| CHUBB CORP Item 1A Risk Factors The Corporation’s business is subject to a number of risks, including those described below, that could have a material effect on the Corporation’s results of operations, financial condition or liquidity and that could cause our operating results to vary significantly from period to period |
| References to “we,” “us” and “our” appearing in this Form 10-K under this heading should be read to refer to the Corporation |
| If our property and casualty loss reserves are insufficient, our results could be adversely affected |
| The process of establishing loss reserves is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events |
| Variations between our loss reserve estimates and the actual emergence of losses could be material and could have a material adverse effect on our results of operations |
| A further discussion of the risk factors related to our property and casualty loss reserves is presented in the Property and Casualty Insurance-Loss Reserves section of MD&A 12 _________________________________________________________________ The effects of emerging claim and coverage issues on our business are uncertain |
| We price and establish the terms and conditions of policies based upon an intended scope of policy coverage |
| However, as industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge |
| These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims |
| In some instances, these changes may not become apparent until some time after we have issued the insurance policies that are affected by the changes |
| As a result, the full extent of liability under our insurance policies may not be known for many years after the policies are issued |
| Emerging claim and coverage issues could have an adverse effect on our results of operations and financial condition |
| Catastrophe losses could materially reduce our profitability |
| As a property and casualty insurance holding company, our insurance operations expose us to claims arising out of catastrophes |
| Catastrophes can be caused by various natural perils, including hurricanes and other windstorms, earthquakes, winter storms and brush fires |
| Catastrophes can also be man-made, such as a terrorist attack |
| The frequency and severity of catastrophes are inherently unpredictable |
| It is possible that both the frequency and severity of natural and man-made catastrophic events will increase |
| The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event |
| Most catastrophes are restricted to relatively small geographic areas; however, hurricanes and earthquakes may produce significant damage in larger areas, especially those that are heavily populated |
| Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition |
| Our ability to write new business could also be affected |
| We believe that increases in the value and geographic concentration of insured property and the effects of inflation could increase the severity of claims from catastrophic events in the future |
| In addition, states have from time to time passed legislation that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from withdrawing from catastrophe-exposed areas |
| The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated |
| Private sector catastrophe reinsurance for terrorism losses is generally unavailable, especially for acts of terrorism involving nuclear, biological, chemical or radiological weapons |
| In addition, the continued threat of terrorism also could generally result in increased reinsurance prices and potentially cause us to retain more risk than we otherwise would retain if we were able to obtain reinsurance at lower prices |
| Terrorist attacks also could disrupt our operations centers in the US or abroad |
| As a result, it is possible that any, or a combination of all, of these factors could have a material adverse effect on our business, results of operations, financial condition or liquidity |
| A further discussion on the risk factors related to catastrophes is presented in the Property and Casualty Insurance — Catastrophe Risk Management section of MD&A The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations |
| We utilize a number of strategies to mitigate our risk exposure, such as: • engaging in vigorous underwriting; • carefully evaluating terms and conditions of our policies; • focusing on our risk aggregations by geographic zones, industry type, credit exposure and other bases; and • ceding reinsurance |
| 13 _________________________________________________________________ However, there are inherent limitations in all of these tactics and no assurance can be given that an event or series of unanticipated events will not result in loss levels in excess of our probable maximum loss models, which could have a material adverse effect on our financial condition or results of operations |
| The availability of reinsurance coverage and our inability to collect amounts due from reinsurers could have a material adverse effect on our financial condition or results of operations |
| The availability and cost of reinsurance are subject to prevailing market conditions |
| In recent years, for certain coverages, we have elected not to renew reinsurance treaties that we believed were no longer economical |
| We have also increased the amount of the risk we retain in many of the treaties that we have renewed |
| Accordingly, our net exposure to liability has increased, which, in turn, could have a material adverse effect on our financial condition or results of operations |
| With respect to reinsurance coverages we have purchased, our ability to recover amounts due from reinsurers may be affected by the creditworthiness and willingness to pay of the reinsurers from whom we have purchased coverage |
| The inability or unwillingness of any of our reinsurers to meet their obligations to us could have a material adverse effect on our results of operations |
| Cyclicality of the property and casualty insurance industry may cause fluctuations in our results |
| The property and casualty insurance business historically has been cyclical, experiencing periods characterized by intense price competition, relatively low premium rates and less restrictive underwriting standards followed by periods of relatively low levels of competition, high premium rates and more selective underwriting standards |
| We expect this cyclicality to continue |
| The periods of intense price competition in the cycle could adversely affect our financial condition, profitability or cash flows |
| A number of factors, including many that are volatile and unpredictable, can have a significant impact on cyclical trends in the property and casualty insurance industry and the industry’s profitability |
| These factors include: • an apparent trend of courts to grant increasingly larger awards for certain damages; • catastrophic hurricanes, windstorms, earthquakes and other natural disasters, as well as the occurrence of man-made disasters (eg, a terrorist attack); • availability, price and terms of reinsurance; • fluctuations in interest rates; • changes in the investment environment that affect market prices of and income and returns on investments; and • inflationary pressures that may tend to affect the size of losses experienced by insurance companies |
| We cannot predict whether or when market conditions will improve, remain constant or deteriorate |
| Negative market conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed |
| If we cannot write insurance at appropriate rates, our ability to transact business would be materially and adversely affected |
| A downgrade in our ratings could adversely impact the competitive positions of our operating businesses |
| Ratings can be 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 |
| If our credit ratings were downgraded in the future, we could incur higher borrowing costs and may have more limited means to access capital |
| In addition, a downgrade in our 14 _________________________________________________________________ financial strength ratings could adversely affect the competitive positions of our insurance operations, including a possible reduction in demand for our products in certain markets |
| Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth |
| Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they conduct business |
| This regulation is generally designed to protect the interests of policyholders, and not necessarily the interests of insurers, their shareholders and other investors |
| The regulation relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and nonfinancial components of an insurance company’s business |
| Virtually all states in which we operate require us, together with other insurers licensed to do business in that state, to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies |
| In addition, in various states, our insurance subsidiaries must participate in mandatory arrangements to provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers |
| The effect of these and similar arrangements could reduce our profitability in any given period or limit our ability to grow our business |
| In recent years, the state insurance regulatory framework has come under increased scrutiny, including scrutiny by federal officials, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies |
| Further, the NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws and the development of new laws and regulations |
| Any proposed or future legislation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs |
| The property and casualty insurance industry is the subject of a number of investigations by state and federal authorities in the US, as well as by regulators in jurisdictions outside the US We cannot predict the outcome of these investigations or the impact on our business or financial results |
| As part of the ongoing investigations of market practices in the property and casualty insurance industry involving the payment of contingent commissions to brokers and agents, we have received subpoenas and requests for information from the Attorneys General of several states, as well as from various other regulatory agencies |
| We also have received subpoenas and requests for information as part of investigations by several state and federal regulators and enforcement agencies, including the US Securities and Exchange Commission and the US Attorney for the Southern District of New York, relating to certain loss mitigation and finite reinsurance products |
| In addition, we have received and responded to similar regulatory inquiries in Canada, the United Kingdom and elsewhere |
| We may receive additional subpoenas and other information requests from Attorneys General or other regulatory agencies regarding similar issues |
| We are cooperating, and intend to continue to cooperate, fully with these investigations |
| Although no regulatory action has been initiated against the Corporation, it is possible that one or more regulatory agencies may pursue an action against the Corporation in the future on the issues currently under investigation or on similar issues |
| We cannot predict the ultimate outcome of these investigations or the impact on our business or results of operations |
| 15 _________________________________________________________________ Intense competition for our products could harm our ability to maintain or increase our profitability and premium volume |
| The property and casualty insurance industry is highly competitive |
| We compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms |
| We compete for business not only on the basis of price, but also on the basis of financial strength, availability of coverage desired by customers and quality of service, including claim adjustment service |
| We may have difficulty in continuing to compete successfully on any of these bases in the future |
| If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely affected |
| We are dependent on a network of independent insurance brokers and agents to distribute our products |
| We generally do not use salaried employees to promote and distribute our insurance products |
| Instead, we rely on a large network of independent brokers and agents |
| Accordingly, our business is dependent on the willingness of these brokers and agents to recommend our products to their customers |
| We have agreements in place with insurance agents and brokers under which we agree to pay commissions that are contingent on the volume and/or the profitability of business placed with us |
| The relationship between insurance carriers and brokers and agents has come under increasing scrutiny by state regulators, which may affect the manner in which we can interact with and compensate our distribution network in the future |
| For example, since the New York Attorney General’s Office filed a civil complaint against Marsh & McLennan Companies, Inc |
| on October 14, 2004, several major brokers and some agents and, in at least one case, a major property and casualty insurance carrier have announced that they have discontinued the acceptance or payment, as applicable, of contingent commissions for some or all lines of business |
| Other industry participants may make similar, or different, determinations in the future |
| In addition, legislative, regulatory, business or other developments may require changes to market practices relative to contingent commissions |
| Changes to the manner in which we interact with and compensate insurance brokers and agents could have a material adverse impact on our ability to renew business or write new business, which, in turn, could have a material adverse impact on our results of operations |
| Payment of obligations under surety bonds could adversely affect our future operating results |
| The surety business tends to be characterized by infrequent but potentially high severity losses |
| The majority of our surety obligations are intended to be performance-based guarantees |
| When losses occur, they may be mitigated, at times, by the customer’s balance sheet, contract proceeds, collateral and bankruptcy recovery |
| We have substantial commercial and construction surety exposure for current and prior customers |
| In that regard, we have exposures related to surety bonds issued on behalf of companies that have experienced or may experience deterioration in creditworthiness |
| If the economy were to worsen and impact any of these companies or if the financial results of these companies were otherwise adversely affected, we may experience an increase in filed claims and may incur high severity losses, which could have a material adverse effect on our future results of operations |
| The inability of our insurance subsidiaries to pay dividends in sufficient amounts would harm our ability to meet our obligations and to pay future dividends |
| As a holding company, Chubb relies primarily on dividends from its insurance subsidiaries to meet its obligations for payment of interest and principal on outstanding debt obligations and to pay dividends to shareholders |
| The ability of our insurance subsidiaries to pay dividends in the future will depend on their statutory surplus, on earnings and on regulatory restrictions |
| We are subject to regulation by some states as an insurance holding company system |
| Such regulation generally provides 16 _________________________________________________________________ that transactions between companies within the holding company system must be fair and equitable |
| Transfers of assets among affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the system may be subject to prior notice to, or prior approval by, state regulatory authorities |
| The ability of our insurance subsidiaries to pay dividends is also restricted by regulations that set standards of solvency that must be met and maintained, the nature of and limitations on investments and the nature of and limitations on dividends to shareholders |
| These regulations may affect Chubb’s insurance subsidiaries’ ability to provide Chubb with dividends |