Understanding the Business Through

Reformulated Financial Statements:

Chubb Corporation
Chubb Corporation is a property and casualty insurance holding company providing insur­ance through its
subsidiaries in the United States, Canada, Europe, and parts of Latin America and Asia. Its subsidiaries include
Federal, Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity, and Texas Pacific
Indemnity insurance companies.
The insurance operations are divided into three business units. Chubb Commercial Insurance offers a full
range of commercial customer insurance products, including cover­age for multiple peril, casualty, workers'
compensation, and property and marine. Chubb Commercial Insurance writes policies for niche business through
agents and brokers. Chubb

Specialty Insurance offers a wide variety of specialized executive protection and profes­
sional liability products for privately and publicly owned companies, financial institutions,
professional firms, and health care organizations. Chubb Specialty Insurance also includes
surety and accident businesses, as well as reinsurance through Chubb Re. Chubb Personal
Insurance offers products for individuals with fine homes, automobiles, and possessions
who require more coverage choices and higher litnits than standard insurance policies.
Chubb's balance sheets for 2009 and 2010 are in Exhibit 10.16. Its 2010 comparative
income statement is also given, along with a statement ofcomprehensive income that Chubb
reports outside both the equity statement and the income statement. You are asked to refor­
mulate these statements in a way that captures how Chubb carries out its business operations
and that reveals the profitability of those operations. The statutory tax rate is 35 percent, but
note that the effective tax rate on investment income is only 19. l percent because much of it
is interest on tax-exempt bonds.
First you should understand how insurers "make money." Insurance companies run un­
derwriting operations where they write insurance policies and processes and pay claims on

EXHIBIT 10.16 THE CHUBB CORPORATION

Balance Sheet, Balance Sheet
Income Statement, (in millions of dollars)
and Comprehensive
Income Statement December 31
for Chubb 2010 2009
Corporation, 2010 Assets
Invested assets
Short term investments $ 1,905 $ 1,918
Fixed maturities
Tax exempt (cost $19,072 and $18,720) 19,774 19,587
Taxable (cost $15,989 and$ 16,470) 16,745 16,991
Equity securities (cost $1,285 and $1,215) 1,550 1,433
Other invested assets 2,239 2,075
Total invested assets 42,213 42,004
Cash 70 51
Accrued investment income 447 460
Premiums receivable 2,098 2,101
Reinsurance recoverable on unpaid losses and loss expenses 1,817 2,053
Prepaid reinsurance premiums 325 308
Deferred policy acquisition costs 1,562 1,533
Deferred income tax 98 272
Goodwill 467 467
Other assets 1,152 1,200
Total assets $50,249 $50,449
Liabilities
Unpaid losses and loss expenses $22,718 $22,839
Unearned premiums 6,189 6,153
Long term debt 3,975 3,975
Dividend payable to shareholders 112 118
Accrued expenses and other liabilities 1,725 1,730
Total liabilities ---
34,719 34,815
EXHIBIT 10.16
(continued)

THE CHUBB CORPORATION

Balance Sheet
(in millions of dollars}

December 31
2010 2009
Commitments and contingent liabilities (Note 6 and 13)
Shareholders' equity
Preferred stock-authorized 8,000,000 shares;
$1 par value; issued-none
Common stock-authorized 1,200,000,000 shares;
$1 par value; issued 371,980,460 shares 372 372
Paid-in surplus 208 224
Retained earnings 17,943 16,235
Accumulated other comprehensive income 790 720
Treasury stock, at cost-74,707,547 and 39,972,796 shares (3,783}
Total shareholders' equity 15,530 15,634
Total liabilities and shareholders' equity $ 50,249 $ 50,449

Consolidated Statements of Income (in

millions of dollars}

Years Ended December 31

2010 2009 2008
Revenues
Premiums earned $11,215 $11,331 $11,828
Investment income 1,665 1,649 1,732
Other revenues 13 13 32
Realized investment gains (losses), net
Total other-than-temporary impairment
losses on investments (6) (132) (446)
Other-than-temporary impairment losses
on investments recognized in other
comprehensive income (5) 20
Other realized investment gains, net 437
---
135 75
Total realized investment gains (losses), net 426 23 (371)
Total revenues 13,319 13,016 13,221
Losses and expenses
Losses and loss expenses 6,499 6,268 6,898
Amortization of deferred policy acquisition costs 3,067 3,021 3,123
Other insurance operating costs and expenses 425 416 441
Investment expenses 35 39 32
Other expenses 15 16 36
Corporate expenses 290 294 284
Total losses and expenses 10,331 10,054 10,814
Income before federal and foreign income tax 2,988 2,962 2,407
Federal and foreign income tax 814 779 603
Net income $ 2,174 $ 2,183 $ 1,804
Net income per share
--- ---
Basic $ 6.81 $ 6.24 $ 5.00
Diluted 6.76 6.18 4.92

(continued)
EXHIBIT 10.16 Consolidated Statements of Comprehensive Income (in
(concluded) millions of dollars)

Year Ended December 31

2010 2009 2008
Net income $2. 174
Other comprehensive income
(loss), net of tax
Change in unrealized appreciation or
depreciation of investments 69 1,223 (669)
Change in unrealized other-than-temporary
impairment losses on investments 7 (6)
Foreign currency translation gains (losses) (18) 170 (226)
Change in postretirement benefit costs
not yet recognized in net income 12 98 (284)
---
70 � (1,179)
Comprehensive income $2,244 $3,668 $625

those policies. They are also involved in investment operations where they manage invest-
ments in which the considerable "float" from insurance operations is invested. Accordingly,
you see both investment assets and liabilities on the balance sheet as well as assets and lia-
bilities associated with insurance. You also see revenues and expenses associated with
both activities in the income statement. Your reformulation should separate the items
identified with the two activities.

Performe full analysis of the financial statements.