10-K 1 y91295ke10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
 
     
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 No. 1-8661
 
The Chubb Corporation
(Exact name of registrant as specified in its charter)
 
     
New Jersey   13-2595722
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
15 Mountain View Road
Warren, New Jersey
 
07059
(Address of principal executive offices)   (Zip Code)
(908) 903-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)   (Name of each exchange on which registered)
Common Stock, par value $1 per share   New York Stock Exchange
Series B Participating Cumulative   New York Stock Exchange
Preferred Stock Purchase Rights    
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ü] No [  ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [ü]
 
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 [ü] No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 [ü] No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]
 
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 [ü]   Accelerated filer [  ]
Non-accelerated filer [  ]
(Do not check if a smaller reporting company)
  Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [ü]
 
The aggregate market value of common stock held by non-affiliates of the registrant was $17,852,043,816 as of June 30, 2011, computed on the basis of the closing sale price of the common stock on that date.
 
271,126,567
Number of shares of common stock outstanding as of February 10, 2012
 
Documents Incorporated by Reference
 
Portions of the definitive Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
 


 

 
CONTENTS
 
             
    ITEM   DESCRIPTION   PAGE
 
PART I
  1     3
    1A     12
    1B     21
    2     21
    3     21
             
PART II
  5     23
    6     25
    7     26
    7A     66
    8     70
    9     70
    9A     70
    9B     71
             
PART III
  10     73
    11     73
    12     73
    13     73
    14     73
             
PART IV
  15     73
          74
          F-1
          E-1
 EX-12.1
 EX-21.1
 EX-23.1
 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

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PART I.
 
Item 1.   Business
 
General
 
The Chubb Corporation (Chubb) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. Chubb and its subsidiaries are referred to collectively as the Corporation. Chubb is a holding company for a family of property and casualty insurance companies known informally as the Chubb Group of Insurance Companies (the P&C Group). Since 1882, the P&C Group has provided property and casualty insurance to businesses and individuals around the world. According to A.M. Best, the P&C Group is the 12th largest U.S. property and casualty insurance group based on 2010 net written premiums.
 
At December 31, 2011, the Corporation had total assets of $50.9 billion and shareholders’ equity of $15.6 billion. Revenues, income before income tax and assets for each operating segment for the three years ended December 31, 2011 are included in Note (14) of the Notes to Consolidated Financial Statements. The Corporation employed approximately 10,100 persons worldwide on December 31, 2011.
 
The Corporation’s principal executive offices are located at 15 Mountain View Road, Warren, New Jersey 07059, and our telephone number is (908) 903-2000.
 
The Corporation’s Internet address is www.chubb.com. The Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)of the Securities Exchange Act of 1934 are available free of charge on this website as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission. Chubb’s Corporate Governance Guidelines, charters of certain key committees of its Board of Directors, Restated Certificate of Incorporation, By-Laws, Code of Business Conduct and Code of Ethics for CEO and Senior Financial Officers are also available on the Corporation’s website or by writing to the Corporation’s Corporate Secretary.
 
Property and Casualty Insurance
 
The P&C Group is divided into three strategic business units. Chubb Personal Insurance offers coverage of fine homes, automobiles and other personal possessions along with options for high limits of personal liability coverage. Chubb Personal Insurance also provides supplemental accident and health insurance in niche markets. Chubb Commercial Insurance offers a full range of commercial insurance products, including coverage for multiple peril, casualty, workers’ compensation and property and marine. Chubb Commercial Insurance is known for writing niche business, where our expertise can add value for our agents, brokers and policyholders. Chubb Specialty Insurance offers a wide variety of specialized professional liability products for privately and publicly owned companies, financial institutions, professional firms and healthcare organizations. Chubb Specialty Insurance also includes our surety business.
 
The P&C Group provides insurance coverages principally in the United States, Canada, Europe, Australia, and parts of Latin America and Asia. Revenues of the P&C Group by geographic area for the three years ended December 31, 2011 are included in Note (14) of the Notes to Consolidated Financial Statements.
 
The principal members of the P&C Group are Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Executive Risk Indemnity Inc. (Executive Risk Indemnity), Great Northern Insurance Company (Great Northern), Vigilant Insurance Company (Vigilant), Chubb National Insurance Company (Chubb National), Chubb Indemnity Insurance Company (Chubb Indemnity), Chubb Custom Insurance Company, Executive Risk Specialty Insurance Company (Executive Risk Specialty), Northwestern Pacific Indemnity Company, Texas Pacific Indemnity Company (Texas Pacific Indemnity) and Chubb Insurance Company of New Jersey (Chubb New Jersey) in the United States, as well as Chubb Atlantic Indemnity Ltd. (a Bermuda company), Chubb Insurance Company of Canada, Chubb Insurance Company of Europe SE, Chubb Capital Ltd. (a United Kingdom company),

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Chubb Insurance Company of Australia Ltd., Chubb Argentina de Seguros, S.A., Chubb Insurance (China) Company Limited and Chubb do Brasil Companhia de Seguros.
 
Chubb & Son, a division of Federal, is the manager of Pacific Indemnity, Executive Risk Indemnity, Great Northern, Vigilant, Chubb National, Chubb Indemnity, Executive Risk Specialty, Texas Pacific Indemnity and Chubb New Jersey. Chubb & Son also provides certain services to other members of the P&C Group. Acting subject to the supervision and control of the boards of directors of the members of the P&C Group, Chubb & Son provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies.
 
Premiums Written
 
A summary of the P&C Group’s premiums written during the past three years is shown in the following table:
 
                                 
    Direct
  Reinsurance
  Reinsurance
  Net
    Premiums
  Premiums
  Premiums
  Premiums
Year   Written   Assumed(a)   Ceded(a)   Written
    (in millions)
2011
  $ 12,302     $ 548     $ 1,092     $ 11,758  
2010
    11,952       391       1,107       11,236  
2009
    11,813       370       1,106       11,077  
 
(a) Intercompany items eliminated.
 
The net premiums written during the last three years for major classes of the P&C Group’s business are included in the Property and Casualty Insurance — Underwriting Results section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
 
One or more members of the P&C Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada, Europe, Australia, and parts of Latin America and Asia. In 2011, approximately 75% of the P&C Group’s direct premiums written were produced in the United States, where the P&C Group’s businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The five states accounting for the largest amounts of direct premiums written were New York with 12%, California with 9%, Texas with 5%, Florida with 4% and New Jersey with 4%. Of the approximately 25% of the P&C Group’s direct premiums written that were produced outside of the United States, approximately 5% were produced in the United Kingdom, 5% in Canada, 4% in Brazil and 3% in Australia.
 
Underwriting Results
 
A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. The P&C Group uses the combined loss and expense ratio calculated in accordance with statutory accounting principles applicable to property and casualty insurance companies. This ratio 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. Investment income is not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on the results of both underwriting and investments operations.
 
The combined loss and expense ratios during the last three years in total and for the major classes of the P&C Group’s business are included in the Property and Casualty Insurance — Underwriting Operations section of MD&A.
 
Another frequently used measurement in the property and casualty insurance industry is the ratio of statutory net premiums written to policyholders’ surplus. At December 31, 2011 and 2010, the ratio for the P&C Group was 0.84 and 0.77, respectively.

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Producing and Servicing of Business
 
The P&C Group does not utilize a significant in-house distribution model for its products. Instead, in the United States, the P&C Group offers products through independent insurance agencies and accepts business on a regular basis from insurance brokers. In most instances, these agencies and brokers also offer products of other companies that compete with the P&C Group. The P&C Group’s branch and service offices assist these agencies and brokers in producing and servicing the P&C Group’s business. In addition to the administrative offices in Warren and Whitehouse Station, New Jersey, the P&C Group has territory, branch and service offices throughout the United States.
 
The P&C Group primarily offers products through insurance brokers outside the United States. Local branch offices of the P&C Group assist the brokers in producing and servicing the business. In conducting its foreign business, the P&C Group mitigates the risks relating to currency fluctuations by generally maintaining investments in those foreign currencies in which the P&C Group has loss reserves and other liabilities. The net asset or liability exposure to the various foreign currencies is regularly reviewed.
 
Business for the P&C Group is also produced through participation in certain underwriting pools and syndicates. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services.
 
Reinsurance Ceded
 
In accordance with the normal practice of the insurance industry, the P&C Group cedes reinsurance to reinsurance companies. Reinsurance is ceded to provide greater diversification of risk and to limit the P&C Group’s maximum net loss arising from large risks or from catastrophic events.
 
A large portion of the P&C Group’s ceded reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. Most of the P&C Group’s treaty reinsurance arrangements consist of excess of loss and catastrophe contracts that protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks. The amount of each risk retained by the P&C Group is subject to maximum limits that vary by line of business and type of coverage. Retention limits are regularly reviewed and are revised periodically as the P&C Group’s capacity to underwrite risks changes. For a discussion of the P&C Group’s reinsurance program and the cost and availability of reinsurance, see the Property and Casualty Insurance — Underwriting Results section of MD&A.
 
Ceded reinsurance contracts do not relieve the P&C Group of the primary obligation to its policyholders. Thus, a credit exposure exists with respect to reinsurance recoverable to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under the reinsurance contracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, coverage interpretations and other factors. The P&C Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers that the P&C Group believes have strong balance sheets and superior underwriting ability. The P&C Group monitors the financial strength of its reinsurers on an ongoing basis.

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Unpaid Losses and Loss Adjustment Expenses and Related Amounts Recoverable from Reinsurers
 
Insurance companies are required to establish a liability in their accounts for the ultimate costs (including loss adjustment expenses) of claims that have been reported but not settled and of claims that have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers.
 
The process of establishing the liability for unpaid losses and loss adjustment expenses is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.
 
The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid losses and loss adjustment expenses. Estimates of the ultimate value of all unpaid losses are based in part on the development of paid losses, which reflect actual inflation. Inflation is also reflected in the case estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all unpaid losses. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors.
 
The P&C Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 2011 was approximately 11% higher than the number at year-end 2010 primarily due to an increase in outstanding catastrophe claims. The number of new arising claims during 2011 was approximately 8% higher than in the prior year.
 
Additional information related to the P&C Group’s estimates related to unpaid losses and loss adjustment expenses and the uncertainties in the estimation process is presented in the Property and Casualty Insurance — Loss Reserves section of MD&A.
 
The table on page 7 presents the subsequent development of the estimated year-end liability for unpaid losses and loss adjustment expenses, net of reinsurance recoverable, for the ten years prior to 2011.
 
The top line of the table shows the estimated net liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all years prior to the balance sheet date that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the P&C Group.
 
The upper section of the table shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of losses for each individual year. The increase or decrease is reflected in operating results of the period in which the estimate is changed. The “cumulative deficiency (redundancy)” as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 2011. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that is related to a prior period occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 2011 relating to losses incurred prior to December 31, 2001 would be included in the cumulative deficiency amount for each year in the period 2001 through 2010. Yet, the deficiency would be reflected in operating results only in 2011. The effect of changes in estimates of the liabilities for losses occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation of the beginning and ending liability for unpaid losses and loss adjustment expenses in the Property and Casualty Insurance — Loss Reserves section of MD&A.

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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
 
                                                                                         
    December 31  
Year Ended   2001     2002     2003     2004     2005     2006     2007     2008     2009     2010     2011  
    (in millions)  
 
                                                                                         
Net Liability for Unpaid Losses and Loss Adjustment Expenses
  $ 11,010     $ 12,642     $ 14,521     $ 16,809     $ 18,713     $ 19,699     $ 20,316     $ 20,155     $ 20,786     $ 20,901     $ 21,329  
                                                                                         
Net Liability Reestimated as of:
                                                                                       
One year later
    11,799       13,039       14,848       16,972       18,417       19,002       19,443       19,393       20,040       20,134          
Two years later
    12,143       13,634       15,315       17,048       17,861       18,215       18,619       18,685       19,229                  
Three years later
    12,642       14,407       15,667       16,725       17,298       17,571       18,049       17,965                          
Four years later
    13,246       14,842       15,584       16,526       16,884       17,184       17,510                                  
Five years later
    13,676       14,907       15,657       16,411       16,636       16,829                                          
Six years later
    13,812       15,064       15,798       16,310       16,459                                                  
Seven years later
    13,994       15,255       15,802       16,231                                                          
Eight years later
    14,218       15,305       15,801                                                                  
Nine years later
    14,301       15,323                                                                          
Ten years later
    14,344                                                                                  
                                                                                         
Total Cumulative Net Deficiency
(Redundancy)
    3,334       2,681       1,280       (578 )     (2,254 )     (2,870 )     (2,806 )     (2,190 )     (1,557 )     (767 )        
                                                                                         
Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims (Included in Above Total)
    1,521       780       530       455       420       396       308       223       133       72          
                                                                                         
Cumulative Amount of
Net Liability Paid as of:
                                                                                       
One year later
    3,135       3,550       3,478       3,932       4,118       4,066       4,108       4,063       4,074       4,300          
Two years later
    5,499       5,911       6,161       6,616       6,896       6,789       6,565       6,711       6,831                  
Three years later
    7,133       7,945       8,192       8,612       8,850       8,554       8,436       8,605                          
Four years later
    8,564       9,396       9,689       10,048       10,089       9,884       9,734                                  
Five years later
    9,588       10,543       10,794       10,977       10,994       10,821                                          
Six years later
    10,366       11,353       11,530       11,606       11,697                                                  
Seven years later
    10,950       11,915       12,037       12,149                                                          
Eight years later
    11,390       12,292       12,497                                                                  
Nine years later
    11,681       12,652                                                                          
Ten years later
    11,991                                                                                  
                                                                                         
Gross Liability, End of Year
  $ 15,515     $ 16,713     $ 17,948     $ 20,292     $ 22,482     $ 22,293     $ 22,623     $ 22,367     $ 22,839     $ 22,718     $ 23,068  
Reinsurance Recoverable, End of Year
    4,505       4,071       3,427       3,483       3,769       2,594       2,307       2,212       2,053       1,817       1,739  
                                                                                         
Net Liability, End of Year
  $ 11,010     $ 12,642     $ 14,521     $ 16,809     $ 18,713     $ 19,699     $ 20,316     $ 20,155     $ 20,786     $ 20,901     $ 21,329  
                                                                                         
Reestimated Gross Liability
  $ 19,894     $ 20,209     $ 19,667     $ 19,680     $ 19,975     $ 19,296     $ 19,678     $ 20,083     $ 21,235     $ 21,890          
Reestimated Reinsurance Recoverable
    5,550       4,886       3,866       3,449       3,516       2,467       2,168       2,118       2,006       1,756          
                                                                                         
Reestimated Net Liability
  $ 14,344     $ 15,323     $ 15,801     $ 16,231     $ 16,459     $ 16,829     $ 17,510     $ 17,965     $ 19,229     $ 20,134          
                                                                                         
Cumulative Gross Deficiency
(Redundancy)
  $ 4,379     $ 3,496     $ 1,719     $ (612 )   $ (2,507 )   $ (2,997 )   $ (2,945 )   $ (2,284 )   $ (1,604 )   $ (828 )        
                                                                                         

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The subsequent development of the net liability for unpaid losses and loss adjustment expenses as of year-ends 2001 through 2003 was adversely affected by substantial unfavorable development related to asbestos and toxic waste claims. The cumulative net deficiencies experienced related to asbestos and toxic waste claims were the result of: (1) an increase in the actual number of claims filed; (2) an increase in the estimated number of potential claims; (3) an increase in the severity of actual and potential claims; (4) an increasingly adverse litigation environment; and (5) an increase in litigation costs associated with such claims. For the years 2001 through 2003, in addition to the unfavorable development related to asbestos and toxic waste claims, there was significant unfavorable development in the professional liability classes — principally directors and officers liability and errors and omissions liability, due in large part to adverse loss trends related to corporate failures and allegations of management misconduct and accounting irregularities — and, to a lesser extent, workers’ compensation and commercial casualty classes. For the years 2004 through 2010, unfavorable development related to asbestos and toxic waste claims was more than offset by significant favorable development, primarily in the professional liability classes and more recently in the commercial casualty classes due to favorable loss trends in recent years and in the commercial property and homeowners classes due to lower than expected emergence of losses.
 
Conditions and trends that have affected development of the liability for unpaid losses and loss adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table.
 
The middle section of the table on page 7 shows the cumulative amount paid with respect to the reestimated net liability as of the end of each succeeding year. For example, in the 2001 column, as of December 31, 2011 the P&C Group had paid $11,991 million of the currently estimated $14,344 million of net losses and loss adjustment expenses that were unpaid at the end of 2001; thus, an estimated $2,353 million of net losses incurred on or before December 31, 2001 remain unpaid as of December 31, 2011, approximately 37% of which relates to asbestos and toxic waste claims.
 
The lower section of the table on page 7 shows the gross liability, reinsurance recoverable and net liability recorded at the balance sheet date for each of the indicated years and the reestimation of these amounts as of December 31, 2011.
 
The liability for unpaid losses and loss adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP) comprises the liabilities of U.S. and foreign members of the P&C Group as follows:
 
                 
    December 31  
    2011     2010  
    (in millions)  
 
U.S. subsidiaries
  $ 17,500     $ 17,193  
Foreign subsidiaries
    3,829       3,708  
                 
    $ 21,329     $ 20,901  
                 
 
Members of the P&C Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The difference between the liability for unpaid losses and loss expenses, net of reinsurance recoverable, reported in the statutory basis financial statements of the U.S. members of the P&C Group and such liability reported on a GAAP basis in the consolidated financial statements is not significant.

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Investments
 
Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the respective boards of directors for each company in the P&C Group.
 
Additional information about the Corporation’s investment portfolio as well as its approach to managing risks is presented in the Invested Assets section of MD&A, the Investment Portfolio section of Quantitative and Qualitative Disclosures About Market Risk and Note (3) of the Notes to Consolidated Financial Statements.
 
The investment results of the P&C Group for each of the past three years are shown in the following table:
                                 
    Average
           
    Invested
  Investment
  Percent Earned
Year   Assets(a)   Income(b)   Before Tax   After Tax
    (in millions)        
 
2011
  $ 38,901     $ 1,562       4.02 %     3.25 %
2010
    38,288       1,558       4.07       3.29  
2009
    36,969       1,549       4.19       3.39  
  (a)  Average of amounts with fixed maturity securities at amortized cost, equity securities at fair value and other invested assets, which include private equity limited partnerships carried at the P&C Group’s equity in the net assets of the partnerships.
  (b)  Investment income after deduction of investment expenses, but before applicable income tax.
 
Competition
 
There are numerous property and casualty insurance companies operating in the United States as well as in the international jurisdictions in which we write business. Accordingly, the property and casualty insurance industry is highly competitive both as to price and service. Members of the P&C Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors produce their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform among insurers and vary according to the types of insurers, product coverage and methods of operation. The P&C Group competes 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. The P&C Group’s products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured. The P&C Group continues to work closely with its distribution network of agents and brokers as well as customers and to reinforce with them the stability, expertise and added value the P&C Group’s products provide.
 
There are approximately 2,500 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant across all lines of business or jurisdictions. However, the relatively large size and underwriting capacity of the P&C Group provide it opportunities not available to smaller companies.
 
Regulation and Premium Rates
 
Chubb is a holding company with subsidiaries primarily engaged in the property and casualty insurance business. In the United States, Chubb and the companies within the P&C Group are subject to regulation by certain states as members of an insurance holding company system. All states have enacted legislation that regulates insurance holding company systems such as the Corporation. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required

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prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners’ prior approval. Recent amendments to the model holding company law and regulation adopted by the National Association of Insurance Commissioners (NAIC), if passed by the state legislatures, will require insurance holding company systems to provide regulators with more information about the risks posed by any non-insurance company subsidiaries in the holding company system.
 
Companies within the P&C Group are subject to regulation and supervision in the respective states in which they do business. In general, such regulation is designed to protect the interests of policyholders, and not necessarily the interests of insurers, their shareholders and other investors. The extent of such regulation varies but generally has its source in statutes that delegate regulatory, supervisory and administrative powers to a department of insurance.
 
State insurance departments impose regulations that, among other things, establish the standards of solvency that must be met and maintained. The NAIC has a risk-based capital requirement for property and casualty insurance companies. The risk-based capital formula is used by all state regulatory authorities to identify insurance companies that may be undercapitalized and that merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholders’ surplus to its minimum capital requirement will determine whether any state regulatory action is required. At December 31, 2011, each member of the P&C Group had more than sufficient capital to meet the risk-based capital requirement. The NAIC periodically reviews the risk-based capital formula and changes to the formula could be considered in the future. The NAIC recently has undertaken a Solvency Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including capital requirements, governance and risk management, group supervision, accounting and financial reporting and reinsurance. Among the changes under consideration by the NAIC is implementation of an Own Risk and Solvency Assessment (ORSA) rule that would require insurers to measure and share with solvency regulators their internal assessment of capital needs for the entire holding company group, including non-insurance subsidiaries.
 
State insurance departments also administer other aspects of insurance regulation and supervision that affect the P&C Group’s operations including: the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks that may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid losses and loss adjustment expenses, both reported and unreported, and other liabilities.
 
Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates cannot be excessive, inadequate or unfairly discriminatory. In many states, these regulatory requirements can impact the P&C Group’s ability to change rates, particularly with respect to personal lines products such as automobile and homeowners insurance, without prior regulatory approval. For example, in certain states there are measures that limit the use of catastrophe models or credit scoring in ratemaking and, at times, some states have adopted premium rate freezes or rate rollbacks. State limitations on the ability to cancel or nonrenew certain policies also can affect the P&C Group’s ability to charge adequate rates.
 
Subject to legislative and regulatory requirements, the P&C Group’s management determines the prices charged for its policies based on a variety of factors including loss and loss adjustment expense experience, inflation, anticipated changes in the legal environment, both judicial and legislative, and tax law and rate changes. Methods for arriving at prices vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of

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insurance regulators to approve changes in those rates that they control and by certain other matters, such as underwriting selectivity and expense control.
 
In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, companies in the P&C Group, together with the other fund members, are assessed in order to provide the funds necessary to pay certain claims against the insolvent insurer. Generally, fund assessments are proportionately based on the members’ written premiums for the classes of insurance written by the insolvent insurer. In certain states, the P&C Group can recover a portion of these assessments through premium tax offsets or policyholder surcharges. In 2011, assessments of the members of the P&C Group were insignificant. The amount of future assessments cannot be reasonably estimated and can vary significantly from year to year.
 
Insurance regulation in certain states requires the companies in the P&C Group, together with other insurers operating in the state, to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers’ compensation insurance, but a majority of states also mandate that insurers, such as the P&C Group, participate in Fair Plans or Windstorm Plans, which offer basic property coverages to insureds where not otherwise available. Some states also require insurers to participate in facilities that provide homeowners, crime and other classes of insurance where periodic market constrictions may occur. Participation is based upon the amount of a company’s voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results.
 
In several states, insurers, including members of the P&C Group, participate in market assistance plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the supervision of the insurance commissioner to provide assistance to applicants unable to obtain commercial and personal liability and property insurance. The assistance may range from identifying sources where coverage may be obtained to pooling of risks among the participating insurers. A few states require insurers, including members of the P&C Group, to purchase reinsurance from a mandatory reinsurance fund.
 
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), were created which may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the United States in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to U.S. financial stability in the event of the insurer’s material financial distress or failure. An insurer so designated by FSOC could be subject to Federal Reserve supervision and heightened prudential standards. Other current and proposed federal measures that may significantly affect the P&C Group’s business and the market as a whole include those concerning federal terrorism insurance, tort law, natural catastrophes, corporate governance, ergonomics, health care reform including the containment of medical costs, privacy, e-commerce, international trade, federal regulation of insurance companies and the taxation of insurance companies.
 
Companies in the P&C Group are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include: redefinitions of risk exposure in areas such as water damage, including mold, flood and storm surge; products liability and commercial general liability; credit scoring; and extension and protection of employee benefits, including workers’ compensation and disability benefits.

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Outside the United States, the extent of insurance regulation varies significantly among the countries in which the P&C Group operates, and regulatory and political developments in international markets could impact the P&C Group’s business. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are subject to greater restrictions than domestic competitors. In certain countries, the P&C Group has incorporated insurance subsidiaries locally to improve its competitive position. Regulators in many countries are working with the International Association of Insurance Supervisors (IAIS) to consider changes to insurance company solvency standards and group supervision of companies in a holding company system, including noninsurance companies. These IAIS initiatives include a set of Insurance Core Principles (ICPs) for a globally-accepted framework for insurance sector regulation and supervision and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). The European Union Solvency II directive, being implemented to harmonize insurance regulation across the European Union member states, will require regulated companies such as the P&C Group’s European operations to meet new requirements in relation to risk and capital management. Solvency II is scheduled to be effective January 1, 2013, but will not be fully enforced until January 1, 2014.
 
Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in the Property and Casualty Insurance — Loss Reserves section of MD&A.
 
Real Estate
 
The Corporation’s wholly owned subsidiary, Bellemead Development Corporation (Bellemead), and its subsidiaries were involved in commercial development activities primarily in New Jersey and residential development activities primarily in central Florida. The real estate operations are in runoff.
 
Chubb Financial Solutions
 
Chubb Financial Solutions (CFS) provided customized financial products, primarily derivative financial instruments, to corporate clients. CFS has been in runoff since 2003. Since that date, CFS has terminated early or run off nearly all of its contractual obligations within its financial products portfolio. Additional information related to CFS’s operations is included in the Corporate and Other — Chubb Financial Solutions section of MD&A.
 
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 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 because it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process. 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 or financial condition.
 
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.
 
The effects of emerging claim and coverage issues on our business are uncertain.
 
As industry practices and legal, judicial, social, environmental and other conditions change, unexpected or unintended issues related to claims and coverage may emerge. These issues may adversely

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affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these issues may not become apparent for some time after we have written the insurance policies that are affected by such issues. 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 a material adverse effect on our results of operations or financial condition.
 
Catastrophe losses could materially and adversely affect our business.
 
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, tsunamis, tidal waves, severe winter weather 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 exposure under our insurance policies 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 over larger areas, especially those that are heavily populated.
 
We are exposed to natural and man-made catastrophe risks in both our U.S. and international operations. Catastrophe risks include hurricanes and cyclones along the coastlines of North America, the Caribbean Region, Latin America, Asia and Australia. Catastrophe risks also include winter storms, northeasters, thunderstorms, hail storms, tornadoes, flooding and other water damage, earthquakes, other seismic or volcanic eruption, wildfires, and terrorism that may occur in locations in and outside the United States where we insure properties.
 
We utilize proprietary and third party catastrophe modeling tools to assist us in managing our catastrophe exposures. These models rely on various methodologies and assumptions which are subjective and subject to uncertainty. The methodologies and assumptions also may be changed from time to time by the third party modeling company. The use of different methodologies or assumptions would result in the model generating substantially different estimations of our catastrophe exposures. Moreover, modeled loss estimates may be materially different from actual results.
 
Natural or man-made catastrophic events could cause claims under our insurance policies to be higher than we anticipated and could cause substantial volatility in our financial results for any fiscal quarter or year. Our ability to write new business could also be affected. 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 limiting insurers ability to increase rates and prohibiting insurers from withdrawing from catastrophe-exposed areas.
 
As a result of the foregoing, it is possible that the occurrence of any natural or man-made catastrophic event could have a material adverse effect on our business, results of operations, financial condition and liquidity. A further discussion of the risk factors related to catastrophes is presented in the Property and Casualty Insurance — Catastrophe Risk Management section of MD&A.
 
We cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
 
Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world. In response to this belief, a number of legal and

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regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions which may be chief contributors to global climate change.
 
We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.
 
We rely on pricing and capital models, but actual results could differ materially from the model outputs.
 
We employ various predictive modeling, stochastic modeling and/or forecasting techniques to analyze and estimate loss trends and the risks associated with our assets and liabilities. We utilize the modeled outputs and related analyses to assist us in making underwriting, pricing, reinsurance and capital decisions. The modeled outputs and related analyses are subject to numerous assumptions, uncertainties and the inherent limitations of any statistical analysis. Consequently, modeled results may differ materially from our actual experience. If, based upon these models or otherwise, we under price our products or underestimate the frequency and/or severity of loss events, our results of operations or financial condition may be adversely affected. If, based upon these models or otherwise, we over price our products or overestimate the risks we are exposed to, new business growth and retention of our existing business may be adversely affected which could have a material adverse effect on our results of operations.
 
We may experience reduced returns or losses on our investments especially during periods of heightened volatility, which could have a material adverse effect on our results of operations or financial condition.
 
The returns on our investment portfolio may be reduced or we may incur losses as a result of changes in general economic conditions, interest rates, real estate markets, fixed income markets, equity markets, alternative investment markets, credit markets, exchange rates, global capital market conditions and numerous other factors that are beyond our control.
 
During prolonged periods of low interest rates and investment returns, we may not be able to invest new money generated by our operations or reinvest funds at rates that generate the same level of investment income generated by our existing invested assets, which could have a material adverse effect on our results of operations and financial condition.
 
The worldwide financial markets experience high levels of volatility during certain periods, which could have an increasingly adverse impact on the U.S. and foreign economies. The financial market volatility and the resulting negative economic impact could continue and it is possible that it may be prolonged, which could adversely affect our current investment portfolio, make it difficult to determine the value of certain assets in our portfolio and/or make it difficult for us to purchase suitable investments that meet our risk and return criteria. These factors could cause us to realize less than expected returns on invested assets, sell investments for a loss or write off or write down investments, any of which could have a material adverse effect on our results of operations or financial condition.
 
A significant portion of our investment portfolio is invested in obligations of states, municipalities and political subdivisions (often referred to as municipal bonds). The recent financial market volatility and the resulting negative economic impact have resulted in actual or projected budget deficits for many municipal bond issuers. These deficits, combined with declining municipal tax bases and revenues, have raised concerns over the potential for an increased risk of default or impairment of municipal bonds. Such concerns, as well actual defaults or impairments, could adversely impact these investments in terms of volatility, liquidity and value.
 
Our investment portfolio includes commercial mortgage-backed securities, residential mortgage-backed securities, collateralized mortgage obligations and pass-through securities. Continuation of the

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prolonged stress in the U.S. housing market and/or financial market disruption could adversely impact these investments.
 
Our investment portfolio includes securities that may be more volatile than fixed maturity instruments and certain of these instruments may be illiquid.
 
Our investment portfolio includes equity securities and private equity limited partnership interests which may experience significant volatility in their investment returns and valuation. Moreover, our private equity limited partnership interests are subject to transfer restrictions and may be illiquid. If the investment returns or value of these investments decline, or if we are unable to dispose of these investments at their carrying value, it could have a material adverse effect on our results of operations or financial condition.
 
Changes to federal and/or state laws could adversely affect the value of our investment portfolio.
 
A significant portion of our investment portfolio consists of tax exempt securities and we receive certain tax benefits relating to such securities based on current laws and regulations. Our portfolio has also benefited from certain other laws and regulations, including without limitation, tax credits (such as foreign tax credits). Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently benefiting us and could negatively impact the value of our investment portfolio.
 
We are exposed to credit risk and foreign currency risk in our business operations and in our investment portfolio.
 
We are exposed to credit risk in several areas of our business operations, including, without limitation, credit risk relating to reinsurance, co-sureties on surety bonds, policyholders of certain of our insurance products, independent agents and brokers, issuers of securities, insurers of certain securities and certain other counterparties relating to our investment portfolio.
 
With respect to reinsurance coverages that we have purchased, our ability to recover amounts due from reinsurers may be affected by the creditworthiness and willingness to pay of the reinsurers. Although certain reinsurance we have purchased is collateralized, the collateral is exposed to credit risk of the counterparty that has guaranteed an investment return on such collateral.
 
It is customary practice in the surety business for multiple insurers to participate as co-sureties on large surety bonds, meaning that each insurer (each referred to as a co-surety) assumes its proportionate share of the risk and receives a corresponding percentage of the bond premium. Under these arrangements, the co-sureties’ obligations are joint and several. Consequently, if a co-surety defaults on its obligations, the remaining co-surety or co-sureties are obligated to make up the shortfall to the beneficiary of the surety bond even though the non-defaulting co-sureties did not receive the premium for that portion of the risk. Therefore, we are subject to credit risk with respect to the insurers with whom we are co-sureties on surety bonds.
 
In accordance with industry practice, when insureds purchase our insurance products through independent agents and brokers, they generally pay the premiums to the agent or broker, which in turn is required to remit the collected premium to us. In many jurisdictions, we are deemed to have received payment upon the receipt of the payment by the agent or broker, regardless of whether the agent or broker actually remits payment to us. As a result, we assume credit risk associated with amounts due from independent agents and brokers.
 
The value of our investment portfolio is subject to credit risk from the issuers and/or guarantors of the securities in the portfolio, other counterparties in certain transactions and, for certain securities, insurers that guarantee specific issuer’s obligations. Defaults by the issuer and, where applicable, an issuer’s guarantor, insurer or other counterparties with regard to any of such investments could reduce our net investment income and net realized investment gains or result in investment losses.

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We report our financial results in U.S. dollars, but a significant amount of the business we write and expenses we incur outside the United States are denominated in currencies other than the U.S. dollar. In addition, a substantial portion of our investment portfolio is denominated in non-U.S. dollar currencies. As a result, changes in the strength of the U.S. dollar relative to these foreign currencies could adversely affect our results of operations and financial condition.
 
Our exposure to any of the above credit risks and foreign currency risk could have a material adverse effect on our results of operations or financial condition.
 
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 rigorous 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.
 
However, there are inherent limitations in all of these tactics and no assurance can be given that an event or series of 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. It is also possible that losses could manifest themselves in ways that we do not anticipate and that our risk mitigation strategies are not designed to address. Such a manifestation of losses could have a material adverse effect on our financial condition or results of operations.
 
These risks may be heightened during difficult economic conditions such as those currently being experienced in the United States and elsewhere.
 
Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.
 
The availability and cost of reinsurance are subject to prevailing market conditions that are beyond our control. No assurances can be made that reinsurance will remain continuously available to us in amounts that we consider sufficient and at rates that we consider acceptable, which would cause us to increase the amount of risk we retain, reduce the amount of business we underwrite or look for alternatives to reinsurance. This, in turn, could have a material adverse effect on our financial condition or 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 (e.g., a terrorist attack);

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  •  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.
 
We may be unsuccessful in our efforts to sell new products and/or to expand our existing product offerings to new markets.
 
Our strategy for enhancing profitable growth includes new product initiatives as well as expanding existing product offerings to new markets. We may not be successful in these efforts, which could have a material adverse effect on our results of operations. If we are successful, results attributable to these product offerings could be different than we anticipate and could have an adverse effect on our results of operations or financial condition.
 
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 recovery rights to the customer’s assets, contract payments, collateral and bankruptcy recoveries. 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 financial condition of these companies were adversely affected by the economy or otherwise, we may experience an increase in filed claims and may incur high severity losses, which could have a material adverse effect on our results of operations.
 
A downgrade in our credit ratings and financial strength ratings could adversely impact the competitive positions of our operating businesses.
 
Credit ratings and financial strength ratings can be important factors 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 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.
 
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 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

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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, that limit investments and that limit dividends to shareholders. These regulations may affect Chubb’s insurance subsidiaries’ ability to provide Chubb with dividends.
 
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 or 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. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines and other sanctions.
 
Virtually all states in which we operate require the P&C Group, 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. A few states require us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund could affect the prices charged for our policies. 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. The NAIC recently has undertaken a Solvency Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including capital requirements, governance and risk management, group supervision, accounting and financial reporting and reinsurance. 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 or increased capital requirements.
 
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the P&C Group’s business and the market as a whole include measures concerning federal terrorism insurance, systemic risk regulation, tort law, natural catastrophes, corporate governance, ergonomics, health care reform including containment of medical costs, privacy, e-commerce, international trade, federal regulation of insurance companies and the taxation of insurance companies. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), were created which may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the United States in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to U.S. financial stability in the event of the insurer’s material financial distress or failure. An insurer so designated by FSOC could be subject to Federal Reserve supervision and heightened prudential standards. While we do not believe the P&C Group or any of its companies are systemically significant, it is possible the FSOC could conclude

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otherwise. If the FSOC were to designate the P&C Group or any of its insurance subsidiaries for supervision by the Federal Reserve, it could place more restrictions on our ability to conduct business and may result in higher costs, increased capital requirements and lower profitability. Even if an insurance company is not designated as a systemically important institution, it still could be adversely impacted by new rules governing such institutions, as non-bank financial institutions may, under certain circumstances, be subject to possible assessment to fund the orderly resolution of a financially distressed systemically important financial institution.
 
Our insurance subsidiaries also are subject to extensive regulation and supervision in jurisdictions outside the United States. Regulators in many countries are working with the International Association of Insurance Supervisors (IAIS) to consider changes to insurance company solvency standards and group supervision of companies in a holding company system, including noninsurance companies. Some IAIS initiatives are particularly focused on the supervision of internationally active insurance groups, such as the P&C Group. The European Union Solvency II directive will require regulated companies such as the P&C Group’s European operations to meet new requirements in relation to risk and capital management. A U.S. parent of an European Union subsidiary could be subject to certain Solvency II requirements if the U.S. state-based regulatory system is not deemed “equivalent” to Solvency II. Solvency II is scheduled to be effective January 1, 2013 and will be fully enforced beginning January 1, 2014. Such proposed or future legislation and regulatory initiatives in countries where we operate, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs, increased capital requirements and lower profitability.
 
The IAIS also is working with the Financial Stability Board (FSB) to decide if any insurers should be designated globally significant financial institutions. While we do not believe the P&C Group or any of its companies are globally systemically significant institutions, it is possible the FSB could conclude otherwise. The ramifications of an FSB globally systemically significant designation for the P&C Group or any of its insurance subsidiaries is unknown at this time; however, it is likely to result in greater regulatory scrutiny and could place more restrictions on our ability to conduct business, result in higher costs, increased capital requirements or lower profitability.
 
Changes in accounting principles and financial reporting requirements may impact the manner in which we present our results of operations and financial condition.
 
The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission may issue from time to time new accounting and reporting standards or changes in the interpretation of existing standards. These new standards or changes in interpretation could have an effect on how we report our results of operations and financial condition in the future.
 
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 results of operations could be adversely affected.
 
We are subject to a number of risks associated with our business outside the United States.
 
A significant portion of our business is conducted outside the United States, including in Asia, Australia, Canada, Europe and Latin America. By doing business outside the United States, we are subject to a number of risks, including without limitation, dealing with jurisdictions, especially in

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emerging markets, that may lack political, financial or social stability and/or a strong legal and regulatory framework, which may make it difficult to do business and comply with local laws and regulations in such jurisdictions. Failure to comply with local laws in a particular jurisdiction or doing business in a country that becomes increasingly unstable could have a significant adverse effect on our business and operations in that market as well as on our reputation generally.
 
As part of our international operations, we engage in transactions denominated in currencies other than the U.S. dollar. To reduce our exposure to currency fluctuation, we attempt to match the currency of the liabilities we incur under insurance policies with assets denominated in the same local currency. However, in the event that we underestimate our exposure, negative movements in the U.S. dollar versus the local currency will exacerbate the impact of the exposure on our results of operations and financial condition.
 
We report the results of our international operations on a consolidated basis with our domestic business. These results are reported in U.S. dollars. A significant portion of the business we write outside the United States, however, is transacted in local currencies. Consequently, fluctuations in the relative value of local currencies in which the policies are written versus the U.S. dollar can mask the underlying trends in our international business.
 
The United States and other jurisdictions in which we operate have adopted various laws and regulations that may apply to the business we conduct outside of the United States, including those relating to antibribery and economic sanctions compliance. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or intermediary could fail to comply with applicable laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions. In addition, such violations could damage our business and/or our reputation. Such civil penalties, criminal penalties, other sanctions and damage to our business and/or reputation could have a material adverse effect on our results of operations or financial condition.
 
We are dependent on a distribution network comprised of independent insurance brokers and agents to distribute our products.
 
We generally do not use salaried employees to promote or distribute our insurance products. Instead, we rely on a large number of independent insurance brokers and agents. Accordingly, our business is dependent on the willingness of these brokers and agents to recommend our products to their customers. Deterioration in relationships with our broker and agent distribution network could materially and adversely affect our ability to sell our products, which, in turn, could have a material adverse effect on our results of operations or financial condition.
 
If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted.
 
We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of operations or financial condition.
 
The occurrence of certain events could have a materially adverse effect on our systems and could impact our ability to conduct business effectively.
 
Our computer, information technology and telecommunications systems, which we use to conduct our business, interface with and rely upon third party systems. Systems failures or outages could

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compromise our ability to perform business functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers.
 
In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, our systems may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees or third party providers are able to report to work, they might be unable to perform their duties for an extended period of time if our computer, information technology or telecommunication systems were disabled or destroyed.
 
Our systems could also be subject to physical break-ins, electronic hacking, and subject to similar disruptions from unauthorized tampering. This may impede or interrupt our business operations, which could have a material adverse effect on our results of operations or financial condition. In addition, such events could result in data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of operations or financial condition.
 
Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
The executive offices of the Corporation are in Warren, New Jersey. The administrative offices of the P&C Group are located in Warren and Whitehouse Station, New Jersey. The P&C Group maintains territory, branch and service offices in major cities throughout the United States and also has offices in Canada, Europe, Australia, Latin America and Asia. Office facilities are leased with the exception of buildings in Whitehouse Station, New Jersey and Simsbury, Connecticut. Management considers its office facilities suitable and adequate for the current level of operations.
 
Item 3.  Legal Proceedings
 
The information required with respect to Item 3 is included in Note (13)(a) of the Notes to Consolidated Financial Statements, which information is incorporated by reference into this Item 3.

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Executive Officers of the Registrant
 
                 
        Year of
    Age(a)   Election(b)
John D. Finnegan, Chairman, President and Chief Executive Officer
    63       2002  
W. Brian Barnes, Senior Vice President and Chief Actuary of Chubb & Son, a division of Federal
    49       2008  
Maureen A. Brundage, Executive Vice President and General Counsel
    55       2005  
Robert C. Cox, Executive Vice President of Chubb & Son, a division of Federal
    53       2003  
John J. Kennedy, Senior Vice President and Chief Accounting Officer
    56       2008  
Mark P. Korsgaard, Executive Vice President of Chubb & Son, a division of Federal
    56       2010  
Paul J. Krump, President of Commercial and Specialty Lines of Chubb & Son, a division of Federal 
    52       2001  
Harold L. Morrison, Jr., Executive Vice President, Chief Global Field Officer and Chief Administrative Officer of Chubb & Son, a division of Federal
    54       2008  
Steven R. Pozzi, Executive Vice President of Chubb & Son, a division of Federal
    55       2009  
Dino E. Robusto, President of Personal Lines and Claims of Chubb & Son, a division of Federal
    53       2006  
Richard G. Spiro, Executive Vice President and Chief Financial Officer
    47       2008  
Kathleen M. Tierney, Executive Vice President of Chubb & Son, a division of Federal
    43       2010  
  (a)  Ages listed above are as of April 24, 2012.
 
(b) Date indicates year first elected or designated as an executive officer.
 
All of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation and have been employees of the Corporation for more than five years except for Mr. Spiro.
 
Before joining the Corporation in 2008, Mr. Spiro was an investment banker at Citigroup Global Markets Inc., where he served as a Managing Director in Citigroup’s financial institutions investment banking group.

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PART II.
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The common stock of Chubb is listed and principally traded on the New York Stock Exchange (NYSE) under the trading symbol “CB”. The following are the high and low closing sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared per share for each quarter of 2011 and 2010.
 
                                 
    2011  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter  
Common stock prices
                               
High
  $ 61.31     $ 65.87     $ 64.45     $ 70.31  
Low
    57.32       60.50       55.43       58.12  
Dividends declared
    .39       .39       .39       .39  
 
                                 
    2010  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter  
Common stock prices
                               
High
  $ 52.47     $ 53.75     $ 58.14     $ 60.23  
Low
    47.66       49.10       49.20       56.05  
Dividends declared
    .37       .37       .37       .37  
 
At February 10, 2012, there were approximately 8,000 common shareholders of record.
 
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 the Corporation’s operating results, financial condition and capital requirements, and the impact of regulatory constraints discussed in Note (17)(e) of the Notes to Consolidated Financial Statements.
 
The following table summarizes Chubb’s repurchases of its common stock during each month in the quarter ended December 31, 2011.
 
                                 
                Total Number of
    Maximum Number of
 
    Total
          Shares Purchased as
    Shares that May Yet Be
 
    Number of
          Part of Publicly
    Purchased Under
 
    Shares
    Average Price
    Announced Plans or
    the Plans or
 
Period   Purchased(a)     Paid Per Share     Programs     Programs(b)  
 
October 2011
    443,900     $ 58.70       443,900       6,461,380  
November 2011
    2,795,903       65.37       2,795,903       3,665,477  
December 2011
    2,756,070       68.04       2,756,070       909,407  
                                 
Total
    5,995,873       66.10       5,995,873          
                                 
 
 
(a)  The stated amounts exclude 2,050 shares and 227 shares delivered to Chubb during the months of October 2011 and December 2011, respectively, 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 Chubb’s common stock. On January 26, 2012, the Board of Directors authorized the repurchase of up to $1.2 billion of Chubb’s common stock. These authorizations have no expiration date.

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Stock Performance Graph
 
The following performance graph compares the performance of Chubb’s common stock during the five-year period from December 31, 2006 through December 31, 2011 with the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s Property & Casualty Insurance Index. The graph plots the changes in value of an initial $100 investment over the indicated time periods, assuming all dividends are reinvested.
 
Cumulative Total Return
Based upon an initial investment of $100 on December 31, 2006
with dividends reinvested
 
 
 
 
                                                 
    December 31
    2006   2007   2008   2009   2010   2011
 
Chubb
  $ 100     $ 105     $ 101     $ 101     $ 125     $ 149  
S&P 500
    100       105       66       84       97       99  
S&P 500 Property & Casualty Insurance
    100       86       61       68       74       74  
 
Our filings with the Securities and Exchange Commission (SEC) may incorporate information by reference, including this Form 10-K. Unless we specifically state otherwise, the information under this heading “Stock Performance Graph” shall not be deemed to be “soliciting materials” and shall not be deemed to be “filed” with the SEC or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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Item 6.  Selected Financial Data
 
                                         
    2011     2010     2009     2008     2007  
    (in millions except for per share amounts)
 
 
FOR THE YEAR
                                       
Revenues
                                       
Property and Casualty Insurance
                                       
Premiums Earned
  $ 11,644     $ 11,215     $ 11,331     $ 11,828     $ 11,946  
Investment Income
    1,598       1,590       1,585       1,652       1,622  
Other Revenues
                2       4       11  
Corporate and Other
    55       88       75       108       154  
Realized Investment Gains
(Losses), Net
    288       426       23       (371 )     374  
                                         
Total Revenues
  $ 13,585     $ 13,319     $ 13,016     $ 13,221     $ 14,107  
                                         
Income
                                       
Property and Casualty Insurance
                                       
Underwriting Income
  $ 574     $ 1,222     $ 1,631     $ 1,361     $ 2,116  
Investment Income
    1,562       1,558       1,549       1,622       1,590  
Other Income (Charges)
    21       2       (3 )     9       6  
                                         
Property and Casualty
Insurance Income
    2,157       2,782       3,177       2,992       3,712  
Corporate and Other
    (246 )     (220 )     (238 )     (214 )     (149 )
Realized Investment Gains
(Losses), Net
    288       426       23       (371 )     374  
                                         
Income Before Income Tax
    2,199       2,988       2,962       2,407       3,937  
Federal and Foreign Income Tax
    521       814       779       603       1,130  
                                         
Net Income
  $ 1,678     $ 2,174     $ 2,183     $ 1,804     $ 2,807  
                                         
                                         
Per Share
                                       
Net Income
  $ 5.76     $ 6.76     $ 6.18     $ 4.92     $ 7.01  
Dividends Declared on
Common Stock
    1.56       1.48       1.40       1.32       1.16  
                                         
AT DECEMBER 31
                                       
Total Assets
  $ 50,865     $ 50,249     $ 50,449     $ 48,429     $ 50,574  
Long Term Debt
    3,575       3,975       3,975       3,975       3,460  
Total Shareholders’ Equity
    15,574       15,530       15,634       13,432       14,445  
Book Value Per Share
    57.15       52.24       47.09       38.13       38.56  

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Item 7.  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 December 31, 2011 compared with December 31, 2010 and the results of operations for each of the three years in the period ended December 31, 2011. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
 
INDEX
         
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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; asbestos and toxic waste liabilities and related developments; the number and severity of surety-related claims; the impact of an improving economy on our business; the impact of changes to our reinsurance program in 2011 and the cost of reinsurance in 2012; the adequacy of the rates at which we renewed and wrote new business; premium volume, pricing and competition in 2012; actions we may take in connection with our estimates of our exposure to catastrophes; property and casualty investment income during 2012; cash flows generated by our fixed income investments; currency rate fluctuations; estimates with respect to our credit derivatives exposure; the repurchase of common stock under our share repurchase program; our capital adequacy and funding of liquidity needs; the expected impact of new guidance related to accounting for costs associated with acquiring or renewing insurance contracts; the funding and timing of loss payments; and the redemption of our capital securities. 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;
 
  •  our expectations with respect to cash flow and investment income and with respect to other income;
 
  •  the adequacy of 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;
 
  •  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;

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  •  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;
 
  •  general political, economic and market conditions, whether globally or in the markets in which we operate, including:
 
  •  changes in interest rates, market credit spreads and the performance of the financial markets;
 
  •  currency fluctuations;
 
  •  the effects of inflation;
 
  •  changes in domestic and foreign laws, regulations and taxes;
 
  •  changes in competition and pricing environments;
 
  •  regional or general changes in asset valuations;
 
  •  the inability to reinsure certain risks economically; and
 
  •  changes in the litigation environment;
 
  •  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 within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.

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OVERVIEW
 
The following highlights do not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to Chubb’s shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
  •  Net income was $1.7 billion in 2011 and $2.2 billion in both 2010 and 2009. The decrease in net income in 2011 compared with 2010 was due primarily to lower operating income and, to a lesser extent, lower net realized investment gains. Net income was similar in 2010 and 2009 as lower operating income in 2010 was offset by higher net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.
 
  •  Operating income was $1.5 billion in 2011, $1.9 billion in 2010 and $2.2 billion in 2009. The lower operating income in 2011 compared with that in 2010 and in 2010 compared with that in 2009 was due to lower underwriting income in our property and casualty insurance business, attributable in large part to an increasingly higher impact of catastrophes. Property and casualty investment income was flat in 2011 and increased slightly in 2010 compared with the respective prior year. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.
 
  •  Underwriting results were profitable in 2011 and highly profitable in both 2010 and 2009. Our combined loss and expense ratio was 95.3% in 2011 compared with 89.3% in 2010 and 86.0% in 2009. The less profitable results in 2011 and 2010 compared to the respective prior year were primarily due to a substantially higher impact of catastrophes. The impact of catastrophes accounted for 8.9 percentage points of the combined ratio in 2011 compared with 5.7 percentage points in 2010 and 0.8 of a percentage point in 2009.
 
  •  During 2011, 2010 and 2009, we experienced overall favorable development of $767 million, $746 million and $762 million, respectively, on loss reserves established as of the previous year end. The favorable development in 2011 and 2010 was due primarily to favorable loss experience in certain professional liability, commercial liability and personal insurance classes. The favorable development in 2009 was due primarily to favorable loss experience in certain professional liability and commercial liability classes as well as lower than expected emergence of losses in the homeowners and commercial property classes.
 
  •  Total net premiums written increased by 5% in 2011 and 1% in 2010. Premium growth in 2010 was limited by the general economic downturn, especially in the United States. Growth in 2011 in the United States benefited from positive pricing trends in the standard commercial market as well as improving general economic conditions. Premium growth in both years benefited slightly from the impact of currency fluctuation on business written outside the United States. Net premiums written in the United States increased by 2% in 2011 and decreased by 1% in 2010. Net premiums written outside the United States increased by 11% in 2011 and 9% in 2010. Measured in local currencies, premiums outside the United States grew significantly in 2011 and modestly in 2010. In both years, overall premium growth reflected our emphasis on underwriting discipline in a highly competitive market.
 
  •  Property and casualty investment income after tax was flat in 2011 and increased by 1% in 2010 in what continued to be a low yield investment environment. The increase in 2010 reflected the positive 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

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  securities and is therefore more meaningful for analysis purposes than investment income before income tax.
 
  •  Net realized investment gains before tax were $288 million ($187 million after tax) in 2011 compared with $426 million ($277 million after tax) in 2010 and $23 million ($15 million after tax) in 2009. The net realized gains in 2011 and 2010 were primarily related to investments in limited partnerships, which generally are reported on a quarter lag.
 
A summary of our consolidated net income is as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Property and casualty insurance
  $ 2,157     $ 2,782     $ 3,177  
Corporate and other
    (246 )     (220 )     (238 )
                         
Consolidated operating income before income tax
    1,911       2,562       2,939  
Federal and foreign income tax
    420       665       771  
                         
Consolidated operating income
    1,491       1,897       2,168  
Realized investment gains after income tax
    187       277       15  
                         
Consolidated net income
  $ 1,678     $ 2,174     $ 2,183  
                         
 
PROPERTY AND CASUALTY INSURANCE
 
A summary of the results of operations of our property and casualty insurance business is as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Underwriting
                       
Net premiums written
  $ 11,758     $ 11,236     $ 11,077  
Decrease (increase) in unearned premiums
    (114 )     (21 )     254  
                         
Premiums earned
    11,644       11,215       11,331  
                         
Losses and loss expenses
    7,407       6,499       6,268  
Operating costs and expenses
    3,695       3,496       3,377  
Decrease (increase) in deferred policy acquisition costs
    (63 )     (30 )     27  
Dividends to policyholders
    31       28       28  
                         
Underwriting income
    574       1,222       1,631  
                         
Investments
                       
Investment income before expenses
    1,598       1,590       1,585  
Investment expenses
    36       32       36  
                         
Investment income
    1,562       1,558       1,549  
                         
Other income (charges)
    21       2       (3 )
                         
Property and casualty income before tax
  $ 2,157     $ 2,782     $ 3,177  
                         
Property and casualty investment income after tax
  $ 1,265     $ 1,261     $ 1,252  
                         

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Property and casualty income before tax was lower in 2011 than in 2010, which in turn was lower than in 2009. The successively lower level of income was due to a decrease in underwriting income. The decrease in underwriting income in 2011 compared with 2010 was primarily the result of a higher impact of catastrophes during 2011 and a decrease in current accident year underwriting profitability excluding the impact of catastrophes. The decrease in underwriting income in 2010 compared with 2009 was primarily attributable to a higher impact of catastrophes during 2010, offset in part by a modest improvement in current accident year underwriting profitability excluding the impact of catastrophes. Investment income in 2011 was flat and was slightly higher in 2010 compared with the respective prior year.
 
The profitability of our property and casualty insurance business depends on the results of both our underwriting and investment operations. We view these as two distinct operations since the underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.
 
Underwriting Operations
 
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 amounted to $11.8 billion in 2011, $11.2 billion in 2010 and $11.1 billion in 2009.
 
Net premiums written by business unit were as follows:
 
                                         
    Years Ended December 31  
          % Increase
          % Increase
       
    2011     2011 vs. 2010     2010     2010 vs. 2009     2009  
    (dollars in millions)  
 
Personal insurance
  $ 3,977       4 %   $ 3,825       5 %   $ 3,657  
Commercial insurance
    5,051       8       4,676             4,660  
Specialty insurance
    2,720             2,727             2,739  
                                         
Total insurance
    11,748       5       11,228       2       11,056  
Reinsurance assumed
    10       *       8       *       21  
                                         
Total
  $ 11,758       5     $ 11,236       1     $ 11,077  
                                         
 
*   The change in net premiums written is not presented since this business is in runoff.
 
Net premiums written increased by 5% in 2011 compared with 2010 and increased 1% in 2010 compared with 2009. Premiums written in the United States, which we define as premiums for U.S.-based exposures and which in 2011 represented about 72% of our total net premiums, increased by 2% in 2011 and decreased by 1% in 2010. Premiums written outside the United States, expressed in U.S. dollars, increased by 11% in 2011 and 9% in 2010. In both 2011 and 2010, the increase in net premiums written outside the United States included the positive impact of foreign currency fluctuation due to the impact of the weaker U.S. dollar relative to several currencies in which we wrote business in 2011 and 2010 compared to the respective prior year. As a result, overall premium growth in both 2011 and 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States. Measured in local currencies, net premiums written outside the United States grew in both years, but more significantly in 2011. We experienced particularly strong growth in our personal insurance business outside the United States in both years. The countries outside the United States which were significant contributors to net premiums written in recent years were the United Kingdom, Canada, Brazil, Australia and Germany.

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Premium growth continued to be constrained in both 2011 and 2010 by the general economic conditions in recent years. The amounts of coverage purchased or the insured exposures, both of which are bases upon which we calculate the premiums we charge, were down slightly or were flat for many classes of business in both 2011 and 2010 compared to the respective prior year. Also, in both 2011 and 2010, our ability to grow premiums was constrained by our emphasis on underwriting discipline in the highly competitive market environment. In 2010, the competitive environment placed pressure on renewal rates, resulting in overall average U.S. renewal rates in the personal, commercial and professional liability businesses being down slightly compared to 2009. While the market remained competitive in 2011, the pricing environment improved steadily during the year, primarily in the commercial classes. Overall average U.S. renewal rates in the commercial business in 2011 were up slightly while rates in the professional liability business were down slightly. Average renewal rates for our personal auto and homeowners business were close to flat.
 
In 2011 and 2010, we retained a high percentage of our existing customers and renewed those accounts at what we believe are acceptable rates relative to the risks. Overall, the percentage of business we retained on renewal was similar in 2011 compared with 2010. In both years, the slow improvement in the economic environment and the highly competitive market continued to make it challenging to obtain new business at acceptable rates. The overall level of new business improved slightly in 2011 compared with 2010, as an increase in new personal and commercial business, driven by business written outside the United States, was mostly offset by a modest decline in new professional liability business. The overall level of new business also improved slightly in 2010 over 2009 levels, as a modest increase in new commercial business was offset to a small extent by a decline in new professional liability business.
 
The highly competitive market is likely to continue in 2012. Nevertheless, we expect that the positive pricing environment experienced in 2011, particularly in the commercial classes, will continue into 2012. In addition, there were some signs during 2011 that the economy was improving, which if it continues and is sustained, should have a positive impact on premiums, although there is typically a lag between a recovery and any resulting growth in premiums. We expect our net written premiums will be modestly higher in 2012 compared with 2011, assuming average foreign currency to U.S. dollar exchange rates in 2012 remain similar to 2011 year-end levels.
 
The reinsurance assumed business has been in runoff since the sale of our ongoing reinsurance assumed business in December 2005.
 
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. Most of our ceded reinsurance arrangements consist of excess of loss and catastrophe contracts that protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. Therefore, unless we incur losses that exceed our initial retention under these contracts, we do not receive any loss recoveries. As a result, in certain years, we cede premiums to reinsurance companies and receive few, if any, loss recoveries. However, in a year in which there is a significant catastrophic event or a series of large individual losses, we may receive substantial loss recoveries. The impact of ceded reinsurance on net premiums written and net premiums earned and on net losses and loss expenses incurred for the three years ended December 31, 2011 is presented in Note (9) of the Notes to Consolidated Financial Statements.
 
The most significant component of our ceded reinsurance program is property reinsurance. We purchase two main types of property reinsurance: catastrophe and property per risk.

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For property risks in the United States and Canada, we purchase traditional catastrophe reinsurance, including our primary treaty which we refer to as our North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our exposures in the northeastern United States. For certain exposures in the United States, we also have arranged for the purchase of multi-year, collateralized reinsurance funded through the issuance of collateralized risk linked securities, known as catastrophe bonds. For events outside the United States, we also purchase traditional catastrophe reinsurance.
 
The North American catastrophe treaty has an initial retention of $500 million and 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 part of the United States and in Florida, the North American catastrophe treaty, supplemental catastrophe reinsurance and/or the catastrophe bond arrangements provide additional coverages as discussed below.
 
The catastrophe bond arrangements 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. We currently have two catastrophe bond arrangements in effect: 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, a portion of which expires in March 2014 and the remainder in 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 arrangement 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 arrangement 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, including Canada, provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million. For catastrophic events in Australia and Canada, additional reinsurance provides coverage of 80% of losses between $350 million and $475 million.
 
In addition to catastrophe treaties, we also have a commercial property per risk treaty. This treaty provides coverage per risk of approximately $625 million to $850 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.

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After decreasing somewhat in 2010, reinsurance rates for property risks stabilized in 2011. Consequently, the overall cost of our property reinsurance program was similar in 2011 and 2010. We do not expect the changes we made to our reinsurance program during 2011 to have a material effect on the Corporation’s results of operations, financial condition or liquidity.
 
Our major, traditional property reinsurance treaties expire on April 1, 2012 and we are in the process of evaluating our 2012 property reinsurance program. Due to the significant worldwide catastrophe losses incurred by the industry in 2011, we expect that reinsurance rates for property risks will increase somewhat in 2012. The final structure of our reinsurance program and amount of coverage purchased, including the mixture of traditional catastrophe reinsurance and collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, is still being determined and will affect our total reinsurance costs in 2012.
 
Profitability
 
The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. Management evaluates the performance of our underwriting operations and of each of our business units using, among other measures, the combined loss and expense ratio calculated in accordance with statutory accounting principles. It is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio) plus the ratio of statutory underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.
 
Statutory accounting principles applicable to property and casualty insurance companies differ in certain respects from generally accepted accounting principles (GAAP). Under statutory accounting principles, policy acquisition and other underwriting expenses are recognized immediately, not at the time premiums are earned. Management uses underwriting results determined in accordance with GAAP, among other measures, to assess the overall performance of our underwriting operations. To convert statutory underwriting results to a GAAP basis, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. Underwriting income determined in accordance with GAAP is defined as premiums earned less losses and loss expenses incurred and GAAP underwriting expenses incurred.
 
An accident year is the calendar year in which a loss is incurred or, in the case of claims-made policies, the calendar year in which a loss is reported. The total losses and loss expenses incurred for a particular calendar year include current accident year losses and loss expenses as well as any increases or decreases to our estimates of losses and loss expenses that occurred in all prior accident years, which we refer to as prior year loss development.
 
Underwriting results were profitable in 2011 and highly profitable in both 2010 and 2009. The combined loss and expense ratio for our overall property and casualty business was as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
 
Loss ratio
    63.8 %     58.1 %     55.4 %
Expense ratio
    31.5       31.2       30.6  
                         
Combined loss and expense ratio
    95.3 %     89.3 %     86.0 %
                         

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The loss ratio was higher in 2011 compared to 2010 due to a higher impact of catastrophes and a modest increase in the current accident year loss ratio excluding catastrophes. The loss ratio was higher in 2010 compared to 2009 also due primarily to a higher impact of catastrophes, but offset in part by a modest decrease in the current accident year loss ratio excluding catastrophes. In each of the last three years, the loss ratio reflected positive loss experience excluding catastrophes that we believe resulted from our disciplined underwriting in recent years. Results in all three years benefited to a similar extent from favorable prior year loss development. For more information on prior year loss development, see “Property and Casualty Insurance — Loss Reserves, Prior Year Loss Development.”
 
In 2011, the impact of catastrophes was $1.0 billion, which represented 8.9 percentage points of the combined ratio. The impact of catastrophes was $634 million in 2010 and $91 million in 2009, which represented 5.7 percentage points and 0.8 percentage points, respectively, of the combined ratio. A significant portion of the catastrophe losses in 2011 related to flooding in Australia as well as tornadoes and other storms in the United States, including losses of about $300 million related to Hurricane Irene. A significant portion of the catastrophe losses in 2010 related to numerous storms in the United States and, to a lesser extent, an earthquake in Chile.
 
We did not have any recoveries from our primary catastrophe reinsurance treaties during the three year period ended December 31, 2011 because there was no individual catastrophe for which our losses exceeded our retention under the treaties. Under a region-specific property catastrophe reinsurance treaty, we made recoveries of about $60 million of our gross losses related to the 2010 earthquake in Chile.
 
Our expense ratio was higher in 2011 compared with 2010, which in turn was higher compared with 2009. The increase in 2011 was due primarily to an increase in commission rates on business written outside the United States partially offset by overhead expenses increasing at a lower rate than the rate of growth of premiums written. The increase in 2010 was due to an increase in commissions and, to a lesser extent, overhead expenses increasing at a rate that exceeded the rate of growth of premiums written. In both 2011 and 2010, our overall commission rate increased due primarily to premium growth outside the United States in classes of business with higher commission rates.
 
Review of Underwriting Results by Business Unit
 
Personal Insurance
 
Net premiums written from personal insurance, which represented 34% of our premiums written in 2011, increased by 4% in 2011 and 5% in 2010 compared with the respective prior year. Net premiums written for the classes of business within the personal insurance segment were as follows:
 
                                         
    Years Ended December 31  
          % Increase
          % Increase
       
    2011     2011 vs. 2010     2010     2010 vs. 2009     2009  
    (dollars in millions)  
 
Automobile
  $ 682       7 %   $ 638       11 %   $ 577  
Homeowners
    2,477       4       2,382       2       2,339  
Other
    818       2       805       9       741  
                                         
Total personal
  $ 3,977       4     $ 3,825       5     $ 3,657  
                                         

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Personal automobile premiums increased in 2011 and 2010, reflecting new business growth in select non-U.S. locations and the positive impact of currency fluctuation on business written outside the United States. Personal automobile premiums in the United States increased slightly in 2011 and decreased slightly in 2010 as growth continued to be constrained by the highly competitive marketplace. Premiums for our homeowners business increased modestly in 2011 and increased slightly in 2010. Premium growth in this business has been constrained due to the downturn in the U.S. economy in recent years, which resulted in a slowdown in new housing construction as well as lower demand for jewelry and fine arts policy endorsements. In 2011, however, growth was achieved 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 2011 due to moderate growth in the excess liability business. In accident and health, significant growth in our non-U.S. business in 2011, attributable to new business initiatives and, to a lesser extent, to the positive effect of currency fluctuation, was offset by a significant decrease in premiums in the United States, due to our decision to exit and run off the employer health care stop loss component of this business. The growth in other personal premiums in 2010 was primarily in our non-U.S. accident and health business and approximately half was attributable to the effect of currency fluctuation.
 
Our personal insurance business produced modestly profitable underwriting results in 2011. Results were highly profitable in 2010 and 2009, but less so in 2010. Results were less profitable in each successive year due in large part to a higher impact of catastrophe losses on our homeowners business. The impact of catastrophes accounted for 13.1 percentage points of the combined loss and expense ratio for our personal business in 2011, compared with 10.2 percentage points in 2010 and 0.9 percentage points in 2009. A significant portion of the catastrophe losses in 2011 related to storms in the United States, including Hurricane Irene. A significant portion of the catastrophe losses in 2010 related to numerous storms in the United States. The less profitable results in 2011 compared to 2010 were also attributable to a higher expense ratio, a higher current accident year loss ratio excluding catastrophes and a lower amount of favorable prior year loss development. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
 
Automobile
    94.4 %     90.8 %     90.4 %
Homeowners
    100.2       91.7       80.4  
Other
    95.7       91.2       90.8  
Total personal
    98.3       91.5       84.1  
 
Our personal automobile results were profitable in 2011 and highly profitable in 2010 and 2009. Results in all three years benefited from moderate claim frequency and favorable prior year loss development.
 
Homeowners results were breakeven in 2011 and highly profitable in 2010 and 2009. Results in each succeeding year were less profitable than the respective prior year due primarily to higher catastrophe losses. The impact of catastrophes accounted for 20.6 percentage points of the combined loss and expense ratio for this class in 2011 compared with 15.6 percentage points in 2010 and 1.5 percentage points in 2009. Results in 2011 were also adversely impacted by more severe non-catastrophe weather-related losses than in 2010.
 
Other personal business produced profitable results in each of the past three years, but less so in 2011. The less profitable results in 2011 compared to 2010 were primarily due to reduced profitability in the accident and health and excess liability components. Results for our excess liability business, however, were highly profitable in all three years and benefited from favorable prior year loss development as a result of better than expected loss trends. Our yacht business was also highly profitable in each of the past three years. Our accident and health business produced breakeven results in 2011 and 2009 compared with profitable results in 2010.

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Commercial Insurance
 
Net premiums written from commercial insurance, which represented 43% of our premiums written in 2011, increased by 8% in 2011 and were flat in 2010 compared with the respective prior year. Net premiums written for the classes of business within the commercial insurance segment were as follows:
 
                                         
    Years Ended December 31  
                      % Increase
       
          % Increase
          (Decrease)
       
    2011     2011 vs. 2010     2010     2010 vs. 2009     2009  
    (dollars in millions)  
 
Multiple peril
  $ 1,136       4 %   $ 1,094       (2 )%   $ 1,121  
Casualty
    1,639       7       1,532       1       1,514  
Workers’ compensation
    860       14       756       (1 )     761  
Property and marine
    1,416       9       1,294       2       1,264  
                                         
Total commercial
  $ 5,051       8     $ 4,676           $ 4,660  
                                         
 
In 2011, premium growth occurred in all classes of our commercial insurance business. This premium growth reflected higher rates, new business opportunities and slightly higher amounts of audit and endorsement premiums in a market that continued to be highly competitive. In 2011, there was improvement in the overall rate environment, particularly in the United States, throughout the year. Average renewal rates in the United States increased over those in 2010 for all major classes of our commercial business. In 2011, the average renewal exposure change was flat in the United States and up slightly outside the United States, an improvement from 2010. Growth in our commercial classes in 2010 was limited by a very competitive marketplace and the restrained insurance purchasing demand of customers operating in weakened economies worldwide. Net premiums written in 2010 reflected slightly reduced exposures on renewal business in the United States due to the continuing effects of the weak economy, although the effect on renewal exposures progressively lessened throughout the year. On average, renewal rates in the United States for most classes of commercial insurance business were about flat in 2010 compared with 2009. Premium growth in both 2011 and 2010 in our commercial insurance business benefited slightly from the impact of currency fluctuation on business written outside the United States.
 
Retention levels of our existing policyholders remained strong over the last three years. New business volume was up modestly in 2011 compared with 2010, driven by activity outside the United States. New business volume was up modestly in 2010 compared with 2009.
 
We continued to maintain our underwriting discipline in the highly competitive market, renewing business and writing new business only where we believe we are securing acceptable rates and appropriate terms and conditions for the exposures.
 
Our commercial insurance business produced near breakeven underwriting results in 2011 compared to profitable results in 2010 and highly profitable results in 2009. Results in all three years benefited from favorable loss experience, disciplined risk selection and appropriate terms and conditions in recent years. Results were less profitable in each successive year mainly due to a higher impact of catastrophes. The impact of catastrophes accounted for 10.5 percentage points of the combined loss and expense ratio for our commercial insurance business in 2011, compared with 5.4 percentage points in 2010 and 1.2 percentage points in 2009. The less profitable results in 2011 compared with 2010 were also due to a higher current accident year loss ratio excluding catastrophes. Excluding the effect of catastrophes, our commercial insurance results were slightly more profitable in 2010 compared to 2009, due to a higher amount of favorable prior year loss development in 2010.

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The combined loss and expense ratios for the classes of business within commercial insurance were as follows:
 
                         
    Years Ended December 31
    2011   2010   2009
 
Multiple peril
    101.5 %     94.7 %     85.8 %
Casualty
    87.9       91.7       96.7  
Workers’ compensation
    93.2       93.4       92.7  
Property and marine
    114.7       90.5       83.3  
Total commercial
    99.3       92.3       89.9  
 
Multiple peril results were slightly unprofitable in 2011 compared with profitable results in 2010 and highly profitable results in 2009. The less profitable results in 2011 compared with 2010 were mainly due to a higher impact of catastrophes in the property component of this business, offset in part by more profitable results in the liability component due to a higher amount of favorable prior year loss development. The less profitable results in 2010 compared with 2009 were due primarily to a higher impact of catastrophes in the property component and, to a lesser extent, less profitable results in the liability component. The impact of catastrophes accounted for 15.1 percentage points of the combined loss and expense ratio for the multiple peril class in 2011 compared with 10.3 percentage points in 2010 and 1.6 percentage points in 2009. The property component reflected moderate non-catastrophe losses in all three years, particularly outside the United States in 2010.
 
Results for our casualty business were profitable in each of the past three years, increasingly so in 2011 and 2010 compared to the respective prior year. The automobile and primary liability components of our casualty business were profitable in each of the past three years, but more so in 2011 due to a higher amount of favorable prior year loss development. Results in the excess liability component were increasingly profitable in each of the past three years. Excess liability results in all three years benefited from favorable prior year loss development mainly due to lower than expected claim severity. Casualty results in each of the three years were adversely affected by incurred losses related to toxic waste claims and, to a lesser extent in 2011, asbestos claims. Our analysis of these exposures resulted in increases in the estimate of our ultimate liabilities. Such losses represented 4.0 percentage points of the combined loss and expense ratio for this class in 2011, 3.5 percentage points in 2010 and 4.1 percentage points in 2009.
 
Workers’ compensation results were profitable in each of the past three years reflecting our disciplined risk selection during the past several years. Results in 2011 benefited from modest favorable prior year loss development.
 
Property and marine results were highly unprofitable in 2011 compared with profitable results in 2010 and highly profitable results in 2009. The deterioration in results in each succeeding year was primarily due to higher catastrophe losses. Catastrophe losses accounted for 24.9 percentage points of the combined loss and expense ratio in 2011 compared with 8.9 percentage points in 2010 and 1.5 percentage points in 2009. Excluding the impact of catastrophes, the combined ratio was 89.8%, 81.6% and 81.8% in 2011, 2010 and 2009, respectively. On this basis, the worse result in 2011 compared to 2010 and 2009 primarily reflected a higher non-catastrophe loss ratio, including a higher frequency of large losses, in the current accident year.

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Specialty Insurance
 
Net premiums written from specialty insurance, which represented 23% of our premiums written in 2011, were flat in 2011 and 2010 compared with the respective prior year. Net premiums written for the classes of business within the specialty insurance segment were as follows:
 
                                         
    Years Ended December 31  
                      % Increase
       
          % Increase
          (Decrease)
       
    2011     2011 vs. 2010     2010     2010 vs. 2009     2009  
          (dollars in millions)        
 
Professional liability
  $ 2,388       %   $ 2,398       (1 )%   $ 2,413  
Surety
    332       1       329       1       326  
                                         
Total specialty
  $ 2,720           $ 2,727           $ 2,739  
                                         
 
Net premiums written in our professional liability business were relatively flat in 2011 and 2010 compared with the respective prior year. Premium growth for this business has been constrained by the continuing effect of the economic downturn in recent years and a highly competitive marketplace due to an oversupply of capacity available from market participants. We experienced a slight overall decrease in our average renewal rates and new business volume but relatively strong retention of our expiring policies in 2011 and 2010 compared with the respective prior year. Premium growth in our professional liability business in 2011 and 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States.
 
Overall, the average renewal rates of our professional liability business written in the United States decreased in both 2011 and 2010, but less so in 2011. Rates were down in most lines of our professional liability business in 2010, with the most significant reduction in rates in our directors and officers liability business. However, in 2011, renewal rate reductions moderated throughout the year for most lines of professional liability business.
 
Retention levels in the professional liability classes remained strong over the last three years. New business volume declined slightly in each of the past two years, due in varying degrees to the competition in the marketplace as well as the effects of the economic downturn. We maintained our focus on small and middle market publicly traded and privately held companies and our commitment to maintaining underwriting discipline in this environment. We continued to obtain what we believe are acceptable rates and appropriate terms and conditions on both new and renewal business.
 
Premium growth in our surety business was constrained in 2011 and 2010 by the highly competitive environment and the lingering effects of the weak economic conditions on the construction business during the last few years. The slight growth in both 2011 and 2010 was attributable to new business in non-U.S. locations.
 
Our specialty insurance business produced highly profitable underwriting results in each of the last three years. The combined loss and expense ratios for the classes of business within specialty insurance were as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
 
Professional liability
    89.9 %     87.8 %     90.1 %
Surety
    49.1       41.3       37.4  
Total specialty
    85.1       82.2       84.1  

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Our professional liability business produced highly profitable results in each of the past three years. The profitability of our professional liability business was particularly strong outside the United States in all three years, especially in 2010. The fiduciary liability class produced highly profitable results in each of the three past years. The directors and officers liability class was profitable in all three years, particularly in 2011 and 2010. The fidelity class was profitable in each of the past three years, but less so in each successive year, primarily due to increased large loss activity resulting from alleged third party and insured-employee criminal activity in recent years. The employment practices liability class was near breakeven in 2011 compared with highly profitable results in 2010 and 2009. The less profitable results in 2011 in this class were due to deterioration in the current accident year loss ratio, while results in 2010 and 2009 benefited from favorable prior year loss development. Our errors and omissions liability business produced highly unprofitable results in each of the past three years partly reflecting the impact of the financial crisis and unfavorable prior year loss development.
 
Collectively, the results for the professional liability classes benefited from favorable prior year loss development in the past three years that was driven mainly by positive loss experience related to accident years 2008 and prior. The combined ratio for the current accident year in our professional liability business in 2011 and 2010 was near breakeven, while the combined ratio for the current accident year in 2009 was higher since that accident year was more affected by the crisis in the financial markets.
 
Our surety business produced highly profitable results in each of the past three years due to favorable loss experience. Our surety business tends to be characterized by losses that are infrequent but have the potential to be highly severe. When losses occur, they are mitigated, at times, by recovery rights to the customer’s assets, contract payments, collateral and bankruptcy recoveries.
 
The majority of our surety obligations are intended to be performance-based guarantees. We manage our exposure by individual account and by specific bond type. We have substantial commercial and construction surety exposure for current and prior customers, including exposures related to surety bonds issued on behalf of companies that have experienced deterioration in creditworthiness since we issued bonds to them. We therefore may experience an increase in filed claims and may incur high severity losses, especially in light of ongoing economic conditions. Such losses would be recognized if and when claims are filed and determined to be valid, and could have a material adverse effect on the Corporation’s results of operations.
 
Reinsurance Assumed
 
In 2005, we transferred our ongoing reinsurance assumed business and certain related assets, including renewal rights, to a reinsurance company. The reinsurer generally did not assume our reinsurance liabilities relating to reinsurance contracts incepting prior to December 31, 2005. We retained those liabilities and the related assets.
 
For a transition period of about two years, the same reinsurer underwrote specific reinsurance business on our behalf. We retained a portion of this business and ceded the balance to the reinsurer.
 
Net premiums written from our reinsurance assumed business during the past three years have not been significant as this business is in runoff.
 
Reinsurance assumed results were profitable in each of the past three years. Prior year loss development was favorable in all three years, but more so in 2009.
 
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.

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Natural Catastrophes
 
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 globally and have strategies and underwriting standards to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas in the United States, such as California and the gulf and east coasts, as well as in natural catastrophe exposed areas in 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 one of the third party catastrophe modeling tools 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 indicates 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 are implementing targeted underwriting and rate initiatives in some regions and we 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.
 
We also continue to actively explore and analyze credible scientific evidence, including the potential impact of global climate change, that may affect our ability to manage exposure under the insurance policies we issue as well as the impact that laws and regulations intended to combat climate change may have on us.
 
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.
 
Terrorism Risk and Legislation
 
The September 11, 2001 attack changed the way the property and casualty insurance industry views catastrophic risk. That tragic event demonstrated that numerous classes of business we write are subject to terrorism related catastrophic risks in addition to the catastrophic risks related to natural occurrences. This, together with the limited availability of terrorism reinsurance, required us to change how we identify and evaluate risk accumulations. We have licensed a terrorism model that provides loss estimates under numerous event scenarios. Actual results may differ materially from those suggested by the model. The risk concentration management tool referred to above also enables us to identify locations and geographic areas that are exposed to risk accumulations. The information provided by the terrorism model and the risk concentration management tool has resulted in our non-renewing some accounts, subject to regulatory constraints, and refraining from writing others.
 
The Terrorism Risk Insurance Act of 2002 and more recently, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively TRIA), are limited duration programs under which the U.S. federal government has agreed to share the risk of loss arising from certain acts of terrorism with the insurance industry. The current program, which will terminate on December 31, 2014, is applicable to many lines of commercial business but excludes, among others, commercial automobile, surety and

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professional liability insurance, other than directors and officers liability. The current program provides protection from all foreign and domestic acts of terrorism.
 
As a precondition to recovery under TRIA, insurance companies with direct commercial insurance exposure in the United States for TRIA lines of business are required to make insurance for covered acts of terrorism available under their policies. In the event of an act of terrorism, each insurer has a separate deductible that it must meet before federal assistance becomes available. The deductible is based on a percentage of direct U.S. earned premiums for the covered lines of business in the previous calendar year. For 2012, that deductible is 20% of direct premiums earned in 2011 for these lines of business. For losses above the deductible, the federal government will pay for 85% of covered losses, while the insurer retains 15%. There is a combined annual aggregate limit for the federal government and all insurers of $100 billion. If acts of terrorism result in covered losses exceeding the $100 billion annual limit, insurers are not liable for additional losses. While the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $930 million in 2012.
 
For certain classes of business, such as workers’ compensation, terrorism coverage is mandatory. For those classes of business where it is not mandatory, policyholders may choose not to purchase terrorism coverage, which would, subject to other statutory or regulatory restrictions, reduce our exposure.
 
We also have exposure outside the United States to risk of loss from acts of terrorism. In some jurisdictions, we have access to government mechanisms that would mitigate our exposure.
 
We will continue to manage this type of catastrophic risk by monitoring terrorism risk aggregations. Nevertheless, given the unpredictability of the targets, frequency and severity of potential terrorist events as well as the very limited terrorism reinsurance coverage available in the market and the limitations of existing government programs and uncertainty regarding their availability in the future, the occurrence of a terrorist event could have a material adverse effect on the Corporation’s results of operations, financial condition or liquidity.
 
Loss Reserves
 
Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability of our property and casualty subsidiaries.
 
Our loss reserves include case estimates for claims that have been reported and estimates for claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss experience modified for current trends as well as prevailing economic, legal and social conditions. Our loss reserves are not discounted to present value.
 
We regularly review our loss reserves using a variety of actuarial techniques. We update the reserve estimates as historical loss experience develops, additional claims are reported and/or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed.
 
Incurred but not reported (IBNR) reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which are not yet known to the insured, as well as a provision for future development on reported claims. A relatively large proportion of our net loss reserves, particularly for long tail liability classes, are reserves for IBNR losses. In fact, about 70% of our aggregate net loss reserves at December 31, 2011 were for IBNR losses.

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Our gross case and IBNR loss reserves and related reinsurance recoverable by class of business were as follows:
 
                                         
                            Net
 
    Gross Loss Reserves     Reinsurance
    Loss
 
December 31, 2011   Case     IBNR     Total     Recoverable     Reserves  
    (in millions)  
 
Personal insurance
                                       
Automobile
  $ 269     $ 151     $ 420     $ 16     $ 404  
Homeowners
    431       349       780       11       769  
Other
    392       649       1,041       139       902  
                                         
Total personal
    1,092       1,149       2,241       166       2,075  
                                         
Commercial insurance
                                       
Multiple peril
    600       1,169       1,769       34       1,735  
Casualty
    1,388       5,229       6,617       343       6,274  
Workers’ compensation
    913       1,669       2,582       190       2,392  
Property and marine
    896       558       1,454       336       1,118  
                                         
Total commercial
    3,797       8,625       12,422       903       11,519  
                                         
Specialty insurance
                                       
Professional liability
    1,498       6,098       7,596       416       7,180  
Surety
    27       54       81       6       75  
                                         
Total specialty
    1,525       6,152       7,677       422       7,255  
                                         
Total insurance
    6,414       15,926       22,340       1,491       20,849  
Reinsurance assumed
    240       488       728       248       480  
                                         
Total
  $ 6,654     $ 16,414     $ 23,068     $ 1,739     $ 21,329  
                                         
 
                                         
                            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  
                                         

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Loss reserves, net of reinsurance recoverable, increased by $428 million or 2% in 2011. The effect of catastrophes increased loss reserves by $285 million and the effect of foreign currency fluctuation increased reserves by $67 million, due to a weaker U.S. dollar at December 31, 2011 compared to December 31, 2010. Loss reserves related to our insurance business increased by $540 million. Loss reserves related to our reinsurance assumed business, which is in runoff, decreased by $112 million.
 
Total gross case reserves related to our insurance business increased by $308 million in 2011. A majority of this increase was in the homeowners and property and marine classes due to catastrophe losses reported during the year that remained unpaid as of December 31, 2011. Total gross IBNR reserves related to our insurance business increased by $209 million in 2011. An increase in gross IBNR reserves in the commercial classes, primarily in the casualty and workers’ compensation classes due to increased exposures and in the property-related classes due to higher catastrophe-related reserves, was offset in part by a decrease in gross IBNR reserves in the professional liability classes, reflecting increased case activity and 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 December 31, 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 described below, 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 December 31, 2011 may change, which could have a material effect on the Corporation’s results of operations and financial condition.
 
Estimates and Uncertainties
 
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. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.
 
Given the inherent complexity of the loss reserving process and the potential variability of the assumptions used, the actual emergence of losses could vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements do not occur until well into the future. Our net loss reserves at December 31, 2011 were $21.3 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on the Corporation’s results of operations.
 
Reserves Other than Those Relating to Asbestos and Toxic Waste Claims.  Our loss reserves include amounts related to short tail and long tail classes of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary.
 
Short tail classes consist principally of homeowners, commercial property and marine business. For these classes, claims are generally reported and settled shortly after the loss occurs and the claims usually relate to tangible property. Consequently, the estimation of loss reserves for these classes is less complex.
 
Most of our loss reserves relate to long tail liability classes of business. Long tail classes include directors and officers liability, errors and omissions liability and other professional liability coverages, commercial primary and excess liability, workers’ compensation and other liability coverages. For many liability claims significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long tail liability classes has limited statistical credibility because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses.

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An accident year is the calendar year in which a loss is incurred or, in the case of claims-made policies, the calendar year in which a loss is reported. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal and economic environment. Consequently, the estimation of loss reserves for these classes is more complex and typically subject to a higher degree of variability than for short tail classes. As a result, the role of judgment is much greater for these reserve estimates.
 
Most of our reinsurance assumed business is long tail casualty reinsurance. Reserve estimates for this business are therefore subject to the variability caused by extended loss emergence periods. The estimation of loss reserves for this business is further complicated by delays between the time the claim is reported to the ceding insurer and when it is reported by the ceding insurer to us and by our dependence on the quality and consistency of the loss reporting by the ceding company.
 
Our actuaries perform a comprehensive review of loss reserves for each of the numerous classes of business we write at least once a year. The timing of such review varies by class of business and, for some classes, the jurisdiction in which the policy was written. The review process takes into consideration the variety of trends that impact the ultimate settlement of claims in each particular class of business. Additionally, each quarter our actuaries review the emergence of paid and reported losses relative to expectations and, as necessary, conduct reserve reviews for particular classes of business.
 
The loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. As part of that process, our actuaries use a variety of actuarial methods that analyze experience, trends and other relevant factors. The principal standard actuarial methods used by our actuaries in the loss reserve reviews include loss development factor methods, expected loss ratio methods, Bornheutter-Ferguson methods and frequency/severity methods.
 
Loss development factor methods generally assume that the losses yet to emerge for an accident year are proportional to the paid or reported loss amounts observed so far. Historical patterns of the development of paid and reported losses by accident year can be predictive of the expected future patterns that are applied to current paid and reported losses to generate estimated ultimate losses by accident year.
 
Expected loss ratio methods use loss ratios for prior accident years, adjusted to reflect our evaluation of recent loss trends, the current risk environment, changes in our book of business and changes in our pricing and underwriting, to determine the appropriate expected loss ratio for a given accident year. The expected loss ratio for each accident year is multiplied by the earned premiums for that year to calculate estimated ultimate losses.
 
Bornheutter-Ferguson methods are combinations of an expected loss ratio method and a loss development factor method, where the loss development factor method is given more weight as an accident year matures.
 
Frequency/severity methods first project ultimate claim counts (using one or more of the other methods described above) and then multiply those counts by an estimated average claim cost to calculate estimated ultimate losses. The average claim costs are often estimated through a regression analysis of historical severity data. Generally, these methods work best for high frequency, low severity classes of business.

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In completing their loss reserve analysis, our actuaries are required to determine the most appropriate actuarial methods to employ for each class of business. Within each class, the business is further segregated by accident year and, where appropriate, by jurisdiction. Each estimation method has its own pattern, parameter and/or judgmental dependencies, with no estimation method being better than the others in all situations. The relative strengths and weaknesses of the various estimation methods when applied to a particular class of business can also change over time, depending on the underlying circumstances. In many cases, multiple estimation methods will be valid for the particular facts and circumstances of the relevant class of business. The manner of application and the degree of reliance on a given method will vary by class of business, by accident year and by jurisdiction based on our actuaries’ evaluation of the above dependencies and the potential volatility of the loss frequency and severity patterns. The estimation methods selected or given weight by our actuaries at a particular valuation date are those that are believed to produce the most reliable indication for the loss reserves being evaluated. These selections incorporate input from claims personnel, pricing actuaries and underwriting management on loss cost trends and other factors that could affect the reserve estimates.
 
For short tail classes, the emergence of paid and incurred losses generally exhibits a reasonably stable pattern of loss development from one accident year to the next. Thus, for these classes, the loss development factor method is generally relatively straightforward to apply and usually requires only modest extrapolation. For long tail classes, applying the loss development factor method often requires more judgment in selecting development factors as well as more significant extrapolation. For those long tail classes with high frequency and relatively low per-loss severity (e.g., workers’ compensation), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, except in the most recent accident years.
 
For certain long tail classes of business, however, anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. These classes include directors and officers liability, errors and omissions liability and commercial excess liability, among others. For these classes, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported to us or are only in the early stages of the settlement process. Therefore, the actuarial estimates for these accident years are based on less extrapolatory methods, such as expected loss ratio and Bornheutter-Ferguson methods. Over time, as a greater number of claims are reported and the statistical credibility of loss experience increases, loss development factor methods are given increasingly more weight.
 
Using all the available data, our actuaries select an indicated loss reserve amount for each class of business based on the various assumptions, projections and methods. The total indicated reserve amount determined by our actuaries is an aggregate of the indicated reserve amounts for the individual classes of business. The ultimate outcome is likely to fall within a range of potential outcomes around this indicated amount, but the indicated amount is not expected to be precisely the ultimate liability.
 
Senior management meets with our actuaries at the end of each quarter to review the results of the latest loss reserve analysis. Based on this review, management determines the carried reserve for each class of business. In making the determination, management considers numerous factors, such as changes in actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular class of business. In doing so, management must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be permanent, it is not always possible to determine the extent of the change until sometime later. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the carried loss reserves. In general, changes are made more quickly to more mature accident years and less volatile classes of business.

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Among the numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves are the following:
 
  •  changes in the inflation rate for goods and services related to covered damages such as medical care and home repair costs,
 
  •  changes in the judicial interpretation of policy provisions relating to the determination of coverage,
 
  •  changes in the general attitude of juries in the determination of liability and damages,
 
  •  legislative actions,
 
  •  changes in the medical condition of claimants,
 
  •  changes in our estimates of the number and/or severity of claims that have been incurred but not reported as of the date of the financial statements,
 
  •  changes in our book of business,
 
  •  changes in our underwriting standards, and
 
  •  changes in our claim handling procedures.
 
In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions change. These issues have had, and may continue to have, a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of such issues include professional liability claims arising out of the recent crisis in the financial markets, directors and officers liability and errors and omissions liability claims arising out of accounting and other corporate malfeasance, and exposure to claims asserted for bodily injury as a result of long term exposure to harmful products or substances. As a result of issues such as these, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have grown, further complicating the already complex loss reserving process.
 
As part of our loss reserving analysis, we take into consideration the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, the effects of changes in judicial interpretations, the effects of emerging claims and coverage issues and the effects of changes in claim handling practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a class of business. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.
 
For each class of business, we regularly adjust the assumptions and actuarial methods used in the estimation of loss reserves in response to our actual loss experience as well as our judgments regarding changes in trends and/or emerging patterns. In those instances where we primarily utilize analyses of historical patterns of the development of paid and reported losses, this may be reflected, for example, in the selection of revised loss development factors. In those long tail classes of business that comprise a majority of our loss reserves and for which loss experience is less predictable due to potential changes in judicial interpretations, potential legislative actions and potential claims issues, this may be reflected in a judgmental change in our estimate of ultimate losses for particular accident years.

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The future impact of the various factors that contribute to the uncertainty in the loss reserving process is extremely difficult to predict. There is potential for significant variation in the development of loss reserves, particularly for long tail classes of business. We do not derive statistical loss distributions or outcome confidence levels around our loss reserve estimate. Actuarial ranges of reasonable estimates are not a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. This is due, among other reasons, to the fact that actuarial ranges are developed based on known events as of the valuation date whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that were unknown as of the valuation date.
 
The following discussion includes disclosure of possible variation from current estimates of loss reserves due to a change in certain key assumptions for particular classes of business. These impacts are estimated individually, without consideration for any correlation among such assumptions or among lines of business. Therefore, it would be inappropriate to take the amounts and add them together in an attempt to estimate volatility for our loss reserves in total. We believe that the estimated variation in reserves detailed below is a reasonable estimate of the possible variation that may occur in the future. However, if such variation did occur, it would likely occur over a period of several years and therefore its impact on the Corporation’s results of operations would be spread over the same period. It is important to note, however, that there is the potential for future variation greater than the amounts discussed below.
 
Two of the larger components of our loss reserves relate to the professional liability classes other than fidelity and to commercial excess liability. The respective reported loss development patterns are key assumptions in estimating loss reserves for these classes of business, both as applied directly to more mature accident years and as applied indirectly (e.g., via Bornheutter-Ferguson methods) to less mature accident years.
 
Reserves for the professional liability classes other than fidelity were $6.8 billion, net of reinsurance, at December 31, 2011. Based on a review of our loss experience, if the loss development factor for each accident year changed such that the cumulative loss development factor for the most recent accident year changed by 10%, we estimate that the net reserves for professional liability classes other than fidelity would change by approximately $700 million, in either direction. This degree of change in the reported loss development pattern is within the historical variation around the averages in our data.
 
Reserves for commercial excess liability (excluding asbestos and toxic waste claims) were $3.1 billion, net of reinsurance, at December 31, 2011. These reserves are included within commercial casualty. Based on a review of our loss experience, if the loss development factor for each accident year changed such that the cumulative loss development factor for the most recent accident year changed by 20%, we estimate that the net reserves for commercial excess liability would change by approximately $400 million, in either direction. This degree of change in the reported loss development pattern is within the historical variation around the averages in our data.
 
Reserves Relating to Asbestos and Toxic Waste Claims.  The estimation of loss reserves relating to asbestos and toxic waste claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of liability. The insurance industry as a whole is engaged in extensive litigation over coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures.
 
Reserves for asbestos and toxic waste claims cannot be estimated with traditional actuarial loss reserving techniques that rely on historical accident year loss development factors. Instead, we rely on an exposure-based analysis that involves a detailed review of individual policy terms and exposures. Because each policyholder presents different liability and coverage issues, we generally evaluate our exposure on a policyholder-by-policyholder basis, considering a variety of factors that are unique to each policyholder. Quantitative techniques have to be supplemented by subjective considerations including management’s judgment.

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We establish case reserves and expense reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves are established to cover additional exposures on both known and unasserted claims.
 
We believe that the loss reserves carried at December 31, 2011 for asbestos and toxic waste claims were adequate. However, given the judicial decisions and legislative actions that have broadened the scope of coverage and expanded theories of liability in the past and the possibilities of similar interpretations in the future, it is possible that our estimate of loss reserves relating to these exposures may increase in future periods as new information becomes available and as claims develop.
 
Asbestos Reserves.  Asbestos remains the most significant and difficult mass tort for the insurance industry in terms of claims volume and dollar exposure. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Tort theory affecting asbestos litigation has evolved over the years. Early court cases established the “continuous trigger” theory with respect to insurance coverage. Under this theory, insurance coverage is deemed to be triggered from the time a claimant is first exposed to asbestos until the manifestation of any disease. This interpretation of a policy trigger can involve insurance policies over many years and increases insurance companies’ exposure to liability. Until recently, judicial interpretations and legislative actions attempted to maximize insurance availability from both a coverage and liability standpoint.
 
New asbestos claims and new exposures on existing claims have continued despite the fact that usage of asbestos has declined since the mid-1970’s. Many claimants were exposed to multiple asbestos products over an extended period of time. As a result, claim filings typically name dozens of defendants. The plaintiffs’ bar has solicited new claimants through extensive advertising and through asbestos medical screenings. A vast majority of asbestos bodily injury claims have been filed by claimants who do not show any signs of asbestos related disease. New asbestos cases are often filed in those jurisdictions with a reputation for judges and juries that are extremely sympathetic to plaintiffs.
 
Approximately 90 manufacturers and distributors of asbestos products have filed for bankruptcy protection as a result of asbestos related liabilities. A bankruptcy sometimes involves an agreement to a plan between the debtor and its creditors, including current and future asbestos claimants. Although the debtor is negotiating in part with its insurers’ money, insurers are generally given only limited opportunity to be heard. In addition to contributing to the overall number of claims, bankruptcy proceedings have also caused increased settlement demands against remaining solvent defendants.
 
There have been some positive legislative and judicial developments in the asbestos environment over the past several years:
 
  •  Various challenges to the mass screening of claimants have been mounted, which have led to higher medical evidentiary standards. For example, several asbestos injury settlement trusts have suspended their acceptance of claims that were based on the diagnosis of specific physicians or screening companies. Further investigations of the medical screening process for asbestos claims are underway.
 
  •  A number of states have implemented legislative and judicial reforms that focus the courts’ resources on the claims of the most seriously injured. Those who allege serious injury and can present credible evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket, which preserves the right to pursue litigation in the future.
 
  •  A number of key jurisdictions have adopted venue reform that requires plaintiffs to have a connection to the jurisdiction in order to file a complaint.

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  •  In recognition that many aspects of bankruptcy plans are unfair to certain classes of claimants and to the insurance industry, these plans are being more closely scrutinized by the courts and rejected when appropriate.
 
Our most significant individual asbestos exposures involve products liability on the part of “traditional” defendants who were engaged in the manufacture, distribution or installation of asbestos products. We wrote excess liability and/or general liability coverages for these insureds. While these insureds are relatively few in number, their exposure has become substantial due to the increased volume of claims, the erosion of the underlying limits and the bankruptcies of target defendants.
 
Our other asbestos exposures involve products and non-products liability on the part of “peripheral” defendants, including a mix of manufacturers, distributors and installers of certain products that contain asbestos in small quantities and owners or operators of properties where asbestos was present. Generally, these insureds are named defendants on a regional rather than a nationwide basis. As the financial resources of traditional asbestos defendants have been depleted, plaintiffs are targeting these viable peripheral parties with greater frequency and, in many cases, for large awards.
 
Asbestos claims against the major manufacturers, distributors or installers of asbestos products were typically presented under the products liability section of primary general liability policies as well as under excess liability policies, both of which typically had aggregate limits that capped an insurer’s exposure. In recent years, a number of asbestos claims by insureds are being presented as “non-products” claims, such as those by installers of asbestos products and by property owners or operators who allegedly had asbestos on their property, under the premises or operations section of primary general liability policies. Unlike products exposures, these non-products exposures typically had no aggregate limits on coverage, creating potentially greater exposure. Further, in an effort to seek additional insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits. It is difficult to predict whether insureds will be successful in asserting claims under non-products coverage or whether insurers will be successful in asserting additional defenses. Accordingly, the ultimate cost to insurers of the claims for coverage not subject to aggregate limits is uncertain.
 
In establishing our asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider a variety of factors including: the available insurance coverage; limits and deductibles; the jurisdictions involved; past settlement values of similar claims; the potential role of other insurance, particularly underlying coverage below our excess liability policies; potential bankruptcy impact; relevant judicial interpretations; and applicable coverage defenses, including asbestos exclusions.
 
Various U.S. federal proposals to solve the ongoing asbestos litigation crisis have been considered by the U.S. Congress over the years, but none have yet been enacted. The prospect of federal asbestos reform legislation remains uncertain. As a result, we have assumed a continuation of the current legal environment with no benefit from any federal asbestos reform legislation.
 
Our actuaries and claim personnel perform periodic analyses of our asbestos related exposures. The analyses during 2011 noted modest adverse developments related to a small number of accounts. Based on these developments, we increased our net asbestos loss reserves by $22 million in 2011. The analyses during 2010 and 2009 noted no significant developments that required a change in our estimate of ultimate liabilities related to asbestos claims.

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The following table presents a reconciliation of the beginning and ending loss reserves related to asbestos claims.
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Gross loss reserves, beginning of year
  $ 658     $ 728     $ 794  
Reinsurance recoverable, beginning of year
    27       39       47  
                         
Net loss reserves, beginning of year
    631       689       747  
Net incurred losses
    22              
Net losses paid
    48       58       58  
                         
Net loss reserves, end of year
    605       631       689  
Reinsurance recoverable, end of year
    22       27       39  
                         
Gross loss reserves, end of year
  $ 627     $ 658     $ 728  
                         
 
The following table presents the number of policyholders for whom we have open asbestos case reserves and the related net loss reserves at December 31, 2011 as well as the net losses paid during 2011 by component.
 
                         
    Number of
    Net Loss
    Net Losses
 
    Policyholders     Reserves     Paid  
          (in millions)  
 
Traditional defendants
    16     $ 143     $ 5  
Peripheral defendants
    349       347       43  
Future claims from unknown policyholders
            115          
                         
            $ 605     $ 48  
                         
 
Significant uncertainty remains as to our ultimate liability related to asbestos related claims. This uncertainty is due to several factors including:
 
  •  the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims;
 
  •  plaintiffs’ expanding theories of liability and increased focus on peripheral defendants;
 
  •  the volume of claims by unimpaired plaintiffs and the extent to which they can be precluded from making claims;
 
  •  the sizes of settlements related to more severely impaired plaintiffs;
 
  •  the efforts by insureds to claim the right to non-products coverage not subject to aggregate limits;
 
  •  the number of insureds seeking bankruptcy protection as a result of asbestos related liabilities;
 
  •  the ability of claimants to bring a claim in a state in which they have no residency or exposure;
 
  •  the impact of the exhaustion of primary limits and the resulting increase in claims on excess liability policies we have issued;
 
  •  inconsistent court decisions and diverging legal interpretations; and
 
  •  the possibility, however remote, of federal legislation that would address the asbestos problem.
 
These significant uncertainties are not likely to be resolved in the near future.

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Toxic Waste Reserves.  Toxic waste claims relate primarily to pollution and related cleanup costs. Our insureds have two potential areas of exposure — hazardous waste dump sites and pollution at the insured site primarily from underground storage tanks and manufacturing processes.
 
The U.S. federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) has been interpreted to impose strict, retroactive and joint and several liability on potentially responsible parties (PRPs) for the cost of remediating hazardous waste sites. Most sites have multiple PRPs.
 
Most PRPs named to date are parties who have been generators, transporters, past or present landowners or past or present site operators. These PRPs had proper government authorization in many instances. However, relative fault has not been a factor in establishing liability. Insurance policies issued to PRPs were not intended to cover claims arising from gradual pollution. Since 1986, most policies have specifically excluded such exposures.
 
Environmental remediation claims tendered by PRPs and others to insurers have frequently resulted in disputes over insurers’ contractual obligations with respect to pollution claims. The resulting litigation against insurers extends to issues of liability, coverage and other policy provisions.
 
There is substantial uncertainty involved in estimating our liabilities related to these claims. First, the liabilities of the claimants are extremely difficult to estimate. At any given waste site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly depending on a variety of factors. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved definitively in the near future.
 
Uncertainties also remain as to the Superfund law itself. Superfund’s taxing authority expired on December 31, 1995 and has not been re-enacted. Federal legislation appears to be at a standstill. At this time, it is not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry.
 
Without federal movement on Superfund reform, the enforcement of Superfund liability has occasionally shifted to the states. States are being forced to reconsider state-level cleanup statutes and regulations. As individual states move forward, the potential for conflicting state regulation becomes greater. In a few states, we have seen cases brought against insureds or directly against insurance companies for environmental pollution and natural resources damages. To date, only a few natural resource claims have been filed and they are being vigorously defended. Significant uncertainty remains as to the cost of remediating the state sites. Because of the large number of state sites, such sites could prove even more costly in the aggregate than Superfund sites.
 
In establishing our toxic waste reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider a variety of factors including: the probable liability, available insurance coverage, past settlement values of similar claims, relevant judicial interpretations, applicable coverage defenses as well as facts that are unique to each insured.
 
In each of the past three years, the analysis of our toxic waste exposures indicated that some of our insureds had become responsible for the remediation of additional polluted sites and that, as clean up standards continue to evolve as a result of technology advances, the estimated cost of remediation of certain sites had increased. Defense costs associated with some of these cases have also increased. Based on these developments, we increased our net toxic waste loss reserves by $50 million in 2011, $61 million in 2010 and $90 million in 2009.

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The following table presents a reconciliation of our beginning and ending loss reserves, net of reinsurance recoverable, related to toxic waste claims. The reinsurance recoverable related to these claims is minimal.
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Reserves, beginning of year
  $ 248     $ 215     $ 181  
Incurred losses
    50       61       90  
Losses paid
    37       28       56  
                         
Reserves, end of year
  $ 261     $ 248     $ 215  
                         
 
At December 31, 2011, $169 million of the net toxic waste loss reserves were IBNR reserves.
 
Reinsurance Recoverable.  Reinsurance recoverable is the estimated amount recoverable from reinsurers related to the losses we have incurred. At December 31, 2011, reinsurance recoverable included $139 million recoverable with respect to paid losses and loss expenses, which is included in other assets, and $1.7 billion recoverable on unpaid losses and loss expenses.
 
Reinsurance recoverable on unpaid losses and loss expenses represents an estimate of the portion of our gross loss reserves that will be recovered from reinsurers. Such reinsurance recoverable is estimated as part of our loss reserving process using assumptions that are consistent with the assumptions used in estimating the gross loss reserves. Consequently, the estimation of reinsurance recoverable is subject to similar judgments and uncertainties as the estimation of gross loss reserves.
 
Ceded reinsurance contracts do not relieve us of our primary obligation to our policyholders. Consequently, an exposure exists with respect to reinsurance recoverable to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities we believe it has assumed under the reinsurance contracts. We are selective in regard to our reinsurers, placing reinsurance with only those reinsurers who we believe have strong balance sheets and superior underwriting ability, and we monitor the financial strength of our reinsurers on an ongoing basis. Nevertheless, in recent years, certain of our reinsurers have experienced financial difficulties or exited the reinsurance business. In addition, we may become involved in coverage disputes with our reinsurers. A provision for estimated uncollectible reinsurance is recorded based on periodic evaluations of balances due from reinsurers, the financial condition of the reinsurers, coverage disputes and other relevant factors.
 
Prior Year Loss Development
 
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.

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A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years ended December 31, 2011 is as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Net loss reserves, beginning of year
  $ 20,901     $ 20,786     $ 20,155  
                         
Net incurred losses and loss expenses related to Current year
    8,174       7,245       7,030  
Prior years
    (767 )     (746 )     (762 )
                         
      7,407       6,499       6,268  
                         
Net payments for losses and loss expenses related to Current year
    2,746       2,280       1,943  
Prior years
    4,300       4,074       4,063  
                         
      7,046       6,354       6,006  
                         
Foreign currency translation effect
    67       (30 )     369  
                         
Net loss reserves, end of year
  $ 21,329     $ 20,901     $ 20,786  
                         
 
During 2011, we experienced overall favorable prior year development of $767 million, which represented 3.7% of the net loss reserves as of December 31, 2010. This compares with favorable prior year development of $746 million during 2010, which represented 3.6% of the net loss reserves at December 31, 2009, and favorable prior year development of $762 million during 2009, which represented 3.8% of the net loss reserves at December 31, 2008. Such favorable development was reflected in operating results in these respective years.
 
The following table presents the overall prior year loss development for the three years ended December 31, 2011 by accident year.
 
                         
    Calendar Year
 
    (Favorable) Unfavorable Development  
Accident Year   2011     2010     2009  
    (in millions)  
 
2010
  $ 44                  
2009
    (91 )   $ (38 )        
2008
    (181 )     (138 )   $ 62  
2007
    (184 )     (183 )     (180 )
2006
    (178 )     (139 )     (230 )
2005
    (98 )     (147 )     (299 )
2004
    (78 )     (105 )     (256 )
2003
    (19 )     (46 )     (50 )
2002
    (25 )     (33 )     (33 )
2001 and prior
    43       83       224  
                         
    $ (767 )   $ (746 )   $ (762 )
                         
 
The net favorable development of $767 million in 2011 was due to various factors. The most significant factors were:
 
  •  We experienced favorable development of about $355 million in the aggregate in the personal and commercial liability classes. Favorable development in the more recent accident years, particularly in accident years 2004 to 2009, more than offset adverse development in accident years 2001 and prior, which included $72 million of incurred losses related to asbestos and toxic waste claims. The overall frequency and severity of prior period liability claims were lower than expected and

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  the effects of underwriting changes that affected these years have been more positive than expected, especially in the commercial excess liability class. These factors were reflected in the determination of the carried loss reserves for these classes at December 31, 2011.
 
  •  We experienced overall favorable development of about $310 million in the professional liability classes other than fidelity. The most significant amount of favorable development occurred in the directors and officers liability class, particularly from our business outside the United States, with additional favorable development in the fiduciary liability class, partially offset by adverse development in the errors and omissions liability class. The aggregate reported loss activity related to accident years 2008 and prior was less than expected. As these years have become increasingly mature, and as the reported loss experience has emerged better than we expected, we have gradually decreased the expected loss ratios for these accident years. The favorable development was recognized as one among many factors in the determination of loss reserves for more current accident years. Among other important factors were the continued uncertainty surrounding the recent crisis in the financial markets and its aftermath and the general downward trend in prices in recent years.
 
  •  We experienced favorable development of about $80 million in the aggregate in the personal and commercial property classes, primarily related to the 2009 and 2010 accident years. The severity and frequency of late developing property claims that emerged during 2011 were lower than expected. Because the incidence of large property losses is subject to a considerable element of fortuity, reserve estimates for these claims are based on an analysis of past loss experience on average over a period of years. As a result, the favorable development in 2011 was recognized, but this factor had a relatively modest effect on our determination of carried property loss reserves at December 31, 2011.
 
  •  We experienced unfavorable development of about $70 million in the fidelity class due to higher than expected reported loss emergence, related to the 2010 accident year and, to a lesser extent, the 2009 accident year. Loss reserve estimates at the end of 2010 included an expectation of less prior year loss activity than actually occurred in 2011. This activity was driven by case developments on a relatively small number of large claims related to the recent economic and financial environment. This continued adverse development was reflected in the determination of carried loss reserves at December 31, 2011.
 
  •  We experienced favorable development of about $30 million in the personal automobile business due primarily to lower than expected frequency of prior year claims. This factor was reflected in our determination of carried personal automobile loss reserves at December 31, 2011.
 
  •  We experienced favorable development of about $30 million in the runoff of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
 
  •  We experienced favorable development of about $15 million in the surety business due to lower than expected loss emergence in recent accident years. Loss reserve estimates at the end of 2010 in this class included an expectation of more late reported losses than actually occurred in 2011. However, since the experience in this class is volatile and we would still expect such losses to occur over time, the favorable development in 2011 was given only modest weight in our determination of carried surety loss reserves at December 31, 2011.
 
The net favorable development of $746 million in 2010 was also due to various factors. The most significant factors were:
 
  •  We experienced overall favorable development of about $315 million in the professional liability classes other than fidelity, including about $190 million from our business outside the United States. The most significant amount of favorable development occurred in the directors and officers liability class, particularly from our business outside the United States, with additional favorable development in the fiduciary liability and employment practices liability classes, partially offset by adverse development in the errors and omissions liability class. The aggregate

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  reported loss activity related to accident years 2007 and prior was less than expected, reflecting a favorable business climate, lower policy limits and better terms and conditions.
 
  •  We experienced favorable development of about $265 million in the aggregate in the personal and commercial liability classes. Favorable development, primarily in accident years 2004 to 2008, more than offset adverse development in accident years 2000 and prior, which included $61 million of incurred losses related to toxic waste claims. The overall frequency and severity of prior period liability claims were lower than expected and the effects of underwriting changes that affected these years have been more positive than expected, especially in the commercial excess liability class.
 
  •  We experienced favorable development of about $110 million in the aggregate in the personal and commercial property classes, primarily related to the 2008 and 2009 accident years. The severity and frequency of late developing property claims that emerged during 2010 were lower than expected.
 
  •  We experienced unfavorable development of about $70 million in the fidelity class due to higher than expected reported loss emergence, mainly related to the 2009 accident year and primarily in the United States.
 
  •  We experienced favorable development of about $40 million in the personal automobile business due primarily to lower than expected frequency of prior year claims.
 
  •  We experienced favorable development of about $40 million in the surety business due to lower than expected loss emergence.
 
  •  We experienced favorable development of about $25 million in the runoff of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
 
The net favorable development of $762 million in 2009 was also due to various factors. The most significant factors were:
 
  •  We experienced favorable development of about $340 million in the professional liability classes other than fidelity, including about $110 million from our business outside the United States. A significant amount of favorable development occurred in the directors and officers liability, fiduciary liability and employment practices liability classes. We had a modest amount of unfavorable development in the errors and omissions liability class, particularly from our business outside the United States. A majority of the favorable development in the professional liability classes was in accident years 2004 through 2006. Reported loss activity related to these accident years was less than expected reflecting a favorable business climate, lower policy limits and better terms and conditions.
 
  •  We experienced favorable development of about $160 million in the aggregate in the homeowners and commercial property classes, primarily related to the 2007 and 2008 accident years. The severity of late reported property claims that emerged during 2009 was lower than expected and development on prior year catastrophe events was favorable.
 
  •  We experienced favorable development of about $150 million in the aggregate in the commercial and personal liability classes. Favorable development, primarily in accident years 2004 through 2006, was partially offset by adverse development in accident years 1999 and prior, which included $90 million of incurred losses related to toxic waste claims. The frequency and severity of prior period excess and primary liability claims have been generally lower than expected and the effects of underwriting changes that affected these years appear to have been more positive than expected.
 
  •  We experienced favorable development of about $55 million in the runoff of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.

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  •  We experienced favorable development of about $35 million in the surety business due to lower than expected loss emergence.
 
  •  We experienced favorable development of about $30 million in the personal automobile business due primarily to lower than expected severity.
 
In Item 1 of this report, we present an analysis of our consolidated loss reserve development on a calendar year basis for each of the ten years prior to 2011. The variability in reserve development over the ten year period illustrates the uncertainty of the loss reserving process. Conditions and trends that have affected reserve development in the past will not necessarily recur in the future. It is not appropriate to extrapolate future favorable or unfavorable reserve development based on amounts experienced in prior years.
 
Our U.S. property and casualty subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. These annual statements include an analysis of loss reserves, referred to as Schedule P, that presents accident year loss development information by line of business for the nine years prior to 2011. It is our intention to post the Schedule P for our combined U.S. property and casualty subsidiaries on our website as soon as it becomes available.
 
Investment Results
 
Property and casualty investment income before taxes was flat in 2011 compared with 2010 and increased by 1% in 2010 compared with 2009. In 2011, the slightly positive impact of currency fluctuation on income from our investments denominated in currencies other than the U.S. dollar was offset by the impact of lower average yields on our investment portfolio. In 2010, the impact of growth in average invested assets on investment income was substantially offset by the impact of lower average yields on our investment portfolio. In 2011 and 2010, the decrease in the average yield of our investment portfolio primarily resulted from lower reinvestment yields on fixed maturity securities that matured, were redeemed by the issuer or were sold during the year. The growth in investment income in 2011 was limited as average invested assets were similar in 2011 and 2010 as a result of substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2011 and 2010. Average invested assets increased only modestly in 2010 compared to 2009 also as a result of substantial dividend distributions made by the property and casualty subsidiaries during 2010 and 2009.
 
The effective tax rate on our investment income was 19.0% in 2011 compared with 19.1% in 2010 and 19.2% in 2009. The effective tax rate fluctuates as the proportion of tax exempt investment income relative to total investment income changes from period to period.
 
On an after-tax basis, property and casualty investment income was flat in 2011 compared to 2010 and increased by 1% in 2010 compared to 2009. The after-tax annualized yield on the investment portfolio that supports our property and casualty insurance business was 3.25% in 2011 compared with 3.29% in 2010 and 3.39% in 2009.
 
If both investment yields and average foreign currency to U.S. dollar exchange rates are similar in 2012 to 2011 year-end levels, property and casualty investment income after taxes for 2012 is expected to decline modestly. This expected decline results, in part, from the effect of investing funds from securities that matured in 2011 in securities with yields lower than the yields of the maturing securities, and the expectation that this pattern will continue in 2012. To a lesser extent, the decline is also impacted by the lower amount of average invested assets estimated to be held during 2012, based on expectations of cash flows during the year.
 
Other Income and Charges
 
Other income and charges, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was income of $21 million in 2011 compared with income of $2 million in 2010 and a loss of $3 million in 2009. The income in 2011 primarily included income from several small property and casualty insurance companies in which we have an interest.

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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 $246 million in 2011 compared with losses of $220 million and $238 million in 2010 and 2009, respectively. The higher loss in 2011 and 2009 compared to 2010 was primarily due to lower investment income in 2011 and 2009. Investment income in 2010 included a $20 million special dividend received on an equity security investment.
 
Chubb Financial Solutions
 
Chubb Financial Solutions (CFS), a wholly owned subsidiary of Chubb, participated in derivative financial instruments and has been in runoff since 2003. Since that date, CFS has terminated early or run off nearly all of its contractual obligations under its derivative contracts.
 
CFS’s aggregate exposure, or retained risk, from its remaining derivative contracts is referred to as notional amount. Notional amounts are used to calculate the exchange of contractual cash flows and are not necessarily representative of the potential for gain or loss. Notional amounts are not recorded on the balance sheet.
 
CFS’s remaining derivative contracts at December 31, 2011 included a contract linked to an equity market index that terminates in 2012 and a few other insignificant contracts. We estimate that the notional amount under the remaining contracts was about $340 million and the fair value of our future obligations was $2 million at December 31, 2011.
 
REALIZED INVESTMENT GAINS AND LOSSES
 
Net realized investment gains and losses were as follows:
 
                         
    Years Ended December 31  
    2011     2010     2009  
    (in millions)  
 
Net realized gains (losses)
                       
Fixed maturities
  $ 31     $ 72     $ 72  
Equity securities
    73       49       84  
Other invested assets
    207       316       (21 )
                         
      311       437       135  
                         
Other-than-temporary impairment losses
                       
Fixed maturities
    (1 )     (5 )     (23 )
Equity securities
    (22 )     (6 )     (89 )
                         
      (23 )     (11 )     (112 )
                         
Realized investment gains before tax
  $ 288     $ 426     $ 23  
                         
Realized investment gains after tax
  $ 187     $ 277     $ 15  
                         
 
Decisions to sell equity securities and fixed maturities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized gains and losses on the sale of these investments may vary significantly from period to period. However, such gains and losses generally have little, if any, impact on shareholders’ equity as all of these investments are carried at fair value, with the unrealized appreciation or depreciation reflected in accumulated other comprehensive income.

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The net realized gains and losses of other invested assets represent primarily the aggregate of realized gain distributions to us from the limited partnerships in which we have an interest and changes in our equity in the net assets of those partnerships based on valuations provided to us by the manager of each partnership. Due to the timing of our receipt of valuation data from the investment managers, these investments are generally reported on a one quarter lag. The net realized gains of the limited partnerships reported in 2011 reflect the strong performance of the equity and high yield investment markets in the fourth quarter of 2010 and in the first quarter of 2011. The net realized gains of the limited partnerships reported in 2010 reflected the strong performance of the equity and high yield investment markets in the fourth quarter of 2009 and for the first nine months of 2010.
 
We regularly review invested assets that have a fair value less than cost to determine if an other-than-temporary decline in value has occurred. We have a monitoring process overseen by a committee of investment and accounting professionals that is responsible for identifying those securities to be specifically evaluated for a potential other-than-temporary impairment.
 
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, prior to April 1, 2009, we considered many factors including the intent and ability to hold a security for a period of time sufficient to allow for the recovery of the security’s cost. When an impairment was deemed other than temporary, the security was written down to fair value and the entire writedown was included in net income as a realized investment loss. Effective April 1, 2009, the Corporation adopted new guidance that modified the previous guidance on the recognition and presentation of other-than-temporary impairments of debt securities. Under the new guidance, we are required to recognize an other-than-temporary impairment loss for a fixed maturity when we conclude that we have the intent to sell or it is more likely than not that we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely we will not recover the entire amortized cost value of an impaired security. Also under this guidance, 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.
 
During each of the last three years, the fair value of some of our investments declined to a level below our cost. Some of these investments were deemed to be other than temporarily impaired. The issuers of the equity securities deemed to be other than temporarily impaired in each of the last three years were not concentrated within any individual industry or sector.
 
Information related to investment securities in an unrealized loss position at December 31, 2011 and 2010 is included in Note (3)(b) of the Notes to Consolidated Financial Statements.

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CAPITAL RESOURCES AND LIQUIDITY
 
Capital resources and liquidity represent a company’s overall financial strength and its ability to generate cash flows, borrow funds at competitive rates and raise new capital to meet operating and growth needs.
 
Capital Resources
 
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At December 31, 2011, the Corporation had shareholders’ equity of $15.6 billion and total debt of $3.6 billion.
 
In November 2011, Chubb repaid $400 million of outstanding 6% notes upon maturity.
 
Chubb has outstanding $275 million of 5.2% notes due in 2013, $600 million of 5.75% notes and $100 million of 6.6% debentures due in 2018, $200 million of 6.8% debentures due in 2031, $800 million of 6% notes due in 2037 and $600 million of 6.5% notes due in 2038, all of which are unsecured.
 
Chubb also has outstanding $1.0 billion of unsecured junior subordinated capital securities that will become due on April 15, 2037, the scheduled maturity date, but only to the extent that Chubb has received sufficient net proceeds from the sale of certain qualifying capital securities. Chubb must use its commercially reasonable efforts, subject to certain market disruption events, to sell enough qualifying capital securities to permit repayment of the capital securities on the scheduled maturity date or as soon thereafter as possible. Any remaining outstanding principal amount will be due on March 29, 2067, the final maturity date. The capital securities bear interest at a fixed rate of 6.375% through April 14, 2017. Thereafter, the capital securities will bear interest at a rate equal to the three-month LIBOR rate plus 2.25%. Subject to certain conditions, Chubb has the right to defer the payment of interest on the capital securities for a period not exceeding ten consecutive years. During any such period, interest will continue to accrue and Chubb generally may not declare or pay any dividends on or purchase any shares of its capital stock.
 
In connection with the issuance of the capital securities, Chubb entered into a replacement capital covenant in which it agreed that it will not repay, redeem or purchase the capital securities before March 29, 2047, unless, subject to certain limitations, it has received proceeds from the sale of specified replacement capital securities. Subject to the replacement capital covenant, the capital securities may be redeemed, in whole or in part, at any time on or after April 15, 2017 at a redemption price equal to the principal amount plus any accrued interest on or prior to April 15, 2017 at a redemption price equal to the greater of (i) the principal amount or (ii) a make-whole amount, in each case plus any accrued interest.
 
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 2008 and 2009, the Board of Directors authorized the repurchase of up to 20,000,000 shares and 25,000,000 shares, respectively, of Chubb’s common stock. In June 2010, the Board of Directors authorized an increase of 14,000,000 shares of common stock to the authorization approved in 2009. In December 2010, the Board of Directors authorized the repurchase of up to an additional 30,000,000 shares of common stock.

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In 2009, we repurchased 22,623,775 shares of Chubb’s common stock in open market transactions at a cost of $1,065 million. In 2010, we repurchased 37,667,829 shares of Chubb’s common stock in open market transactions at a cost of $2,008 million. In 2011, we repurchased 27,582,889 shares of Chubb’s common stock in open market transactions at a cost of $1,718 million. As of December 31, 2011, 909,407 shares remained under the December 2010 share repurchase authorization. We repurchased the shares remaining under the December 2010 authorization during January 2012 at a cost of $63 million.
 
In January 2012, the Board of Directors authorized the repurchase of up to $1.2 billion of Chubb’s common stock. The authorization has no expiration date. We expect to complete the repurchase of shares under this authorization by the end of January 2013, subject to market conditions.
 
Ratings
 
Chubb and its property and casualty insurance subsidiaries are rated by major rating agencies. These ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position and ability to meet our obligations to policyholders.
 
Credit ratings assess a company’s ability to make timely payments of interest and principal on its debt. Financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders.
 
Ratings are an important factor in establishing our competitive position in the insurance markets. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed.
 
It is possible that one or more of the rating agencies may raise or lower our existing ratings in the future. If our credit ratings were downgraded, we might incur higher borrowing costs and might have more limited means to access capital. A downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.
 
Liquidity
 
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short and long term cash requirements of its business operations.
 
The Corporation’s liquidity requirements in the past have generally been met by funds from operations and we expect that in the future funds from operations will continue to be sufficient to meet such requirements. Liquidity requirements could also be met by funds received upon the maturity or sale of marketable securities in our investment portfolio. The Corporation also has the ability to borrow under its existing $500 million credit facility and we believe we could issue debt or equity securities.
 
Our property and casualty operations provide liquidity in that insurance premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. Cash receipts from operations, consisting of insurance premiums and investment income, provide funds to pay losses, operating expenses and dividends to Chubb. After satisfying our cash requirements, excess cash flows are used to build the investment portfolio with the expectation of generating increased future investment income.
 
Our strong underwriting and investment results generated substantial operating cash flows in 2011. In 2011, cash provided by the property and casualty subsidiaries’ operating activities declined compared to 2010 primarily as a result of higher loss payments partially offset by higher premium collections. Cash used by the property and casualty subsidiaries for financing activities (primarily the payment of

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dividends to Chubb) exceeded the cash provided by operating activities by approximately $650 million. In 2011, dividends paid to Chubb by the property and casualty subsidiaries increased by $500 million compared to 2010. In 2010 and 2009, our strong underwriting and investment results also generated substantial operating cash flows. In 2010, cash provided by the property and casualty subsidiaries operating activities was flat compared to 2009 and included the impact of modestly higher loss payments. The cash provided by the property and casualty subsidiaries’ operating activities exceeded the cash used for financing activities (primarily the payment of dividends to Chubb) by approximately $250 million in 2010 and $1.3 billion in 2009. In 2010, dividends paid to Chubb by the property and casualty subsidiaries increased by $1.0 billion compared to 2009.
 
Our property and casualty subsidiaries maintain substantial investments in highly liquid, short term marketable securities. Accordingly, we do not anticipate selling long term fixed maturity investments to meet any liquidity needs.
 
Chubb’s liquidity requirements primarily include the payment of dividends to shareholders and interest and principal on debt obligations. The declaration and payment of future dividends to Chubb’s shareholders will be at the discretion of Chubb’s Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.
 
As a holding company, Chubb’s ability to continue to pay dividends to shareholders and to satisfy its debt obligations relies on the availability of liquid assets, which is dependent in large part on the dividend paying ability of its property and casualty subsidiaries. The timing and amount of dividends paid by the property and casualty subsidiaries to Chubb may vary from year to year. Our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount and timing of dividends they may pay within twelve consecutive months without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders’ surplus as determined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered “extraordinary” and require prior regulatory approval. The maximum dividend distributions that the subsidiaries could have paid to Chubb during 2011, 2010 and 2009 without prior approval were approximately $2.0 billion, $1.5 billion and $1.2 billion, respectively. During 2011, 2010 and 2009 these subsidiaries paid dividends to Chubb of $2.7 billion, $2.2 billion and $1.2 billion, respectively. Included in the dividends paid in 2011 and 2010 were $2.5 billion and $1.9 billion, respectively, of dividends deemed to be extraordinary under applicable insurance regulations due to the limitation on the amount of dividends that may be paid within twelve consecutive months. Regulatory approval was required and obtained for the payment of those dividends deemed extraordinary. As a result of the timing and/or amount of the dividends paid in 2011, any dividends the property and casualty subsidiaries pay to Chubb in the first six months of 2012 also will require regulatory approval. Whether dividends paid in the remainder of 2012 will require regulatory approval will depend on the amount and timing of dividend payments by the subsidiaries to Chubb during 2012. The maximum aggregate dividend distribution that may be made by the subsidiaries to Chubb during 2012 without prior regulatory approval is approximately $1.8 billion.
 
Chubb has a revolving credit agreement with a group of banks that provides for up to $500 million of unsecured borrowings. There have been no borrowings under this agreement. Various interest rate options are available to Chubb, all of which are based on market interest rates. The agreement contains customary restrictive covenants including a covenant to maintain a minimum consolidated shareholders’ equity, as adjusted. At December 31, 2011, Chubb was in compliance with all such covenants. The revolving credit facility is available for general corporate purposes and to support our commercial paper borrowing arrangement. The agreement has a termination date of October 19, 2012. Under the agreement Chubb is permitted to request on two occasions, at any time during the remaining term of the agreement, an extension of the maturity date for an additional one year period. On the termination date of the agreement, any borrowings then outstanding become payable.

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Contractual Obligations and Off-Balance Sheet Arrangements
 
The following table provides our future payments due by period under contractual obligations as of December 31, 2011, aggregated by type of obligation.
 
                                         
          2013
    2015
             
          and
    and
    There-
       
    2012     2014     2016     after     Total  
    (in millions)  
 
Principal due under long term debt
  $     $ 275     $     $ 3,300     $ 3,575  
Interest payments on long term debt(a)
    220       418       411       2,689       3,738  
Purchase obligations(b)
    127       138       117       109       491  
Future minimum rental payments under operating leases
    71       108       58       49       286  
                                         
      418       939       586       6,147       8,090  
Loss and loss expense reserves(c)
    5,075       5,767       3,460       8,766       23,068  
                                         
Total
  $ 5,493     $ 6,706     $ 4,046     $ 14,913     $ 31,158  
                                         
 
  (a)  Junior subordinated capital securities of $1 billion bear interest at a fixed rate of 6.375% through April 14, 2017 and at a rate equal to the three-month LIBOR rate plus 2.25% thereafter. For purposes of the above table, interest after April 14, 2017 was calculated using the three-month LIBOR rate as of December 31, 2011. The table includes future interest payments through the scheduled maturity date, April 15, 2037. Interest payments for the period from the scheduled maturity date through the final maturity date, March 29, 2067, would increase the contractual obligation by $848 million. It is our expectation that the capital securities will be redeemed at the end of the fixed interest rate period.
 
  (b)  Includes agreements with vendors to purchase various goods and services such as information technology, human resources and administrative services.
 
  (c)  There is typically no stated contractual commitment associated with property and casualty insurance loss reserves. The obligation to pay a claim arises only when a covered loss event occurs and a settlement is reached. The vast majority of our loss reserves relate to claims for which settlements have not yet been reached. Our loss reserves therefore represent estimates of future payments. These estimates are dependent on the outcome of claim settlements that will occur over many years. Accordingly, the payment of the loss reserves is not fixed as to either amount or timing. The estimate of the timing of future payments is based on our historical loss payment patterns. The ultimate amount and timing of loss payments will likely differ from our estimate and the differences could be material. We expect that these loss payments will be funded, in large part, by future cash receipts from operations.
 
The above table excludes certain commitments totaling $600 million at December 31, 2011 to fund limited partnership investments. These commitments can be called by the partnerships (generally over a period of five years or less), if and when needed by the partnerships to fund certain partnership expenses or the purchase of investments. It is uncertain whether and, if so, when we will be required to fund these commitments. There is no predetermined payment schedule.
 
The Corporation does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the Corporation’s financial condition, results of operations, liquidity or capital resources, other than as disclosed in Note (13) of the Notes to Consolidated Financial Statements.

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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.
 
Limited partnership investments by their nature are less liquid and may involve more risk than other investments. We actively manage our risk through type of asset class and domestic and international diversification. At December 31, 2011, we had investments in about 85 separate partnerships. We review the performance of these investments on a quarterly basis and we obtain audited financial statements annually.
 
During 2011, cash used for financing activities exceeded cash provided by operating activities. As a result, our holdings of tax exempt fixed maturities and mortgage-backed securities both decreased slightly during the year, partly offset by a slight increase in our holdings of corporate bonds. In 2010, we invested new cash primarily in tax exempt fixed maturities and we reduced our holdings of mortgage-backed securities. In 2009, we invested new cash in tax exempt fixed maturities and taxable fixed maturities. The taxable fixed maturities we invested in were corporate bonds while we reduced our holdings of mortgage-backed securities. 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 December 31, 2011, 68% of our U.S. fixed maturity portfolio was invested in tax exempt securities compared with 67% at December 31, 2010 and December 31, 2009.
 
We classify our fixed maturity securities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, as available-for-sale. Fixed maturities classified as available-for-sale are carried at fair value.
 
Changes in the general interest rate environment affect the returns available on new fixed maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the fair value of existing fixed maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new investments but increases the fair value of existing investments, creating the opportunity for realized investment gains on disposition.
 
The net unrealized appreciation before tax of our fixed maturities and equity securities carried at fair value was $2.7 billion at December 31, 2011, $1.7 billion at December 31, 2010 and $1.6 billion at December 31, 2009. Such unrealized appreciation is reflected in accumulated other comprehensive income, net of applicable deferred income taxes.
 
In 2011, market yields on fixed maturity investments declined resulting in an increase in the fair value of many of our fixed maturity investments.

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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 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 methods and assumptions used to estimate the fair values of financial instruments are as follows:
 
Fair values for fixed maturities are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from third party 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.
 
The carrying value of short term investments approximates fair value due to the short maturities of these investments.
 
Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service.
 
We use a pricing service to estimate fair value measurements for approximately 99% of our fixed maturities. The prices we obtain from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments. At December 31, 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.
 
The methods and assumptions used to estimate the fair value of the Corporation’s pension plan and other postretirement benefit plan assets, other than assets invested in pooled funds, are similar to the methods and assumptions used for our other financial instruments. The fair value of pooled funds is based on the net asset value of the funds. At December 31, 2011 and December 31, 2010, approximately 99% of the pension plan and other postretirement benefit plan assets are categorized as Level 1 or Level 2 in the fair value hierarchy.

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PENSION AND OTHER POSTRETIREMENT BENEFITS
 
In 2011, primarily as a result of a decline in the discount rates used to value our pension and other postretirement obligations, and lower than expected return on plan assets, the liability related to our pension and other postretirement benefit plans increased. Postretirement benefit costs not recognized in net income increased by $329 million, which was reflected in other comprehensive income, net of applicable deferred income taxes.
 
In 2010, as a result of improvement in the financial markets, the fair value of the assets in our pension and other postretirement benefit plans increased. Postretirement benefit costs not recognized in net income decreased by $20 million, which was reflected in other comprehensive income, net of applicable deferred income taxes. This decline reflected the periodic amortization of net actuarial loss and prior service cost and an increase in the fair value of the assets held by our pension and other postretirement benefit plans in excess of the expected return substantially offset by actuarial losses primarily from a decrease in the discount rates used to value our pension benefit obligations.
 
As a result of improvement in the financial markets in 2009, the fair value of the assets in our pension and other postretirement benefit plans increased, improving the funded status of these plans. Postretirement benefit costs not recognized in net income decreased by $134 million, which was reflected in other comprehensive income, net of applicable deferred income taxes.
 
Employee benefits are discussed further in Note (11) of the Notes to Consolidated Financial Statements.
 
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. 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.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. Our primary exposure to market risks relates to our investment portfolio, which is sensitive to changes in interest rates and, to a lesser extent, credit quality, prepayment, foreign currency exchange rates and equity prices. We also have exposure to market risks through our debt obligations. Analytical tools and monitoring systems are in place to assess each of these elements of market risk.
 
INVESTMENT PORTFOLIO
 
Interest Rate Risk
 
Interest rate risk is the price sensitivity of a security that promises a fixed return to changes in interest rates. When market interest rates rise, the fair value of our fixed income securities decreases. We view the potential changes in price of our fixed income investments within the overall context of asset and liability management. Our actuaries estimate the payout pattern of our liabilities, primarily our

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property and casualty loss reserves, to determine their duration. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows. We set duration targets for our fixed income investment portfolios after consideration of the estimated duration of these liabilities and other factors, which allows us to prudently manage the overall effect of interest rate risk for the Corporation.
 
The following table provides information about our fixed maturity securities, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates at December 31, 2011 and 2010. Consideration is given to the call dates of securities trading above par value and the expected prepayment patterns of mortgage-backed securities. Actual cash flows could differ from the expected amounts, primarily due to future changes in interest rates.
 
                                                                 
    At December 31, 2011  
                                        Total  
                                  There-
    Amortized
    Fair
 
    2012     2013     2014     2015     2016     after     Cost     Value  
    (in millions)  
 
Tax exempt
  $ 1,813     $ 2,758     $ 2,105     $ 2,119     $ 1,970     $ 8,021     $ 18,786     $ 20,211  
Average interest rate
    4.0 %     4.1 %     4.1 %     4.1 %     4.2 %     4.3 %                
Taxable — other than mortgage-backed securities
    1,747       1,662       1,796       1,741       1,440       4,885       13,271       14,156  
Average interest rate
    4.1 %     3.9 %     4.3 %     4.2 %     3.9 %     4.8 %                
Mortgage-backed securities
    893       624       400       318       207       263       2,705       2,817  
Average interest rate
    5.0 %     5.2 %     5.1 %     5.1 %     5.0 %     4.7 %                
                                                                 
Total
  $ 4,453     $ 5,044     $ 4,301     $ 4,178     $ 3,617     $ 13,169     $ 34,762     $ 37,184  
                                                                 
 
                                                                 
    At December 31, 2010  
                                        Total  
                                  There-
    Amortized
    Fair
 
    2011     2012     2013     2014     2015     after     Cost     Value  
    (in millions)  
 
Tax exempt
  $ 1,527     $ 1,607     $ 2,855     $ 2,188     $ 2,233     $ 8,662     $ 19,072     $ 19,774  
Average interest rate
    4.1 %     4.1 %     4.1 %     4.0 %     4.1 %     4.4 %                
Taxable — other than mortgage-backed securities
    1,134       1,896       1,881       1,738       1,635       4,724       13,008       13,638  
Average interest rate
    4.2 %     4.1 %     4.0 %     4.4 %     4.1 %     4.9 %                
Mortgage-backed securities
    707       855       640       270       177       332       2,981       3,107  
Average interest rate
    4.9 %     5.1 %     5.3 %     5.2 %     5.1 %     5.1 %                
                                                                 
Total
  $ 3,368     $ 4,358     $ 5,376     $ 4,196     $ 4,045     $ 13,718     $ 35,061     $ 36,519  
                                                                 
 
At December 31, 2011, our tax exempt fixed maturity portfolio had an average expected maturity of five years. Our taxable fixed maturity portfolio had an average expected maturity of four years.

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Credit Risk
 
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We have consistently invested in high quality marketable securities. At December 31, 2011, less than 2% of our fixed maturity portfolio was below investment grade. Our investment portfolio did not have any direct exposure to either sub-prime mortgages or collateralized debt obligations.
 
Our decisions to acquire and hold specific tax exempt fixed maturities and taxable fixed maturities are primarily based on an initial and ongoing evaluation of the underlying characteristics, including credit quality, sector, structure and liquidity of the issuer, performed by our internal investment professionals. Third party credit ratings are also used by our investment professionals to help assess the relative credit quality of the issuer and manage the overall credit risk of our fixed maturity portfolio. About 99% of the third party credit ratings of our fixed maturity portfolio are obtained from Moody’s Investors Service.
 
Our tax exempt fixed maturities comprise bonds issued by states, municipalities and political subdivisions within the United States. Our holdings consist of: special revenue bonds issued by state and local government agencies; state, municipal and political subdivision general obligation bonds; and pre-refunded bonds for which an irrevocable trust containing U.S. government or government agency obligations has been established to fund the remaining payment of principal and interest.
 
Our evaluation of a special revenue bond includes analyzing key credit factors such as the structure of the revenue pledge, the rate covenant, debt service reserve fund, margin of debt service coverage and the issuer’s historic financial performance. Our evaluation of a general obligation bond issued by a state, municipality or political subdivision includes analyzing key credit factors such as the economic and financial condition of the issuer and its ability and commitment to service its debt.
 
At December 31, 2011, about 80% of our tax exempt securities were rated Aa or better with about 25% rated Aaa. The average rating of our tax exempt securities was Aa. While about 30% of our tax exempt securities were insured, the effect of insurance on the average credit rating of these securities was insignificant. The insured tax exempt securities in our portfolio have been selected based on the quality of the underlying credit and not the value of the credit insurance enhancement.
 
At December 31, 2011, about 5% of our taxable fixed maturity portfolio was invested in U.S. government and government agency and authority obligations other than mortgage-backed securities and had an average rating of Aa. About 70% of the U.S. government and government agency and authority obligations other than mortgage-backed securities were U.S. Treasury securities with an average rating of Aaa and the remainder were taxable bonds issued by states, municipalities and political subdivisions within the United States with an average rating of Aa.
 
About 38% of our taxable fixed maturity portfolio consisted of corporate bonds other than mortgage-backed securities, which were issued by a diverse group of U.S. and foreign issuers and had an average rating of A. About 60% of our corporate bonds other than mortgage-backed securities were issued by U.S. companies and about 40% were issued by foreign companies. Our foreign corporate bonds included $94 million, $45 million and $42 million issued by companies, including banks, in Italy, Spain and Ireland, respectively. We held no bonds issued by companies in Greece or Portugal.
 
At December 31, 2011, about 40% of our taxable fixed maturity portfolio was invested in foreign government and government agency obligations, which had an average rating of Aa. The foreign government and government agency obligations consisted of high quality securities, primarily issued by national governments and, to a lesser extent, government agencies, regional governments and supranational organizations. The five largest sovereign issuers within our portfolio were Canada, the United Kingdom, Germany, Australia and Brazil, which collectively accounted for about 75% of our total

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foreign government and government agency obligations. Another 7% of our total foreign government and government agency obligations were issued by supranational organizations. We held no sovereign securities issued by Greece, Portugal, Ireland or Italy and held only $13 million of sovereign securities issued by Spain. We do not hold any foreign government or government agency fixed maturities that have third party guarantees.
 
At December 31, 2011, 17% of our taxable fixed maturity portfolio was invested in mortgage-backed securities. About 95% of the mortgage-backed securities were rated Aaa. About half of the remaining 5% were below investment grade. Of the Aaa rated securities, 28% were residential mortgage-backed securities, consisting of government agency pass-through securities guaranteed by a government agency or a government sponsored enterprise (GSE), GSE collateralized mortgage obligations (CMOs) and other CMOs, all backed by single family home mortgages. The majority of our CMOs are actively traded in liquid markets. The other 72% of the Aaa rated securities were call protected, commercial mortgage-backed securities (CMBS). About 95% of our CMBS were senior securities with the highest level of subordination. The remainder of our CMBS were seasoned securities that were issued in 1998 or earlier.
 
Prepayment risk refers to the changes in prepayment patterns related to decreases and increases in interest rates that can either shorten or lengthen the expected timing of the principal repayments and thus the average life of a security, potentially reducing or increasing its effective yield. Such risk exists primarily within our portfolio of residential mortgage-backed securities. We monitor such risk regularly.
 
Foreign Currency Risk
 
Foreign currency risk is the sensitivity to foreign exchange rate fluctuations of the fair value and investment income related to foreign currency denominated financial instruments. The functional currency of our foreign operations is generally the currency of the local operating environment since business is primarily transacted in such local currency. We seek to mitigate the risks relating to currency fluctuations by generally maintaining investments in those foreign currencies in which our property and casualty subsidiaries have loss reserves and other liabilities, thereby limiting exchange rate risk to the net assets denominated in foreign currencies.
 
At December 31, 2011, the property and casualty subsidiaries held foreign currency denominated investments of $7.6 billion supporting our international operations. The principal currencies creating foreign exchange rate risk for the property and casualty subsidiaries were the Canadian dollar, the British pound sterling, the euro and the Australian dollar. The following table provides information about those fixed maturity securities that are denominated in these currencies. The table presents cash flows of principal amounts in U.S. dollar equivalents by expected maturity dates at December 31, 2011. Actual cash flows could differ from the expected amounts.
 
                                                                 
    At December 31, 2011  
                                        Total  
                                  There-
    Amortized
    Fair
 
    2012     2013     2014     2015     2016     after     Cost     Value  
    (in millions)  
 
Canadian dollar
  $ 244     $ 222     $ 229     $ 261     $ 259     $ 649     $ 1,864     $ 1,992  
British pound sterling
    170       159       328       289       156       600       1,702       1,850  
Euro
    88       205       147       190       144       484       1,258       1,317  
Australian dollar
    50       72       152       167       92       448       981       1,037  

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Equity Price Risk
 
Equity price risk is the potential loss in fair value of our equity securities resulting from adverse changes in stock prices. In general, equities have more year-to-year price variability than intermediate term high grade bonds. However, returns over longer time frames have generally been higher. Our publicly traded equity securities are high quality, diversified across industries and readily marketable. A hypothetical decrease of 10% in the market price of each of the equity securities held at December 31, 2011 and 2010 would have resulted in a decrease of $151 million and $155 million, respectively, in the fair value of the equity securities portfolio.
 
All of the above risks are monitored on an ongoing basis. A combination of in-house systems and proprietary models and externally licensed software are used to analyze individual securities as well as each portfolio. These tools provide the portfolio managers with information to assist them in the evaluation of the market risks of the portfolio.
 
DEBT
 
Interest Rate Risk
 
We also have interest rate risk on our debt obligations. The following table presents expected cash flow of principal amounts and related weighted average interest rates by maturity date of our long term debt obligations at December 31, 2011.
 
                                                                 
    At December 31, 2011  
                                  There-
          Fair
 
    2012     2013     2014     2015     2016     after     Total     Value  
    (in millions)  
 
Expected cash flows of principal amounts
  $     $ 275     $     $     $     $ 3,300     $ 3,575     $ 4,085  
Average interest rate
          5.2 %                       6.2 %                
 
Item 8.   Consolidated Financial Statements and Supplementary Data
 
Consolidated financial statements of the Corporation at December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 and the report thereon of our independent registered public accounting firm, and the Corporation’s unaudited quarterly financial data for the two-year period ended December 31, 2011 are listed in Item 15(a) of this report.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
As of December 31, 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 December 31, 2011.
 
During the three month period ended December 31, 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.

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Management’s Report on Internal Control over Financial Reporting
 
Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Corporation’s internal control over financial reporting was designed under the supervision of and with the participation of the Corporation’s management, including Chubb’s chief executive officer and chief financial officer, to provide reasonable assurance regarding the reliability of the Corporation’s financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management conducted an assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that, as of December 31, 2011, the Corporation’s internal control over financial reporting is effective.
 
The Corporation’s internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Corporation’s consolidated financial statements. Their attestation report on the Corporation’s internal control over financial reporting is shown on page 72.
 
Item 9B.  Other Information
 
None.

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Report of Independent Registered Public Accounting Firm
 
Ernst & Young LLP
5 Times Square
New York, New York 10036
 
The Board of Directors and Shareholders
The Chubb Corporation
 
We have audited The Chubb Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Chubb Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, The Chubb Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Chubb Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2011, and our report dated February 27, 2012 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
February 27, 2012

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PART III.
 
Item 10.  Directors, Executive Officers and Corporate Governance
 
Information regarding Chubb’s directors is incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders under the caption “Our Board of Directors.” Information regarding Chubb’s executive officers is included in Part I of this report under the caption “Executive Officers of the Registrant.” Information regarding Section 16 reporting compliance of Chubb’s directors, executive officers and 10% beneficial owners is incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Information regarding Chubb’s Code of Ethics for CEO and Senior Financial Officers is included in Item 1 of this report under the caption “Business — General.” Information regarding the Audit Committee of Chubb’s Board of Directors and its Audit Committee financial experts is incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders under the captions “Corporate Governance — Audit Committee,” “Audit Committee Report” and “Committee Assignments.”
 
Item 11.  Executive Compensation
 
Incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders, under the captions “Corporate Governance — Compensation Committee Interlocks and Insider Participation,” “Corporate Governance — Directors’ Compensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis” and “Executive Compensation.”
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence
 
Incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders, under the captions “Corporate Governance — Director Independence,” “Corporate Governance — Related Person Transactions” and “Certain Transactions and Other Matters.”
 
Item 14.  Principal Accountant Fees and Services
 
Incorporated by reference from Chubb’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders, under the caption “Proposal 2: Ratification of Appointment of Independent Auditor.”
 
PART IV.
 
Item 15.  Exhibits, Financial Statements and Schedules
 
The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report.
 
 
The exhibits listed in the accompanying index to exhibits are filed as part of this report.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
The Chubb Corporation
            (Registrant)
February 23, 2012
 
       By 
/s/  John D. Finnegan
(John D. Finnegan Chairman, President and
Chief Executive Officer)
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
         
Signature   Title   Date
 
         
         
         
/s/  John D. Finnegan

(John D. Finnegan)
 
Chairman, President, Chief
Executive Officer and
Director
  February 23, 2012
         
         
         
/s/  Zoë Baird Budinger

(Zoë Baird Budinger)
 
Director
  February 23, 2012
         
         
         
/s/  Sheila P. Burke

(Sheila P. Burke)
 
Director
  February 23, 2012
         
         
         
/s/  James I. Cash, Jr.

(James I. Cash, Jr.)
 
Director
  February 23, 2012
         
         
         
/s/  Lawrence W. Kellner

(Lawrence W. Kellner)
 
Director
  February 23, 2012
         
         
         
/s/  Martin G. McGuinn

(Martin G. McGuinn)
 
Director
  February 23, 2012
         
/s/  Lawrence M. Small

(Lawrence M. Small)
 
Director
  February 23, 2012
         
/s/  Jess Søderberg

(Jess Søderberg)
 
Director
  February 23, 2012

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Signature   Title   Date
 
/s/  Daniel E. Somers

(Daniel E. Somers)
 
Director
  February 23, 2012
         
/s/  James M. Zimmerman

(James M. Zimmerman)
 
Director
  February 23, 2012
         
/s/  Alfred W. Zollar

(Alfred W. Zollar)
 
Director
  February 23, 2012
         
/s/  Richard G. Spiro

(Richard G. Spiro)
 
Executive Vice President and
Chief Financial Officer
  February 23, 2012
         
/s/  John J. Kennedy

(John J. Kennedy)
 
Senior Vice President and
Chief Accounting Officer
  February 23, 2012

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THE CHUBB CORPORATION
 
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 
(Item 15(a))
 
             
        Form 10-K
        Page
 
         
    F-2  
         
    F-3  
         
    F-4  
         
    F-5  
         
    F-6  
         
    F-7  
         
    F-8  
         
Supplementary Information (unaudited)
       
         
    F-43  
         
Schedules:
       
             
      S-1  
             
      S-2  
             
      S-5  
 
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
              

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Ernst & Young LLP
5 Times Square
New York, New York 10036
 
The Board of Directors and Shareholders
The Chubb Corporation
 
We have audited the accompanying consolidated balance sheets of The Chubb Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Chubb Corporation at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Chubb Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2012 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
February 27, 2012

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THE CHUBB CORPORATION
 
                             
    In Millions,
 
    Except For Per Share Amounts
 
    Years Ended December 31  
    2011       2010       2009  
Revenues
                           
Premiums Earned
  $ 11,644       $ 11,215       $ 11,331  
Investment Income
    1,644         1,665         1,649  
Other Revenues
    9         13         13  
Realized Investment Gains (Losses), Net
                           
Total Other-Than-Temporary Impairment Losses on Investments
    (22 )       (6