable either directly or indirectly. In those instances where observable inputs are not available, fair values are measured using unobservable inputs for the asset or liability. Unobservable inputs reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements.


Table of Contents

Page 12

     The methods and assumptions used to estimate the fair values of financial instruments are as follows:
  (i)   The carrying value of short term investments approximates fair value due to the short maturities of these investments.
 
  (ii)   Fair values for fixed maturities are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from independent brokers. For fixed maturities that have quoted prices in active markets, market quotations are provided. For fixed maturities that do not trade on a daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference data, prepayment rates and measures of volatility. Management reviews on an ongoing basis the reasonableness of the methodologies used by the relevant pricing service and brokers. In addition, management, using the prices received for the securities from the pricing service and brokers, determines the aggregate portfolio price performance and reviews it against applicable indices. If management believes that significant discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve the discrepancies.
 
  (iii)   Fair values of equity securities are based on quoted market prices.
 
  (iv)   Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service.
     The carrying values and fair values of financial instruments were as follows:
                                 
    September 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
    (in millions)  
 
                               
Assets
                               
Invested assets
                               
Short term investments
  $ 2,289     $ 2,289     $ 1,905     $ 1,905  
Fixed maturities
    37,405       37,405       36,519       36,519  
Equity securities
    1,366       1,366       1,550       1,550  
 
                               
Liabilities
                               
Long term debt
    3,975       4,427       3,975       4,318  
     A pricing service provides fair value amounts for approximately 99% of the Corporation’s fixed maturities. The prices obtained from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments.


Table of Contents

Page 13

     At September 30, 2011 and December 31, 2010, the Corporation held an insignificant amount of financial instruments in its investment portfolio for which a lack of market liquidity impacted the determination of fair value.
          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 categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:
                                 
    September 30, 2011  
    Level 1     Level 2     Level 3     Total  
    (in millions)  
 
                               
Fixed maturities
                               
Tax exempt
  $     $ 20,126     $ 8     $ 20,134  
 
                       
Taxable
                               
U.S. Government and government agency and authority obligations
          860             860  
Corporate bonds
          6,661       177       6,838  
Foreign government and government agency obligations
          6,656       3       6,659  
Residential mortgage-backed securities
          968       11       979  
Commercial mortgage-backed securities
          1,935             1,935  
 
                       
 
          17,080       191       17,271  
 
                       
 
                               
Total fixed maturities
          37,206       199       37,405  
 
                               
Equity securities
    1,358             8       1,366  
 
                       
 
                               
 
  $ 1,358     $ 37,206     $ 207     $ 38,771  
 
                       


Table of Contents

Page 14

                                 
    December 31, 2010  
    Level 1     Level 2     Level 3     Total  
    (in millions)  
 
                               
Fixed maturities
                               
Tax exempt
  $     $ 19,765     $ 9     $ 19,774  
Taxable
                               
U.S. Government and government agency and authority obligations
          829             829  
Corporate bonds
          6,483       165       6,648  
Foreign government and government agency obligations
          6,135       26       6,161  
Residential mortgage-backed securities
          1,329       21       1,350  
Commercial mortgage-backed securities
          1,757             1,757  
 
                       
 
          16,533       212       16,745  
 
                       
 
                               
Total fixed maturities
          36,298       221       36,519  
 
                               
Equity securities
    1,537             13       1,550  
 
                       
 
                               
 
  $ 1,537     $ 36,298     $ 234     $ 38,069  
 
                       
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 operations and investments, 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 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 in runoff following the transfer of the ongoing business to a reinsurance company in 2005.
     Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the results of the Corporation’s non-insurance subsidiaries.


Table of Contents

Page 15

    Revenues and income before income tax of each operating segment were as follows:
                                 
    Periods Ended September 30  
    Third Quarter     Nine Months  
    2011     2010     2011     2010  
    (in millions)  
 
                               
Revenues
                               
Property and casualty insurance
                               
Premiums earned
                               
Personal insurance
  $ 987     $ 942     $ 2,924     $ 2,800  
Commercial insurance
    1,249       1,159       3,692       3,475  
Specialty insurance
    693       694       2,077       2,093  
 
                       
 
                               
Total insurance
    2,929       2,795       8,693       8,368  
 
                               
Reinsurance assumed
    3       3       6       11  
 
                       
 
    2,932       2,798       8,699       8,379  
 
                               
Investment income
    404       398       1,200       1,187  
 
                       
 
                               
Total property and casualty insurance
    3,336       3,196       9,899       9,566  
 
                               
Corporate and other
    13       17       41       71  
Realized investment gains, net
    71       54       300       271  
 
                       
 
                               
Total revenues
  $ 3,420     $ 3,267     $ 10,240     $ 9,908  
 
                       
 
                               
Income (loss) before income tax
                               
Property and casualty insurance
                               
Underwriting
                               
Personal insurance
  $ (168 )   $ 125     $ (84 )   $ 143  
Commercial insurance
    8       151       (90 )     262  
Specialty insurance
    89       123       368       404  
 
                       
 
                               
Total insurance
    (71 )     399       194       809  
 
                               
Reinsurance assumed
    11       7       26       21  
 
                       
 
    (60 )     406       220       830  
 
                               
Increase (decrease) in deferred policy acquisition costs
    13       (7 )     70       36  
 
                       
 
                               
Underwriting income (loss)
    (47 )     399       290       866  
 
                               
Investment income
    396       390       1,171       1,162  
 
                               
Other income (charges)
    8       (2 )     24       (5 )
 
                       
 
                               
Total property and casualty insurance
    357       787       1,485       2,023  
 
                               
Corporate and other loss
    (62 )     (57 )     (188 )     (160 )
Realized investment gains, net
    71       54       300       271  
 
                       
 
                               
Total income before income tax
  $ 366     $ 784     $ 1,597     $ 2,134  
 
                       


Table of Contents

Page 16

6) Contingent Liabilities
     Chubb and certain of its subsidiaries have been involved in the investigations 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 certain business practices in the property and casualty insurance industry including (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 received subpoenas and other requests for information from various regulators. The Corporation has cooperated fully with these investigations. The Corporation has settled with several state Attorneys General and insurance departments all issues arising out of their investigations. Nevertheless, it is possible that actions could be brought against the Corporation with respect to some or all of the issues that were the focus of the business practice 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. On August 1, 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 (N.J. District Court). 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, state law and the Racketeer Influenced and Corrupt Organizations Act (RICO) arising from the alleged unlawful use of contingent commission agreements. On September 28, 2007, the N.J. District Court dismissed the second amended complaint filed by the plaintiffs 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 appealed the dismissal of their second amended complaint to the U.S. Court of Appeals for the Third Circuit (Third Circuit). On August 13, 2010, the Third Circuit affirmed in part and vacated in part the N.J. District Court decision and remanded the case back to the N.J. District Court for further proceedings. As a result of the Third Circuit’s decision, the plaintiffs’ state law claims and certain of the plaintiffs’ Sherman Act and RICO claims were reinstated against the Corporation. The Corporation and the other defendants filed on October 1, 2010 motions to dismiss the reinstated claims. Since that time, several of the other defendants entered into settlement agreements with the plaintiffs, which currently are awaiting final court approval. In light of these settlements and their impact on the litigation, the N.J. District Court on June 17, 2011 dismissed without prejudice the motions to dismiss filed by the Corporation and the other non-settling defendants. On October 21, 2011 the Corporation and the other non-settling defendants refiled their motions to dismiss and the plaintiffs filed their statements in opposition. No date has yet been set for any further proceedings with respect to these motions.


Table of Contents

Page 17

     Chubb and certain of its subsidiaries also have been named as defendants in other putative class actions relating or similar to the In re Insurance Brokerage Antitrust Litigation that have been filed in various state courts or in U.S. district courts between 2005 and 2007. These actions have been subsequently removed and ultimately transferred to the N.J. District Court for consolidation with the In re Insurance Brokerage Antitrust Litigation. These actions are currently stayed.
     In the various actions described above, 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.
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  
    2011     2010     2011     2010  
    (in millions,  
    except for per share amounts)  
 
                               
Basic earnings per share:
                               
Net income
  $ 298     $ 572     $ 1,226     $ 1,554  
 
                       
 
                               
Weighted average shares outstanding
    285.7       314.4       292.6       323.9  
 
                       
 
                               
Basic earnings per share
  $ 1.04     $ 1.82     $ 4.19     $ 4.80  
 
                       
 
                               
Diluted earnings per share:
                               
Net income
  $ 298     $ 572     $ 1,226     $ 1,554  
 
                       
 
                               
Weighted average shares outstanding
    285.7       314.4       292.6       323.9  
Additional shares from assumed issuance of shares under stock-based compensation awards
    2.1       2.9       1.8       2.4  
 
                       
 
                               
Weighted average shares and potential shares assumed outstanding for computing diluted earnings per share
    287.8       317.3       294.4       326.3  
 
                       
 
                               
Diluted earnings per share
  $ 1.04     $ 1.80     $ 4.16     $ 4.76  
 
                       


Table of Contents

Page 18

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, 2011 compared with December 31, 2010 and the results of operations for the nine months and three months ended September 30, 2011 and 2010. 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, 2010.
Cautionary Statement Regarding Forward-Looking Information
          Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding our loss reserve and reinsurance recoverable estimates; the cost of reinsurance in 2011; the adequacy of the rates at which we renewed and wrote new business; premium volume, competition and other market conditions in 2011; the runoff of our employer healthcare stop loss business; property and casualty investment income during 2011; our receipt of Medicare Part D subsidies; indications of our catastrophe exposure under a recently released version of a catastrophe modeling tool and any actions we or third parties may take in response thereto; the level of currency rate fluctuations for the rest of 2011; the value of our limited partnership investments in the fourth quarter of 2011; the repurchase of common stock under our share repurchase program; our capital position, capital adequacy and funding of liquidity needs; the impact of a downgrade in our credit or financial strength ratings; and the impact of the new guidance issued by the Financial Accounting Standards Board related to the accounting for costs associated with acquiring or renewing insurance contracts. Forward-looking statements frequently can be identified by words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue,” or other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with:
  global political 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;
  our ability to retain existing business and attract new business;


Table of Contents

Page 19

  our expectations with respect to cash flow and investment income and with respect to other income;
  the adequacy of our loss reserves, including:
    our expectations relating to reinsurance recoverables;
 
    the willingness of parties, including us, to settle disputes;
 
    developments in judicial decisions or regulatory or legislative actions relating to coverage and liability, in particular, for asbestos, toxic waste and other mass tort claims;
 
    development of new theories of liability;
 
    our estimates relating to ultimate asbestos liabilities; and
 
    the impact from the bankruptcy protection sought by various asbestos producers and other related businesses;
  the availability and cost of reinsurance coverage;
  the occurrence of significant weather-related or other natural or human-made disasters, particularly in locations where we have concentrations of risk, or changes to our estimates (or the assessments of rating agencies and other third parties) of our potential exposure to such events;
  the impact of economic factors on companies on whose behalf we have issued surety bonds, and in particular, on those companies that file for bankruptcy or otherwise experience deterioration in creditworthiness;
  the effects of disclosures by, and investigations of, companies relating to possible accounting irregularities, practices in the financial services industry, investment losses or other corporate governance issues, including:
    the effects on the capital markets and the markets for directors and officers and errors and omissions insurance;
 
    claims and litigation arising out of actual or alleged accounting or other corporate malfeasance by other companies;
 
    claims and litigation arising out of practices in the financial services industry;
 
    claims and litigation relating to uncertainty in the credit and broader financial markets; and
 
    legislative or regulatory proposals or changes;
  the effects of changes in market practices in the U.S. property and casualty insurance industry arising from any legal or regulatory proceedings, related settlements and industry reform, including changes that have been announced and changes that may occur in the future;
  the impact of legislative, regulatory and similar developments on our business, including those relating to terrorism, catastrophes, the financial markets, solvency standards, capital requirements and accounting guidance;
  any downgrade in our claims-paying, financial strength or other credit ratings;
  the ability of our subsidiaries to pay us dividends;


Table of Contents

Page 20

  general political, economic and market conditions, whether globally or in the markets in which we operate and/or invest, including:
    changes in credit ratings, interest rates, market credit spreads and the performance of the financial markets;
 
    currency fluctuations;
 
    the effects of inflation;
 
    changes in domestic and foreign laws, regulations and taxes;
 
    changes in competition and pricing environments;
 
    regional or general changes in asset valuations;
 
    the inability to reinsure certain risks economically; and
 
    changes in the litigation environment; and
  our ability to implement management’s strategic plans and initiatives.
          Chubb assumes no obligation to update any forward-looking information set forth in this document, which speak as of the date hereof.
Critical Accounting Estimates and Judgments
          The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables and the evaluation of whether a decline in value of any investment is temporary or other than temporary. These estimates and judgments, which are discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010 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.


Table of Contents

Page 21

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 $1.2 billion in the first nine months of 2011 and $298 million in the third quarter compared with $1.6 billion and $572 million, respectively, in the same periods of 2010. The decrease in net income in the first nine months and the third quarter of 2011 was due to lower operating income compared with the same periods in 2010. We define operating income as net income excluding realized investment gains and losses after tax.
    Operating income was $1.0 billion in the first nine months of 2011 and $252 million in the third quarter compared with $1.4 billion and $537 million, respectively, in the same periods of 2010. The lower operating income in the 2011 periods was due to significantly lower underwriting income in our property and casualty business. Property and casualty investment income increased slightly in the first nine months and third quarter of 2011 compared with the same periods in 2010. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.
    Underwriting results were modestly profitable in the first nine months of 2011 and modestly unprofitable in the third quarter compared with highly profitable results in the same periods of 2010. Our combined loss and expense ratio was 97.1% in the first nine months of 2011 and 102.6% in the third quarter compared with 90.1% and 86.2% in the respective periods of 2010. The deterioration in results in the 2011 periods was due primarily to a higher impact from catastrophes. The impact of catastrophes accounted for 11.7 percentage points of the combined ratio in the first nine months of 2011 and 14.4 percentage points in the third quarter, compared with 7.1 and 2.1 percentage points, respectively, in the same periods of 2010. The less profitable results in the 2011 periods were also due to a higher current accident year loss ratio excluding catastrophes as well as a lower amount of favorable prior year loss development.
    During the first nine months and third quarter of 2011, we estimate that we experienced overall favorable development of about $580 million and $155 million, respectively, on loss reserves established as of the previous year end. In both periods, the most significant amounts of favorable development occurred in the commercial liability and professional liability classes. In the first nine months and third quarter of 2010, we estimate that we experienced overall favorable development of about $600 million and $200 million, respectively, due primarily to favorable loss experience in the professional liability, commercial liability and personal insurance classes.


Table of Contents

Page 22

    Total net premiums written increased by 5% in the first nine months and third quarter of 2011 compared with the same periods in 2010. Premium growth occurred both in the United States as well as outside the U.S. Net premiums written in the United States increased by 2% in the first nine months and third quarter of 2011. Net premiums written outside the U.S. increased by 13% in the first nine months and 17% in the third quarter. Premium growth outside the United States was also strong in the first nine months and third quarter of 2011 when measured in local currencies. The growth in net premiums written in the U.S. in the first nine months and third quarter of 2011, while benefiting from positive pricing trends in the standard commercial market, continued to reflect our emphasis on underwriting discipline in a market environment that remains competitive.
    Property and casualty investment income after tax increased by 1% in the first nine months and third quarter of 2011 compared with the same periods in 2010, in what continued to be a low yield investment environment. The increase in both periods was attributable in large part to the effect of currency fluctuation on income from our investments denominated in currencies other than the U.S. dollar. Management uses property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment results because it reflects the impact of any change in the proportion of the investment portfolio invested in tax exempt securities and is therefore more meaningful for analysis purposes than investment income before income tax.
    Net realized investment gains before tax were $300 million ($195 million after tax) in the first nine months of 2011 and $71 million ($46 million after tax) in the third quarter compared with $271 million ($176 million after tax) and $54 million ($35 million after tax) in the comparable periods of 2010. The net realized gains in the first nine months and third quarter of 2011 were primarily related to investments in limited partnerships, which generally are reported on a quarter lag. The net realized gains in the first nine months of 2010 were also primarily related to investments in limited partnerships. The net realized gains in the third quarter of 2010 were primarily related to sales of securities and, to a lesser extent, investments in limited partnerships.
          A summary of our consolidated net income is as follows:
                                 
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
            (in millions)          
Property and casualty insurance
  $ 1,485     $ 2,023     $ 357     $ 787  
Corporate and other
    (188 )     (160 )     (62 )     (57 )
 
                       
Consolidated operating income before income tax
    1,297       1,863       295       730  
Federal and foreign income tax
    266       485       43       193  
 
                       
Consolidated operating income
    1,031       1,378       252       537  
Realized investment gains after income tax
    195       176       46       35  
 
                       
Consolidated net income
  $ 1,226     $ 1,554     $ 298     $ 572  
 
                       


Table of Contents

Page 23

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  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
            (in millions)          
Underwriting
                               
Net premiums written
  $ 8,793     $ 8,383     $ 2,879     $ 2,732  
Decrease (increase) in unearned premiums
    (94 )     (4 )     53       66  
 
                       
Premiums earned
    8,699       8,379       2,932       2,798  
 
                       
Losses and loss expenses
    5,666       4,912       2,054       1,522  
Operating costs and expenses
    2,790       2,615       931       864  
Decrease (increase) in deferred policy acquisition costs
    (70 )     (36 )     (13 )     7  
Dividends to policyholders
    23       22       7       6  
 
                       
 
                               
Underwriting income (loss)
    290       866       (47 )     399  
 
                       
 
                               
Investments
                               
Investment income before expenses
    1,200       1,187       404       398  
Investment expenses
    29       25       8       8  
 
                       
 
                               
Investment income
    1,171       1,162       396       390  
 
                       
 
                               
Other income (charges)
    24       (5 )     8       (2 )
 
                       
 
                               
Property and casualty income before tax
  $ 1,485     $ 2,023     $ 357     $ 787  
 
                       
 
                               
Property and casualty investment income after tax
  $ 949     $ 941     $ 321     $ 317  
 
                       
     Property and casualty income before tax was substantially lower in the first nine months and third quarter of 2011 compared to the same periods in 2010. The lower income in the 2011 periods included an underwriting loss in the third quarter and a significant decrease in underwriting income in the first nine months of 2011, which were primarily the result of a higher impact of catastrophes. The underwriting results in the 2011 periods also reflected a higher current accident year loss ratio excluding catastrophes, due partly to a higher impact from non-catastrophe related property losses, as well as a lower amount of favorable prior year loss development.
     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 because the underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.


Table of Contents

Page 24

     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 $8.8 billion in the first nine months of 2011 and $2.9 billion in the third quarter, compared with $8.4 billion and $2.7 billion, respectively, in the same periods of 2010.
          Net premiums written by business unit were as follows:
                                                 
    Nine Months Ended             Quarter Ended        
    Sept. 30             Sept. 30     % Incr.  
    2011     2010     % Incr.     2011     2010     (Decr.)  
    (in millions)             (in millions)          
Personal insurance
  $ 2,986     $ 2,862       4 %   $ 1,029     $ 980       5 %
Commercial insurance
    3,819       3,534       8       1,183       1,082       9  
Specialty insurance
    1,984       1,981             665       669       (1 )
 
                                       
Total insurance
    8,789       8,377       5       2,877       2,731       5  
Reinsurance assumed
    4       6       *       2       1       *  
 
                                       
Total
  $ 8,793     $ 8,383       5     $ 2,879     $ 2,732       5  
 
                                       
 
*   The change in net premiums written is not presented since the business is in runoff.
          Net premiums written increased by 5% in the first nine months and third quarter of 2011 compared with the same periods in 2010. Premiums in the United States, which represented 72% of our premiums written in the first nine months of 2011, increased by 2% in both the first nine months and third quarter of 2011. Net premiums written outside the United States, expressed in U.S. dollars, increased by 13% in the first nine months and 17% in the third quarter. The increase in net premiums written outside the United States was partly due to the impact of the weaker U.S. dollar relative to several currencies in which we wrote business in the first nine months and third quarter of 2011 compared to the same periods in 2010. Net premiums written outside the United States also grew significantly in both periods when measured in local currencies.
          Premium growth in the United States continued to be affected in the first nine months and third quarter of 2011 by the slow rate of recovery in the economy and a highly competitive marketplace. However, there were continued indications of improvements in pricing in the third quarter, primarily in the commercial classes. We have continued our emphasis on underwriting discipline in these competitive market conditions. Overall, renewal rates in the first nine months of 2011 in the U.S. were up slightly in commercial lines and down slightly in the professional liability business in comparison to expiring rates. The amounts of coverage purchased or the insured exposure amounts, both of which are bases upon which we calculate the premiums we charge, were generally flat, although exposure amounts were up in select lines of business. We continued to retain a high percentage of our existing customers, and to renew those accounts at what we believe are acceptable rates relative to the risks. The overall level of new business in the United States was similar in the first nine months of 2011 and 2010.


Table of Contents

Page 25

          Premium growth outside the United States was strong in all segments of our business in the first nine months and third quarter of 2011, in spite of a modest decline in renewal rates, due in part to new business and strong retention of existing business.
          The highly competitive market is likely to continue through the remainder of 2011. We expect that our net written premium growth for the year 2011 will be about the same as it was in the first nine months of the year, reflecting a slight positive impact from currency fluctuation, assuming average foreign currency to U.S. dollar exchange rates for the remainder of the year remain similar to September 30, 2011 levels.
     Reinsurance Ceded
          Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies we write that are subject to reinsurance.
          The most significant component of our ceded reinsurance program is property reinsurance. We purchase two types of property reinsurance: catastrophe and property per risk.
          For property risks in the United States and Canada, we purchase catastrophe reinsurance in two forms. We purchase traditional catastrophe reinsurance, including our primary treaty which we refer to as our North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our northeast United States exposures. We have also arranged for the purchase of multi—year, collateralized reinsurance funded through the issuance of collateralized risk linked securities, known as catastrophe bonds. We also purchase traditional catastrophe reinsurance for events outside the United States.
          We renewed our major traditional property catastrophe treaties and our commercial property per risk treaty in April 2011, with only modest changes in coverage. In the first quarter of 2011, we arranged for the purchase of reinsurance through the issuance of catastrophe bonds to replace two catastrophe bond coverages that expired in March and April 2011. In June 2011, we purchased supplemental catastrophe reinsurance for exposures in the northeast United States. In June 2011, we also purchased additional catastrophe coverage for our exposures in Australia and Canada.
          Our North American catastrophe treaty has an initial retention of $500 million.
          The North American catastrophe treaty provides coverage for United States and Canadian exposures of approximately 64% of losses (net of recoveries from other available reinsurance) between $500 million and $1.65 billion. For catastrophic events in the northeastern United States and in Florida, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the catastrophe bond coverages provide additional coverages as discussed below.


Table of Contents

Page 26

          The catastrophe bond coverages generally provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the North American catastrophe treaty. Our two catastrophe bond coverages are: a $150 million reinsurance arrangement that expires in March 2012 that provides coverage for homeowners-related hurricane losses in Florida and a $475 million reinsurance arrangement, portions of which expire in March 2014 and March 2015, that provides coverage for homeowners and commercial exposures for loss events in the northeastern United States.
          For catastrophic events in the northeastern United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the $475 million catastrophe bond coverage provides additional coverage of approximately 64% of losses (net of recoveries from other available reinsurance) between $1.65 billion and $3.55 billion.
          For hurricane events in Florida, we have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this mandatory program limits our initial retention in Florida for homeowners-related losses to approximately $160 million and provides coverage of 90% of covered losses between approximately $160 million and $570 million. Additionally, the $150 million catastrophe bond coverage provides coverage of approximately 60% of Florida homeowners-related hurricane losses between $750 million and $1.0 billion.
          Our primary property catastrophe treaty for events outside the United States provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million. For catastrophic events in Australia and Canada, the additional reinsurance purchased in June 2011 provides coverage of 80% of losses between $350 million and $475 million.
          In addition to catastrophe treaties, we also have a commercial property per risk treaty. This treaty provides coverage per risk of between approximately $625 million and $900 million (depending upon the currency in which the insurance policy was issued) in excess of our initial retention. Our initial retention is generally between $25 million and $35 million.
          In addition to our major property catastrophe and property per risk treaties, we purchase several smaller property treaties that only cover specific classes of business or locations having potential concentrations of risk.
          Recoveries under our property reinsurance treaties are subject to certain coinsurance requirements that affect the interaction of some elements of our reinsurance program.
          Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated by foreign terrorists, and for nuclear, biological, chemical and radiological loss causes whether such acts are perpetrated by foreign or domestic terrorists.
          Overall, rates related to our property reinsurance program have remained consistent with those in 2010. We therefore expect that the overall cost of our property reinsurance program in 2011 will be similar to that in 2010.


Table of Contents

Page 27

     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 modestly profitable in the first nine months of 2011 and modestly unprofitable in the third quarter compared with highly profitable results in the same periods of 2010. The combined loss and expense ratio for our overall property and casualty business was as follows:
                                 
    Periods Ended September 30  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
Loss ratio
    65.3 %     58.8 %     70.2 %     54.5 %
Expense ratio
    31.8       31.3       32.4       31.7  
 
                       
Combined ratio
    97.1 %     90.1 %     102.6 %     86.2 %
 
                       
          The loss ratio was higher in the first nine months and third quarter of 2011 compared with the same periods in 2010. The increase in the loss ratio in the 2011 periods was due primarily to a higher impact from catastrophe losses and, to a lesser extent, a higher current accident year loss ratio excluding catastrophes, as well as a lower amount of favorable prior year loss development. The loss ratio in all periods reflected favorable prior accident year loss experience which we believe resulted from our disciplined underwriting in recent years as well as relatively moderate loss trends in several classes of business.
          The impact of catastrophes in the first nine months of 2011 was $1.0 billion, which represented 11.7 percentage points of the combined loss and expense ratio. This compares with an impact of catastrophes in the first nine months of 2010 of $595 million, including incurred losses of $586 million and reinsurance reinstatement premium costs of $9 million, which collectively represented 7.1 percentage points of the combined loss and expense ratio. The


Table of Contents

Page 28

$9 million reinstatement premium reinstated coverage under property catastrophe treaties for events outside the United States, including parts of Latin America, following an earthquake in Chile in the first quarter of 2010. The impact of catastrophes in the third quarter of 2011 was $420 million, which represented 14.4 percentage points of the combined loss and expense ratio. This compares with an impact of catastrophes of $58 million in the third quarter of 2010, which represented 2.1 percentage points of the combined loss and expense ratio. A significant portion of the catastrophe losses in the first nine months of 2011 related to flooding in Australia and earthquakes in New Zealand and Japan in the first quarter and tornadoes and other storms in the United States, primarily in the second and third quarters, including losses of $335 million in the third quarter related to Hurricane Irene. A significant portion of the catastrophe losses in the first nine months of 2010 related to numerous storms in the United States, including a severe hail storm in Oklahoma in the second quarter and an earthquake in Chile in the first quarter.
          The expense ratio was higher in the first nine months and third quarter of 2011 compared with the same periods in 2010. The increase in the 2011 periods was primarily due to an increase in commission rates on business written outside the United States offset, in part, by overhead expenses increasing at a lesser rate than the rate of growth of premiums written.
     Review of Underwriting Results by Business Unit
     Personal Insurance
          Net premiums written from personal insurance, which represented 34% of our premiums written in the first nine months of 2011, increased by 4% in the first nine months of 2011 and 5% in the third quarter compared with the same periods in 2010. The increase was driven by growth in business written outside the United States, including a slight benefit from the effect of currency fluctuation. Premiums were flat in the United States in the first nine months and third quarter of 2011. Net premiums written for the classes of business within the personal insurance segment were as follows:
                                                 
    Nine Months Ended             Quarter Ended        
    Sept. 30             Sept. 30        
    2011     2010     % Incr.     2011     2010     % Incr.  
    (in millions)             (in millions)          
Automobile
  $ 517     $ 474       9 %   $ 174     $ 160       9 %
Homeowners
    1,872       1,795       4       658       631       4  
Other
    597       593       1       197       189       4  
 
                                       
Total personal
  $ 2,986     $ 2,862       4     $ 1,029     $ 980       5  
 
                                       
          Personal automobile premiums increased significantly in the first nine months and third quarter of 2011, driven by growth outside the United States, due primarily to new business. Premiums for automobile business written in the United States increased modestly in both periods, but growth continued to be constrained by the highly competitive marketplace. Premium growth in our homeowners business occurred both inside and outside the United States, due primarily to new business, and to a lesser extent, increases in coverage on some existing policies. Premiums from our other personal business, which includes accident and health, excess liability and yacht coverages, increased slightly in the first nine months of 2011 and increased modestly in the third quarter compared with the same periods in 2010. Premium growth in 2011 for this


Table of Contents

Page 29

component of our personal insurance business was adversely affected by our decision to exit and runoff the employer healthcare stop loss component of our U.S. accident and health business. The runoff of this business will negatively impact premium growth for our other personal business for the remainder of this year. Premiums for our other personal business increased significantly outside the U.S. in both periods, primarily in our accident and health business.
          Our personal insurance business produced modestly unprofitable underwriting results in the first nine months of 2011 compared with profitable results in the same period of 2010. Results in the third quarter of 2011 were highly unprofitable compared with highly profitable results in the same period of 2010. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
                                 
    Periods Ended September 30  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
Automobile
    94.8 %     91.1 %     99.3 %     91.7 %
Homeowners
    106.2       96.1       126.1       81.0  
Other
    96.1       90.7       97.6       94.2  
Total personal
    102.2       94.2       115.6       85.4  
          The deterioration in the results in the 2011 periods was attributable in large part to the significant impact of catastrophes, particularly the impact of losses from Hurricane Irene on the homeowners class. The impact of catastrophes on our personal insurance business represented 17.0 percentage points of the combined ratio in the first nine months of 2011 and 28.5 points in the third quarter compared with 13.4 and 3.7 percentage points, respectively, in the comparable periods of 2010. In addition, favorable prior year loss development was lower in the first nine months and the third quarter of 2011 than in the comparable periods of 2010.
          Our personal automobile business produced profitable results in the first nine months of 2011 and 2010. Results in the third quarter of 2011 were near breakeven compared to profitable results in the same period of 2010. Results in all periods, but more so in the 2010 periods, benefited from favorable prior year loss development. The less profitable results in the third quarter of 2011 also reflected higher catastrophe losses.
          Homeowners results were unprofitable in the first nine months of 2011 compared with profitable results in the same period of 2010. Results were highly unprofitable in the third quarter of 2011 compared with highly profitable results in the same period of 2010. The less profitable results in the 2011 periods were due in large part to a higher impact of catastrophe losses. Catastrophe losses represented 26.6 and 44.7 percentage points of the combined ratio for this class in the first nine months and third quarter of 2011, respectively, compared with 20.3 and 5.7 percentage points, respectively, in the same periods in 2010.
          Other personal results were profitable in the first nine months and third quarter of 2011 and 2010, but more so in the 2010 periods. The less profitable results in the 2011 periods were primarily due to reduced profitability in the accident and health and excess liability components. Our accident and health business produced modestly unprofitable results in the first nine months and third quarter of 2011 compared with profitable results in the same periods of


Table of Contents

Page 30

2010. In recent years, an increasing portion of our accident and health business has been written outside the United States. Our personal excess liability business produced highly profitable results in the first nine months and the third quarter of both 2011 and 2010. Results were somewhat less profitable in the 2011 periods, however, due to lower amounts of favorable prior year loss development. Our yacht business produced highly profitable results in the first nine months of 2011 and 2010 but produced unprofitable results in the third quarter of both years.
     Commercial Insurance
          Net premiums written from commercial insurance, which represented 43% of our premiums written in the first nine months of 2011, increased by 8% in the first nine months of 2011 and by 9% 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:
                                                 
    Nine Months Ended             Quarter Ended        
    Sept. 30             Sept. 30        
    2011     2010     % Incr.     2011     2010     % Incr.  
    (in millions)             (in millions)          
Multiple peril
  $ 852     $ 817       4 %   $ 290     $ 277       5 %
Casualty
    1,247       1,162       7       392       350       12  
Workers’ compensation
    662       586       13       199       177       12  
Property and marine
    1,058       969       9       302       278       9  
 
                                       
Total commercial
  $ 3,819     $ 3,534       8     $ 1,183     $ 1,082       9  
 
                                       
          Premium growth occurred in all classes of our commercial insurance business in the first nine months and third quarter of 2011 compared with the same periods in 2010. This premium growth reflected new business opportunities, higher audit and endorsement premiums and better pricing, in a market that continued to be highly competitive. There was improvement in the overall rate environment, particularly in the third quarter of 2011. Average renewal rates in the United States for all classes of our commercial business increased over those from the same periods in 2010. A portion of the overall growth in our commercial insurance business in the first nine months of 2011 compared to the first nine months of 2010 was also attributable to improvement in the retention levels of our existing customers. In the first nine months of 2011, the average renewal exposure change was flat in the United States and up slightly outside the United States, an improvement from 2010. The amount of new business was up in the first nine months of 2011, particularly outside the United States, and was flat overall in the third quarter compared with the comparable periods in 2010. We have continued to maintain our underwriting discipline in the competitive market, renewing business and writing new business where we believe we are securing acceptable rates and appropriate terms and conditions for the exposures. We expect the competitive conditions in the market will continue for the remainder of this year.


Table of Contents

Page 31

     Our commercial insurance business produced slightly unprofitable underwriting results in the first nine months and third quarter of 2011 compared with profitable results in the same periods of 2010. The combined loss and expense ratios for the classes of business within the commercial insurance segment were as follows:
                                 
    Periods Ended September 30  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
Multiple peril
    108.0 %     97.2 %     95.6 %     84.5 %
Casualty
    86.7       91.3       92.5       94.9  
Workers’ compensation
    92.5       92.1       94.4       95.0  
Property and marine
    119.0       88.1       119.8       83.3  
Total commercial
    101.4       91.9       101.1       89.1  
     The less profitable results in our commercial insurance business in the 2011 periods were due primarily to the higher impact of catastrophes, and to a lesser extent, a higher current accident year loss ratio excluding catastrophes. The impact of catastrophes represented 14.2 percentage points of the combined ratio for our commercial insurance business in the first nine months of 2011 and 11.2 percentage points in the third quarter compared with 6.3 and 2.0 percentage points, respectively, in the comparable periods in 2010. Results in all periods benefited from favorable prior year reserve development as well as disciplined risk selection and appropriate policy terms and conditions in recent years.
     Multiple peril results were unprofitable in the first nine months of 2011 compared with profitable results in the same period of 2010. Results in the third quarter of 2011 were profitable compared with highly profitable results in the same period of 2010. The less profitable results in the 2011 periods were due in large part to deterioration in the property component of this business, which was primarily due to the higher impact of catastrophes but also reflected a higher loss ratio excluding catastrophes. The impact of catastrophes was 21.6 percentage points of the combined ratio for the multiple peril class in the first nine months of 2011 and 10.3 percentage points in the third quarter compared with 14.9 and 1.1 percentage points, respectively, in the same periods of 2010. The liability component of this business produced profitable results in the first nine months and third quarter of both years, but more so in 2011 due in large part to higher amounts of favorable prior year loss development.
     Results for our casualty business were profitable in the first nine months and the third quarter of 2011 and 2010. Results in the first nine months of 2011 were more profitable than the comparable period in 2010, particularly in the excess liability component of this business. The results for the excess liability component were highly profitable in the first nine months and third quarter of both years, but more so in 2011. Results for the excess liability component benefited from substantial favorable prior year loss development in all periods. The primary liability component was also profitable in the first nine months of both years. Results for this component were also profitable in the third quarter of 2011 compared with unprofitable results in the same period of 2010; results in 2010 were adversely impacted by a higher volume of large loss activity. The automobile component of the casualty business produced highly profitable results in the first nine months and third quarter of 2011 compared with the near breakeven results in the same periods of 2010. The more profitable results for this component in the 2011 periods were


Table of Contents

Page 32

due to higher amounts of favorable prior year loss development. Casualty results were adversely affected by incurred losses related to asbestos and toxic waste claims in the first nine months and third quarter of both years. These losses represented 3.0 and 1.4 percentage points of the combined ratio for the casualty business in the first nine months of 2011 and 2010, respectively, and 1.7 and 1.6 percentage points in the third quarter of 2011 and 2010, respectively.
     Workers’ compensation results were profitable in the first nine months and third quarter of both 2011 and 2010. Results in both years benefited from our disciplined risk selection during the past several years and from favorable prior year loss development which was modestly higher in the 2011 periods.
     Property and marine results were highly unprofitable in the first nine months and third quarter of 2011 compared with highly profitable results in the same periods of 2010, mainly due to higher catastrophe losses and, to a lesser extent, higher current accident year loss ratios excluding catastrophes. Catastrophe losses represented 32.9 percentage points of the combined ratio for this class in the first nine months of 2011 and 31.3 percentage points in the third quarter compared with 8.5 and 5.0 percentage points, respectively, in the same periods of 2010.
     Specialty Insurance
     Net premiums written from specialty insurance, which represented 23% of our premiums written in the first nine months of 2011, were flat in the first nine months of 2011 and decreased by 1% in the third quarter compared with the same periods in 2010. Net premiums written for the classes of business within the specialty insurance segment were as follows:
                                                 
    Nine Months Ended             Quarter Ended        
    Sept. 30             Sept. 30     % Incr.  
    2011     2010     % Decr.     2011     2010     (Decr.)  
    (in millions)             (in millions)          
Professional liability
  $ 1,740     $ 1,735       %   $ 594     $ 582       2 %
Surety
    244       246       (1 )     71       87       (18 )
 
                                     
Total specialty
  $ 1,984     $ 1,981           $ 665     $ 669       (1 )
 
                                     
     Premium growth in our professional liability business remained constrained by the highly competitive marketplace. Renewal rates overall for our professional liability business in the United States decreased slightly in the first nine months of 2011 and the third quarter compared with those in the same periods of 2010. Renewal rates outside the United States also decreased in both periods. Retention levels and new business volume were higher in the first nine months of 2011 compared with those in the same period of 2010, both inside and outside the United States. Retention levels and new business volume overall were relatively flat in the third quarter. We have continued our focus on underwriting discipline, obtaining what we believe are acceptable rates and appropriate terms and conditions on both new business and renewals.
     Net premiums written for our surety business decreased slightly in the first nine months of 2011 compared with the same period in 2010. Net premiums written for this business decreased significantly in the third quarter of 2011 compared to the third quarter of 2010. Premiums for this business, both inside


Table of Contents

Page 33

and outside the United States, grew in the first six months of 2011 compared to the same period in 2010 primarily due to new surety bonds being written for existing customers on contracts awarded to them. However, the timing of such contract awards does vary and is inconsistent among periods. Premiums decreased in the third quarter primarily due to the cancellation of a few large contracts previously awarded to our insureds, a highly competitive market and the lingering effects on the construction business of the weak economic conditions during the last few years.
     Our specialty insurance business produced highly profitable underwriting results in the first nine months and third quarter of 2011 and 2010. The combined loss and expense ratios for the classes of business within the specialty insurance segment were as follows:
                                 
    Periods Ended September 30  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
Professional liability
    87.9 %     87.5 %     92.5 %     89.3 %
Surety
    49.9       42.5       55.5       40.0  
Total specialty
    83.6       82.2       88.3       83.3  
     Our professional liability business produced highly profitable results in the first nine months of 2011 and 2010. Both periods benefited from a significant amount of favorable prior year loss development that was driven mainly by continued positive loss experience related to accident years 2007 and prior. The overall professional liability results in the third quarter were profitable in both 2011 and 2010, but more so in 2010. Results in the third quarter of 2011 included a lower amount of favorable prior year loss development than the third quarter of 2010, primarily due to loss experience outside the United States and in the U.S. fidelity classes.
     Results in the directors and officers liability and fiduciary liability classes were highly profitable in the first nine months of both 2011 and 2010. Results in the employment practices liability and fidelity classes were profitable in the first nine months of 2011 compared to highly profitable results in the same period in 2010. Results in the errors and omissions liability class were highly unprofitable and reflected unfavorable prior year loss development in the first nine months of both years.
     Surety results were highly profitable in the first nine months and third quarter of both 2011 and 2010. The surety business tends to be characterized by losses that are infrequent but have the potential to be highly severe.
     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 2011 and 2010.
     Reinsurance assumed results were profitable in the first nine months and third quarter of 2011 and 2010. Results in the first nine months of both years benefited from favorable prior year loss development.


Table of Contents

Page 34

     Catastrophe Risk Management
     Our property and casualty subsidiaries have exposure to losses caused by natural perils such as hurricanes and other windstorms, earthquakes, severe winter weather and brush fires as well as from man-made catastrophic events such as terrorism. The frequency and severity of catastrophes are inherently unpredictable.
     The extent of losses from a natural catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas and have strategies and underwriting standards to manage these exposures through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas of the United States, such as California and the gulf and east coasts, as well as in natural catastrophe exposed areas of other countries. The information provided by the catastrophe modeling and the risk concentration management tool has resulted in our non-renewing some accounts and refraining from writing others.
     A new version of a third-party catastrophe modeling tool that we and others in the insurance industry utilize for estimating potential losses from natural catastrophes was released during the first quarter of 2011. Overall, the model is indicating higher risk estimates for our exposure to hurricanes in the United States, but the impact of the new model on our book of business varies significantly among the regions that we model for hurricanes. Based on our analysis, and the indications of other catastrophe models, we have begun to implement more targeted underwriting and rate initiatives in some regions and we have purchased additional catastrophe reinsurance. We will continue to take underwriting actions and/or purchase additional reinsurance to reduce or mitigate our exposure as we believe is warranted.
     Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. The modeling results may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived from our modeling exercises.
     Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material effect on the Corporation’s results of operations, financial condition or liquidity.


Table of Contents

Page 35

     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.


Table of Contents

Page 36

     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, 2011   Case     IBNR     Total     Recoverable     Reserves  
    (in millions)  
Personal insurance
                                       
Automobile
  $ 276     $ 158     $ 434     $ 16     $ 418  
Homeowners
    447       533       980       15       965  
Other
    384       652       1,036       139       897  
 
                             
Total personal
    1,107       1,343       2,450       170       2,280  
 
                             
 
                                       
Commercial insurance
                                       
Multiple peril
    651       1,212       1,863       36       1,827  
Casualty
    1,394       5,229       6,623       358       6,265  
Workers’ compensation
    920       1,601       2,521       169       2,352  
Property and marine
    822       661       1,483       343       1,140  
 
                             
Total commercial
    3,787       8,703       12,490       906       11,584  
 
                             
 
                                       
Specialty insurance
                                       
Professional liability
    1,507       6,258       7,765       414       7,351  
Surety
    26       50       76       7       69  
 
                             
Total specialty
    1,533       6,308       7,841       421       7,420  
 
                             
 
                                       
Total insurance
    6,427       16,354       22,781       1,497       21,284  
 
                                       
Reinsurance assumed
    249       508       757       257       500  
 
                             
 
                                       
Total
  $ 6,676     $ 16,862     $ 23,538     $ 1,754     $ 21,784  
 
                             
                                         
                                    Net  
    Gross Loss Reserves     Reinsurance     Loss  
December 31, 2010   Case     IBNR     Total     Recoverable     Reserves  
    (in millions)  
Personal insurance
                                       
Automobile
  $ 257     $ 155     $ 412     $ 17     $ 395  
Homeowners
    383       327       710       18       692  
Other
    359       663       1,022       145       877  
 
                             
Total personal
    999       1,145       2,144       180       1,964  
 
                             
 
                                       
Commercial insurance
                                       
Multiple peril
    607       1,136       1,743       38       1,705  
Casualty
    1,446       5,058       6,504       363       6,141  
Workers’ compensation
    897       1,512       2,409       175       2,234  
Property and marine
    664       487       1,151       332       819  
 
                             
Total commercial
    3,614       8,193       11,807       908       10,899  
 
                             
 
                                       
Specialty insurance
                                       
Professional liability
    1,477       6,329       7,806       418       7,388  
Surety
    16       50       66       8       58  
 
                             
Total specialty
    1,493       6,379       7,872       426       7,446  
 
                             
 
                                       
Total insurance
    6,106       15,717       21,823       1,514       20,309  
 
                                       
Reinsurance assumed
    261       634       895       303       592  
 
                             
 
                                       
Total
  $ 6,367     $ 16,351     $ 22,718     $ 1,817     $ 20,901  
 
                             


Table of Contents

Page 37

     Loss reserves, net of reinsurance recoverable, increased by $883 million during the first nine months of 2011. Loss reserves related to our insurance business increased by $975 million during the first nine months of 2011, which included increases of approximately $605 million related to catastrophe losses and approximately $155 million related to the effect of currency fluctuation due to a weaker U.S. dollar at September 30, 2011 compared to December 31, 2010. Loss reserves related to our reinsurance assumed business, which is in runoff, decreased by $92 million.
     The increase in gross case and IBNR reserves related to our homeowners, commercial multiple peril and property and marine classes of business during the first nine months of 2011 was due largely to catastrophe losses in the first nine months of 2011 that remained unpaid at September 30. Most of the increase in gross loss reserves related to the effect of currency fluctuation in the first nine months of 2011 impacted our casualty and professional liability classes of business, but these classes also experienced a significant amount of favorable prior year development.
     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, 2011 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, 2010, 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, 2011 may change, which could have a material effect on the Corporation’s results of operations and financial condition.
     Changes in loss reserve estimates are unavoidable because such estimates are subject to the outcome of future events. Loss trends vary and time is required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development or reserve releases.
     We estimate that we experienced overall favorable prior year development of about $580 million during the first nine months of 2011 and $155 million in the third quarter compared with favorable prior year development of about $600 million and $200 million, respectively, in the comparable periods of 2010.
     The favorable development in the first nine months of 2011 was primarily in the commercial liability and professional liability classes related mainly to accident years 2007 and prior, and to a lesser extent, in the personal insurance classes. The favorable development in the first nine months of 2010 occurred primarily in the professional liability classes due to continued favorable loss trends related to accident years 2007 and prior and particularly outside the United States, in the commercial liability classes related mainly to accident years 2007 and prior, and in the personal insurance classes.


Table of Contents

Page 38

     Investment Results
          Property and casualty investment income before taxes increased 1% in the first nine months of 2011 and 2% in the third quarter compared with the same periods in 2010. The increase was attributable to the positive impact of foreign currency fluctuation on income from our investments denominated in currencies other than the U.S. dollar and the growth in average invested assets. These positive impacts were mostly offset by the effect of lower average yields on our investment portfolio. The average invested assets of the property and casualty subsidiaries were modestly higher during the first nine months of 2011 compared with the same period of 2010, but growth was limited as a result of the dividend distributions made by the property and casualty subsidiaries to Chubb during the last six months of 2010 and the first six months of 2011. The average yield of our investment portfolio decreased for the first nine months of 2011 compared to the same period of 2010 due to the continuing impact of lower reinvestment yields compared to those on fixed maturity securities that matured, were redeemed by the issuer or were sold since the third quarter of 2010.
          The effective tax rate on investment income was 19.0% in the first nine months of both 2011 and 2010. The effective tax rate on investment income can fluctuate as the proportion of tax exempt investment income relative to total investment income changes from period to period.
          On an after-tax basis, property and casualty investment income increased by 1% in the first nine months of 2011 and the third quarter of 2011 compared with the same periods in 2010. The after-tax annualized yield on the investment portfolio that supports our property and casualty insurance business was 3.24% and 3.28% in the first nine months of 2011 and 2010, respectively.
          If investment yields and average foreign currency to U.S. dollar exchange rates in the fourth quarter of 2011 remain about the same as September 30, 2011 levels, property and casualty investment income after taxes for the year 2011 is expected to be similar to investment income for the year 2010. We expect property and casualty investment income after taxes to decline in the fourth quarter of 2011 compared with the same period in 2010. We expect that lower reinvestment yields will continue to negatively impact our property and casualty investment income into 2012.
     Other Income and Charges
          Other income and charges, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was income of $24 million in the first nine months of 2011 compared with a loss of $5 million in the same period of 2010. The income in the first nine months of 2011 primarily included income from several small property and casualty insurance companies in which we have an interest.
Corporate and Other
          Corporate and other comprises investment income earned on corporate invested assets, interest expense and other expenses not allocated to our operating subsidiaries and the results of our non-insurance subsidiaries.
          Corporate and other produced a loss before taxes of $188 million in the first nine months of 2011 compared to a loss of $160 million for the same period of 2010. The lower loss in the first nine months of 2010 was due to higher investment income, which was largely due to a $20 million special dividend received during the second quarter of 2010 on an equity investment.


Table of Contents

Page 39

Realized Investment Gains and Losses
     Net realized investment gains and losses were as follows:
                                 
    Periods Ended September 30  
    Nine Months     Third Quarter  
    2011     2010     2011     2010  
            (in millions)          
Net realized gains
                               
Fixed maturities
  $ 23     $ 54     $ 15     $ 8  
Equity securities
    44       29       16       18  
Other invested assets
    256       197       47       28  
 
                       
 
    323       280       78       54  
 
                       
Other-than-temporary impairment losses
                               
Fixed maturities
    (1 )     (3 )     (1 )      
Equity securities
    (22 )     (6 )     (6 )      
 
                       
 
    (23 )     (9 )     (7 )      
 
                       
 
Realized investment gains before tax
  $ 300     $ 271     $ 71     $ 54  
 
                       
 
Realized investment gains after tax
  $ 195     $ 176     $ 46     $ 35  
 
                       
     The net realized gains of our other invested assets represent primarily the aggregate of realized gains distributions to us from the limited partnerships in which we have an interest and changes in our equity in the net assets of those partnerships based on valuations provided to us by the manager of each partnership. Due to the timing of our receipt of valuation data from the investment managers, these investments are generally reported on a one quarter lag.
     The net realized gains of the limited partnerships reported in the first nine months of 2011 reflected the strong performance of the equity and high yield investment markets in the first quarter of 2011 and the fourth quarter of 2010. The net realized gains of the limited partnerships reported in the first nine months of 2010 reflected the strong performance of the equity and high yield investment markets in the first quarter of 2010 and the fourth quarter of 2009.
     We have not received third quarter 2011 valuations from many of the limited partnerships. As a result of weak performance in the equity markets in the third quarter of 2011, we expect to report an overall decline in our equity in the net assets of these limited partnerships in our fourth quarter 2011 results.
     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. We have a monitoring process overseen by a committee of investment and accounting professionals that is responsible for identifying those securities to be specifically evaluated for potential other-than-temporary impairment.


Table of Contents

Page 40

     The determination of whether a decline in value of any investment is temporary or other than temporary requires the judgment of management. The assessment of other-than-temporary impairment of fixed maturities and equity securities is based on both quantitative criteria and qualitative information and also considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, general market conditions and industry or sector specific factors. The decision to recognize a decline in the value of a security carried at fair value as other than temporary rather than temporary has no impact on shareholders’ equity.
     In determining whether fixed maturities are other than temporarily impaired, we are required to recognize an other-than-temporary impairment loss for a fixed maturity when we conclude that we have the intent to sell or it is more likely than not that we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely we will not recover the entire amortized cost value of an impaired debt security. If we have the intent to sell or it is more likely than not we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value, the security is written down to fair value and the entire amount of the writedown is included in net income as a realized investment loss. For all other impaired fixed maturities, the impairment loss is separated into the amount representing the credit loss and the amount representing the loss related to all other factors. The amount of the impairment loss that represents the credit loss is included in net income as a realized investment loss and the amount of the impairment loss that relates to all other factors is included in other comprehensive income.
     In determining whether equity securities are other than temporarily impaired, we consider our intent and ability to hold a security for a period of time sufficient to allow us to recover our cost. If a decline in the fair value of an equity security is deemed to be other than temporary, the security is written down to fair value and the amount of the writedown is included in net income as a realized investment loss.
Income Taxes
     Net income in the first nine months of 2010 included an income tax charge of $22 million in the first quarter related to a decrease in deferred tax assets as a result of federal health care legislation enacted in March 2010. The legislation eliminated the tax benefit associated with Medicare Part D subsidies we expect to receive for providing qualifying prescription drug coverage to retirees.
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.


Table of Contents

Page 41

     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, 2011, the Corporation had shareholders’ equity of $15.6 billion and total debt of $4.0 billion.
          Management regularly monitors the Corporation’s capital resources. In connection with our long term capital strategy, Chubb from time to time contributes capital to its property and casualty subsidiaries. In addition, in order to satisfy capital needs as a result of any rating agency capital adequacy or other future rating issues, or in the event we were to need additional capital to make strategic investments in light of market opportunities, we may take a variety of actions, which could include the issuance of additional debt and/or equity securities. We believe that our strong financial position and current debt level provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short term and long term basis.
          In December 2010, the Board of Directors authorized the repurchase of up to 30,000,000 shares of Chubb’s common stock. The authorization has no expiration date. During the first nine months of 2011, we repurchased 21,587,016 shares of Chubb’s common stock in open market transactions at a cost of $1.3 billion. As of September 30, 2011, 6,905,280 shares remained under the share repurchase authorization. We expect to repurchase all of the shares remaining under the authorization by the end of January 2012, subject to market conditions.
     Ratings
          Chubb and its property and casualty insurance subsidiaries are rated by major rating agencies. These ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position and ability to meet our obligations to policyholders.
          Ratings are an important factor in establishing our competitive position in the insurance markets. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed.
          It is possible that one or more of the rating agencies may raise or lower our existing ratings in the future. If our credit ratings were downgraded, we might incur higher borrowing costs and might have more limited means to access capital. A downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.
     Liquidity
          Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short and long term cash requirements of its business operations.


Table of Contents

Page 42

     The Corporation’s liquidity requirements in the past have generally been met by funds from operations and we expect that in the future funds from operations will continue to be sufficient to meet such requirements. Liquidity requirements could also be met by funds received upon the maturity or sale of marketable securities in our investment portfolio. The Corporation also has the ability to borrow under its existing $500 million credit facility and we believe we could issue debt or equity securities.
     Our property and casualty operations provide liquidity in that insurance premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. Cash receipts from operations, consisting of insurance premiums and investment income, provide funds to pay losses, operating expenses and dividends to Chubb. After satisfying our cash requirements, excess cash flows are used to build the investment portfolio, with the expectation of generating increased future investment income.
     For the first nine months of 2011 and 2010, substantial cash from operations was generated by the underwriting and investment activities of our property and casualty subsidiaries. In both periods, this cash was available for the property and casualty subsidiaries to use for investing activities and/or for financing activities, primarily the payment of dividends to Chubb. The property and casualty subsidiaries paid $2.1 billion of dividends to Chubb in the first nine months of 2011 compared with $1.6 billion of dividends paid in the comparable period of 2010. During the first nine months of 2011, cash used by the property and casualty subsidiaries for financing activities exceeded the cash provided by the operating activities by approximately $340 million. In the first nine months of 2010, the excess of cash provided by operations over cash used for financing activities resulted in new cash available for investment by our property and casualty subsidiaries of approximately $275 million. The cash provided by operating activities of the property and casualty subsidiaries was modestly lower in the first nine months of 2011 compared with the same period in 2010 due in part to higher income tax payments and, to a lesser extent, higher loss payments, partially offset by higher premium collections.
     Our property and casualty subsidiaries maintain substantial investments in highly liquid, short term marketable securities. Accordingly, we do not anticipate selling long term fixed maturity investments to meet any liquidity needs.
     Chubb’s liquidity requirements primarily include the payment of dividends to shareholders and interest and principal on debt obligations. The declaration and payment of future dividends to Chubb’s shareholders will be at the discretion of Chubb’s Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.
     As a holding company, Chubb’s ability to continue to pay dividends to shareholders and to satisfy its debt obligations relies on the availability of liquid assets, which is dependent in large part on the dividend paying ability of its property and casualty subsidiaries. The timing and amount of dividends paid by the property and casualty subsidiaries to Chubb may vary from year to year. Our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount and timing of dividends they may pay within twelve consecutive months without the prior approval of regulatory authorities. The restrictions are generally


Table of Contents

Page 43

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.
     Included in the $2.1 billion of dividends paid by the property and casualty subsidiaries to Chubb during the first nine months of 2011 were a $600 million dividend paid in the first quarter and a $1.3 billion dividend paid in the third quarter that were deemed to be extraordinary under applicable insurance regulations due to the limitation on the amount of dividends that may be paid within twelve consecutive months. As a result, regulatory approval was required and obtained for the payment of these dividends. Regulatory approval will be required for the payment of any additional dividends by the subsidiaries during the remainder of 2011. Depending on the timing and amount of dividend payments by the subsidiaries during 2012, such dividends may require prior regulatory approval.
Invested Assets
     The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment return while minimizing credit risk and managing interest rate risk in order to ensure that funds will be available to meet our insurance obligations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors of Chubb and its respective operating companies.
     Our investment portfolio primarily comprises high quality bonds, principally tax exempt securities, corporate bonds, mortgage-backed securities and U.S. Treasury securities, as well as foreign government and corporate bonds that support our operations outside the United States. The portfolio also includes equity securities, primarily publicly traded common stocks, and other invested assets, primarily private equity limited partnerships, all of which are held with the primary objective of capital appreciation.
     Our objective is to achieve the appropriate mix of taxable and tax exempt securities in our portfolio to balance both investment and tax strategies. At September 30, 2011, 68% of our fixed maturity portfolio that supports our U.S. operations was invested in highly rated tax exempt securities. While about 35% of our tax exempt securities are insured, the effect of insurance on the average credit rating of these securities is insignificant. The insured tax exempt securities in our portfolio have been selected based on the quality of the underlying credit and not the value of the credit insurance enhancement.
     At September 30, 2011, 17% of our taxable fixed maturity portfolio was invested in highly rated mortgage-backed securities. About 35% of these securities are residential mortgage-backed securities, consisting of government agency pass-through securities guaranteed by a government agency or a government sponsored enterprise (GSE), GSE collateralized mortgage obligations (CMOs) and other CMOs, all backed by single family home mortgages. The majority of the CMOs are actively traded in liquid markets. The balance of the mortgage-backed securities are call protected, commercial mortgage-backed securities (CMBS). About 95% of our CMBS are senior securities with the highest level of subordination. The remainder of our CMBS are seasoned securities that were issued in 2004 or earlier.


Table of Contents

Page 44

     The net unrealized appreciation before tax of our fixed maturities and equity securities carried at fair value was $2.3 billion at September 30, 2011 compared with net unrealized appreciation before tax of $1.7 billion at December 31, 2010. Such unrealized appreciation is reflected in accumulated other comprehensive income, net of applicable deferred income tax.
Fair Values of Financial Instruments
     Fair values of financial instruments are determined using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical assets or liabilities or other inputs, such as quoted prices for similar assets or liabilities, that are observable either directly or indirectly. In those instances where observable inputs are not available, fair values are measured using unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange.
     The fair value hierarchy prioritizes the inputs to valuation techniques used to measure the fair values of our fixed maturities and equity securities into three broad levels as follows:
     Level 1 — Unadjusted quoted prices in active markets for identical assets.
     Level 2 — Other inputs that are observable for the asset, either directly or indirectly.
     Level 3 — Inputs that are unobservable.
     The methods and assumptions used to estimate the fair values of financial instruments are as follows:
     Fair values for fixed maturities are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from independent brokers. For fixed maturities that have quoted prices in active markets, market quotations are provided. For fixed maturities that do not trade on a daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference data, prepayment rates and measures of volatility. Management reviews on an ongoing basis the reasonableness of the methodologies used by the relevant pricing service and brokers. In addition, management, using the prices received for the securities from the pricing service and brokers, determines the aggregate portfolio price performance and reviews it against applicable indices. If management believes that significant discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve the discrepancies.
     Fair values of equity securities are based on quoted market prices.


Table of Contents

Page 45

     The carrying value of short term investments approximates fair value due to the short maturities of these investments.
     Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service.
     We use a pricing service to estimate fair value measurements for approximately 99% of our fixed maturities. The prices we obtain from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments.
     At September 30, 2011 and December 31, 2010, we held an insignificant amount of financial instruments in our investment portfolio for which a lack of market liquidity impacted our determination of fair value.
Accounting Pronouncements Not Yet Adopted
     In October 2010, the Financial Accounting Standards Board issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies those costs relating to the successful acquisition of new or renewal insurance contracts that should be capitalized. This guidance is effective for the Corporation for the year beginning January 1, 2012 and may be applied prospectively or retrospectively. We are continuing to assess the effect that implementation of the new guidance will have on the Corporation’s financial position and results of operations. The Corporation expects to elect retrospective application of the guidance. Under retrospective application, deferred policy acquisition costs and related deferred taxes would be reduced as of the beginning of the earliest period presented in the financial statements with a corresponding reduction to shareholders’ equity. The adoption of the new guidance during the first quarter of 2012 is currently expected to reduce the Corporation’s deferred policy acquisition costs as of December 31, 2011 by approximately 22% to 27% and shareholders’ equity by approximately $250 million to $300 million.


Table of Contents

Page 46

Item 4 — Controls and Procedures
     As of September 30, 2011, 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 Chubb’s 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, 2011.
     During the quarter ended September 30, 2011, 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.


Table of Contents

Page 47

PART II. OTHER INFORMATION
Item 1 — Legal Proceedings
     The information required with respect to Item 1 is included in Note (6) of the unaudited Consolidated Financial Statements contained in this quarterly report, which information is incorporated by reference into this Item 1.
Item 1A — Risk Factors
     The Corporation’s business is subject to a number of risks, including those identified in Item 1A of Chubb’s Annual Report on Form 10-K for the year ended December 31, 2010, 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 the Annual Report on Form 10-K 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.
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, 2011:
                                 
                    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  
    Purchased(a)     Per Share     Plans or Programs     Plans or Programs(b)  
Period
                               
 
July 2011
    1,131,604     $ 62.41       1,131,604       13,770,849  
 
August 2011
    4,937,337       59.57       4,937,337       8,833,512  
 
September 2011
    1,928,232       59.58       1,928,232       6,905,280  
                         
 
Total
    7,997,173       59.97       7,997,173          
                         
 
(a)   The stated amounts exclude 361 shares delivered to Chubb during the month of August 2011 by employees of the Corporation to cover option exercise prices in connection with the Corporation’s stock-based compensation plans.
(b)   On December 9, 2010, the Board of Directors authorized the repurchase of up to 30,000,000 shares of common stock. The authorization has no expiration date.


Table of Contents

Page 48

Item 6 — Exhibits
     
Exhibit    
Number   Description
 
-   Rule 13a-14(a)/15d-14(a) Certifications
31.1
  Certification by John D. Finnegan filed herewith.
31.2
  Certification by Richard G. Spiro filed herewith.
 
   
 
-   Section 1350 Certifications
32.1
  Certification by John D. Finnegan filed herewith.
32.2
  Certification by Richard G. Spiro filed herewith.
 
   
 
-   Interactive Data File
101.INS
  XBRL Instance Document
101.SCH
  XBRL Taxonomy Extension Schema Document
101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
  XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
  XBRL Taxonomy Extension Definition Linkbase Document
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 7, 2011