chubb Annual Report 2006

THE CHUBB CORPORATION

Annual Report 2006


Annual Report 2006

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THE CHUBB CORPORATION15 Mountain View Road, P.O. Box 1615Warren, New Jersey 07061-1615Telephone (908) 903-2000www.chubb.com

Chubb celebrates its 125th anniversary in 2007.

In 1882, Thomas Caldecot Chubb and his son

Percy opened a marine underwriting business in

the seaport district of New York City. The Chubbs

were adept at turning risk into success, often by

helping policyholders prevent disasters before they

occurred. By the turn of the century, Chubb had

established strong relationships with the insurance agents and brokers who

placed their clients’ business with Chubb underwriters.

“Never compromise integrity,” a Chubb principle, captures the spirit

of our company. Each member of the Chubb organization seeks to satisfy

customers by bringing quality, fairness and integrity to each transaction.

The Chubb Corporation was formed in 1967 and was listed on the

New York Stock Exchange in 1984. Today, Chubb stands among the largest

property and casualty insurers in the world. Chubb’s 10,800 employees

serve customers from offices in North America, South America, Europe

and Asia (see page 8).

The principles of financial stability, product innovation and excellent

service combined with the high caliber of our employees have been the

mainstays of our organization for 125 years.

Contents

1 Letter to Shareholders

8 Chubb Worldwide Locations

9 Excelling for Customers and Producers

26 Employee Profiles

28 Corporate Directory

31 Form 10-K

On the cover: Chubb is proud to insure the owner of Fallingwater, Frank

Lloyd Wright’s most famous residential masterpiece. See pages 10–11.

T h e C h u b b C o r p o r a t i o n

Stock ListingThe common stock of the Corporation

is traded on the New York Stock

Exchange under the symbol CB.

Dividend Agent, TransferAgent and RegistrarComputershare Trust Company, N.A.

P.O. Box 43069

Providence, RI 02940-3069

Telephone (800) 317-4445

Company Code 1816

www.computershare.com

SEC and NYSE CertificationsChubb has included as exhibits to its

Annual Report on Form 10-k for the

year ended December 31, 2006 filed

with the Securities and Exchange

Commission certificates of its Chief

Executive Officer and Chief Financial

Officer certifying the quality of

Chubb’s internal controls over

financial reporting and disclosure

controls. Chubb has submitted to

the New York Stock Exchange (NYSE)

a certificate of its Chief Executive

Officer certifying that he is not

aware of any violation by Chubb of

the NYSE’s corporate governance

listing standards.

The Chubb Corporation15 Mountain View Road, P.O. Box 1615

Warren, New Jersey 07061-1615

Telephone (908) 903-2000

www.chubb.com

Photography Randy Duchaine, Peter Vidor, Greg Leshé, Joseph Lynch and David Levenson.

Subsidiaries

Property and Casualty Insurance

Federal Insurance Company

Vigilant Insurance Company

Great Northern Insurance Company

Pacific Indemnity Company

Northwestern Pacific Indemnity Company

Texas Pacific Indemnity Company

Executive Risk Indemnity Inc.

Executive Risk Specialty Insurance Company

Chubb Custom Insurance Company

Chubb Indemnity Insurance Company

Chubb Insurance Company of New Jersey

Chubb National Insurance Company

Chubb Atlantic Indemnity, Ltd.

Chubb Insurance Company of Australia, Limited

Chubb Insurance Company of Canada

Chubb Insurance Company of Europe, S.A.

Chubb Argentina de Seguros, S.A.

Chubb do Brasil Companhia de Seguros

Chubb de Colombia Compañía de Seguros S.A.

Chubb de Chile Compañía de Seguros Generales S.A.

Chubb de Mexico, Compania Afianzadora, S.A. de C.V.

Chubb de Mexico, Compania de Seguros, S.A. de C.V.

Property and Casualty Insurance Underwriting Managers

Chubb Custom Market, Inc.

Chubb Multinational Managers Inc.

Reinsurance

Harbor Island Indemnity Ltd.

Consulting — Claims Administration — Services

Chubb Services Corporation

Insurance Agency

Chubb Insurance Solutions Agency, Inc.

Licensing Services

Chubb Licensing Services LLC

C

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UBB & SO

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5 th AN NIVERSARY

1882 2007

D e a r F e l l o w S h a r e h o l d e r :

I am pleased to report that 2006 was a great year for Chubb — in fact,

its best year ever. Net income grew to $2.5 billion from $1.8 billion in

2005, and net income per share grew to $5.98 from $4.47. Operating

income, which we define as net income excluding realized investment

gains and losses, increased 50% to $2.4 billion from $1.6 billion in 2005,

and operating income per share increased 45% to $5.60 from $3.87. These

2006 results set all-time records for Chubb, comfortably exceeding those

John D. Finnegan, Chairman, President and Chief Executive Officer

Net Income per Share

0

1

2

3

4

5

6 $5.98

$4.01

2002 2003 2004 2005 2006

$4.47

$0.64

$2.23

L e t t e r t o S h a r e h o l d e r s

2

previously set in 2005. I am particularly pleased that our return on equity

reached 18.5%.

In 2006, net written premiums declined 3% to $12 billion, reflecting

the impact of the transfer of our ongoing reinsurance assumed business

to Harbor Point in December 2005. Premiums for the insurance business

actually grew 2%; premiums for the reinsurance assumed business

declined 57%.

Property and casualty investment income after taxes increased 10%

to $1.2 billion in 2006 from $1.1 billion in 2005, reflecting strong cash

flow from investments and from underwriting income.

The combined loss and expense ratio for 2006 improved

8.1 percentage points to 84.2% from 92.3% in 2005. The expense

ratio was 29.0% in 2006 and 28.0% in 2005. While we benefited from

substantially lower catastrophe losses in 2006 compared to 2005

(1.4 percentage points vs. 5.6 points), the combined ratio also improved

3.9 points excluding catastrophes. This remarkable result reflects

outstanding performance by all three units of our insurance business,

each of which increased its profitability in 2006.

Chubb Personal Insurance net written premiums grew 6% to

$3.5 billion. CPI’s combined ratio improved to 81.7% from 86.6% in

2005. Excluding the impact of catastrophes, CPI’s combined ratio

improved to 78.0% from 80.1%.

These excellent results were driven by Homeowners insurance,

which grew net written premiums by 8% and had a combined ratio of

Our 2006 results set all-

time records for Chubb,

comfortably exceeding

those previously set

in 2005.

Combined Loss & Expense RatioPercentage of premium dollars spent on claims and expenses

84%

88%

92%

96%

100%

104%

108%

92.3%

2002 2003 2004 2005 200684.2%

92.3%

106.7%

98.0%

3

74.6%. Our Masterpiece® policy remains the gold standard in the affluent

market to which we cater. Some competitors, lured by these attractive

returns, have attempted to copy our innovative, broad coverages, but

they haven’t even come close to attaining Chubb’s 125-year reputation

for equitable and prompt claim service. We remain the insurer of choice

for knowledgeable high-net-worth customers — and for their agents

and brokers.

The Personal Automobile line grew 4% and had a combined ratio of

90.4%. Other personal lines, which include personal excess liability, yacht

and accident insurance, grew 4% and had a combined ratio of 98.6%.

Chubb Commercial Insurance net written premiums grew 2% to

$5.1 billion. The combined ratio improved to 83.1% from 92.4% in 2005.

Excluding the impact of catastrophes, the combined ratio improved to

82.5% from 84.1% in 2005.

Our Masterpiece® policyremains the goldstandard in the affluentmarket to which wecater. We remain theinsurer of choice forknowledgeable high-net-worth customers —and for their agentsand brokers.

John J. Degnan, Vice Chairman and Chief Administrative Officer

Thomas F. Motamed, Vice Chairman andChief Operating Officer

Michael O’Reilly, Vice Chairman and Chief Financial Officer


4

The Multiple Peril, Workers Compensation and Property & Marine

lines were all more profitable than in 2005, an outstanding result in a very

competitive marketplace.

Chubb Specialty Insurance net written premiums declined 3% in

2006 to $2.9 billion. The combined ratio improved by 9.8 percentage

points to 87.5% from 97.3% in 2005.

Professional Liability had a 6% decline in premiums and a combined

ratio of 91.8%, an improvement of 8 percentage points over 2005,

reflecting less adverse loss development stemming from the Wall Street

and corporate accounting scandals of 2000-2002 and favorable

development in the more recent years. Excluding the hospital medical

malpractice and managed care errors & omissions businesses which CSI

exited in July 2005, Professional Liability premiums declined 2%. Surety

had premium growth of 23%, due in part to the nonrenewal of a

reinsurance treaty, and a combined ratio of 44.2%.

Professional Liability’s progress to profitability has been nothing

short of amazing. After several years of losses, Chubb Specialty Insurance

successfully navigated a sea-change in its portfolio of business, with a new

emphasis on middle-market clients. The combined ratio improved in each

of the eight quarters of 2005 and 2006.

The characteristically cyclical market for both commercial and

specialty insurance reflected heightened competitive activity in 2006,

which is continuing in 2007. In the race for market share and top-line

growth, some insurers sacrifice profitability by being overly zealous in

Professional Liability’sprogress to profitabilityhas been nothing shortof amazing. Thecombined ratioimproved in each of the eight quarters of2005 and 2006.

Shareholders’ Equity($ in billions)

2000

4400

6800

9200

11600

14000$13.9

$10.1

2002 2003 2004 2005 2006

$12.4

$6.8

$8.5

5

cutting rates and liberalizing policy terms and conditions, which equates to

selling more product for the same or less money.

At Chubb, however, we will not sacrifice underwriting profitability

for top-line growth. We want to be the most profitable insurer, not the

one that writes the most premiums. Our underwriting philosophy can be

stated in simple terms:

• First, we strive for superior risk selection in those segments and

geographies where we have a skill set that is valued by our

producers and their clients. We do not attempt to be all things

to all people.

• Second, we price the product for the individual exposure

including inflationary trends, and we do not chase irresponsible

pricing.

• Third, we manage terms and conditions, and we avoid throwing

in additional coverage and limits simply to retain accounts.

• Fourth, we continually evaluate the overall rate need of each class

of business based upon its accident year performance, adjusted to

the conditions expected for the year ahead.

• Fifth and most important, we operate on the premise that

premium growth does not drive earnings and therefore should

be pursued only when it can generate underwriting profit.

These basic principles do not sound like rocket science, and they are

not; in fact, they seem quite obvious. However, much discipline is required

to implement them and constant vigilance to sustain them. This approach

We strive for superiorrisk selection in thosesegments andgeographies where wehave a skill set that isvalued by our producersand their clients. We donot attempt to be allthings to all people. Weoperate on the premisethat premium growthdoes not drive earningsand therefore should bepursued only when itcan generateunderwriting profit.


6

takes a lot of effort, but it has served us well.

During the years 2003 through 2006 — four consecutive years of

record earnings — Chubb shareholders enjoyed a compound average

annual return of 22%, including stock price appreciation and dividends.

Book value per common share increased at a compound average annual

rate of 14% over the same period.

Beyond the numbers, 2006 was a year of many accomplishments for

Chubb. Among them:

• We successfully resolved the investigations led by former New

York Attorney General Eliot Spitzer, with no fine or apology

required of us, in recognition of the finding of independent

investigators that Chubb did not engage in the illegal bid-rigging

activity that had resulted in guilty pleas by employees of other

insurance companies and brokers and fines for those companies

and brokers;

• We pioneered a new guaranteed supplemental compensation

system to replace contingent commissions. The new system has

been very favorably received by our independent agents and

brokers, many of whom have told us they hope it will become

the model for the industry; and

• We executed our capital management strategy by raising the

dividend 16%, splitting the stock 2 for 1, completing the share

buyback authorized in 2005 and initiating a new repurchase

program. During 2006, we repurchased a total of 25.4 million

During the years 2003through 2006 — fourconsecutive years ofrecord earnings —Chubb shareholdersenjoyed a compoundaverage annual returnof 22%, including stockprice appreciation anddividends.

Market Value at Year End($ in billions)

0

5

10

15

20

25

$14.8

2002 2003 2004 2005 2006

$20.4$21.8

$8.9

$12.8

7

shares of our common stock at a total cost of $1.3 billion. All

per-share amounts in this report have been adjusted to reflect

the split.

In addition, we received a number of honors that demonstrate the

kind of values we espouse. In January 2006, we won the Catalyst Award

for developing an inclusive environment and expanded opportunities for

women; we were named by Fortune to its list of the “Most Admired

Companies”; and we were listed as one of the best companies for Latinas,

one of the best companies for gays, one of the best employers in Canada

and the insurer in Singapore with the best claim service. In January 2007,

Forbes listed Chubb as one of America’s 400 best companies.

Above all, we validated our focus-and-execution strategy,

demonstrating for the fourth consecutive year that focusing on core

competencies and executing our underwriting strategy and expense control

initiatives can produce outstanding results for shareholders.

2006 was a year of achievement for Chubb, and 2007 should be

another great year. I am grateful to our employees for their superior efforts

which produced these results and to our customers, agents and brokers for

their ongoing support.

John D. FinneganChairman, President and Chief Executive Officer

March 2, 2007

We validated our focus-and-execution strategy,demonstrating for thefourth consecutive yearthat focusing on corecompetencies andexecuting our under-writing strategy andexpense controlinitiatives can produceoutstanding results forshareholders.


C h u b b Wo r l d w i d e L o c a t i o n s

UNITED STATES

Mid-AtlanticBaltimore, MDChesapeake, VAFlorham Park, NJHarrisburg, PANew York, NYPhiladelphia, PAPittsburgh, PARichmond, VAWashington, DCWhitehouse Station, NJ

NortheastAlbany, NYBoston, MALong Island, NYNew Haven, CTPortsmouth, NHRochester, NYSimsbury, CTWestchester, NY

WestDenver, COLos Angeles, CANewport Beach, CAPhoenix, AZPleasanton, CAPortland, ORSalt Lake City, UTSan Diego, CASan Francisco, CASeattle, WA

NorthChicago, ILCincinnati, OHCleveland, OHColumbus, OHDes Moines, IAGrand Rapids, MIIndianapolis, INItasca, ILKansas City, MOLouisville, KYMilwaukee, WIMinneapolis, MNSt. Louis, MOTroy, MI

SouthAtlanta, GAAustin, TXBirmingham, ALCharlotte, NCColumbia, SCDallas, TXHouston, TXJackson, MSMaitland, FLNashville, TNRaleigh, NCSan Antonio, TXSunrise, FLTampa, FLTulsa, OK

CANADACalgary, ABMontréal, PQToronto, ONVancouver, BC

BERMUDAHamilton

LATIN AMERICAArgentinaBuenos Aires

BrazilBelo HorizonteBrasiliaCuritibaPorto AlegreRio de JaneiroSão Paulo

ChileSantiago

ColombiaBarranquillaBogotáCaliMedellín

MéxicoGuadalajaraMéxico CityMonterrey

EUROPEAustriaVienna

BelgiumBrussels

DenmarkCopenhagen

FranceBordeauxLilleLyonNantesParis

GermanyDüsseldorfHamburgMunich

IrelandDublin

ItalyMilan

NetherlandsAmsterdam

NorwayOslo

SpainBarcelonaMadrid

SwedenStockholm

SwitzerlandZurich

United KingdomBelfastBirminghamGlasgowLeedsLondonManchesterReading

ASIA/PACIFICAustraliaBrisbaneMelbournePerthSydney

ChinaBeijingHong KongShanghai

IndiaMumbaiNew Delhi

JapanTokyo

KoreaSeoul

SingaporeTaiwanTaipei

ThailandBangkok

Worldwide Headquarters: Warren, NJ

8

9

NOW IN ITS 125TH YEAR AS A PROPERTY AND CASUALTY INSURER,

Chubb owes much to Percy Chubb’s simple but elegant formula

for success. Since 1882, when we began serving customers as a marine

underwriting business in New York City’s seaport district, Chubb has

prospered by selecting risks carefully, paying losses fairly and never

compromising our integrity.

Our principled approach to risk assumption has produced a company

that can be trusted to keep its promises, even in the most extraordinary

circumstances. What we viewed as the right course of action in June 1938,

when Percy Chubb II organized a pool of insurers to cover war risks involving

American imports and exports, informed our view of the right course of action

in September 2001. Following the attack on the World Trade Center, Chubb

was the first insurer to announce that although our policies contained a war

exclusion, we would not seek to apply it. The decisions we make in

responding to routine losses, while clearly less momentous, are similarly guided

by a distinction between what we have a right to do, and what is right to do.

The company’s longevity and stability are due in no small part to our

enduring financial strength and commitment to advance the interests of both

our customers and shareholders. Our efforts to generate an attractive return

for investors continue to benefit from the wisdom of the early partners, who

advised that we “recognize the usefulness and necessity of innovation, but

never neglect what we have for what we think that we can get.”

And innovate we have. The cargo ship risks of Thomas and Percy

Chubb’s era have given way to a growing array of global property and casualty

risks unimaginable at the time the company was founded. When we celebrate

our anniversary in April 2007, we will do so in some 120 offices in

29 countries worldwide. While undeniably diverse, we are bound by a shared

pride in our association with a company that has stood strong for 125 years.

We take great satisfaction in knowing that our customers and producers —

some of whom are profiled on the following pages — are proud of that

association as well.

The way to success is to select good risks and cover them.Obviously this does not lead to great size,but it should produceprofitable business.

Percy Chubb, 1857-1930

Excelling for Customers and Producers

NEGOTIATING THE DELICATE RELATIONSHIP BETWEEN HUMANS AND NATURE IS ALL IN A DAY’S WORK FOR THE

Western Pennsylvania Conservancy (WPC). Since its founding as a nonprofit institution in 1932, the WPC

has protected more than 212,000 acres of the region’s natural habitats, some of which are now publicly owned parks,

forests and gamelands enjoyed by millions of residents and tourists.

In 1963, the WPC was presented with a unique opportunity when the son of Edgar and Liliane Kaufmann

donated Fallingwater, the weekend retreat designed for them by Frank Lloyd Wright in 1935. A national historic

landmark, Fallingwater was named the best all-time work of American architecture by the American Institute of

Architects and one of National Geographic magazines’s “Places of a Lifetime.” Fallingwater has been toured by more

than 4 million visitors since opening in 1964. The Conservancy is responsible for ensuring that this architectural

masterpiece exists in harmony with the surrounding ecosystem.

“We know that the Conservancy represents an unusual insurance risk, but the blanket coverage provided by

Chubb’s Cultural Institutions and Museums policy meets our needs perfectly,” says Mike Augustine, Vice President of

Administration and Finance for the Western Pennsylvania Conservancy. While the WPC is a commercial account,

Fallingwater was designed as a private residence, and the original furniture, fine art, textiles and books belonging to

the Kaufmann family remain on view. “Early on, Chubb Personal Insurance loaned us an appraiser who specialized in

one-of-a-kind houses,” explains Paul Deibert, Chubb’s Senior Commercial Underwriter in Pittsburgh. “He had

worked previously with the Frank Lloyd Wright Foundation and had actually appraised several of Wright’s

structures.”

For Walter R. Sapp, president of Daniell Sapp Boorn Associates insurance agency, Chubb’s “can do” approach

translates to real value. “In addition to property and casualty insurance, Chubb also provides the WPC with several

specialty coverages. Utilizing expertise from the personal lines department to assist with a unique commercial

building valuation is typical of the service that distinguishes Chubb from other carriers.”

10

Western Pennsylvania Conservancy

Photo at right: In the living room of Frank Lloyd Wright’smasterpiece, Fallingwater, isMichael E. Augustine, VicePresident, Administration andFinance, Western PennsylvaniaConservancy.

Photo at left: Pictured on the grounds of Fallingwater are(from left) Victor A. Dorazio,CPCU, ARM, Vice President ofCommercial Lines, and Walter R.Sapp, President, both of DaniellSapp Boorn Associates, Inc.; andPaul Deibert, Senior CommercialInsurance Specialty Underwriter,and Dana Dragotto, CommercialInsurance Specialty PracticeLeader, both of Chubb’s Pittsburghbranch.

11111111

WHEN THE COLLEGE KNOWN TODAY AS

School of Visual Arts (SVA) opened

its doors in 1947 as the Cartoonists and

Illustrators School, it did so with only three

faculty members and 35 students. The college

was renamed in 1956 and has since grown to

become one of the largest independent,

accredited art colleges in the United States.

Widely recognized as a leader in the education of

students who aspire to become working artists,

SVA is integral not only to New York City’s

professional art and design community but to its

cultural life overall.

The campus includes classrooms,

dormitories, galleries, a library, photo labs and

computer centers located in buildings in

midtown and lower Manhattan. Because many

are older structures originally used for other

purposes, the campus presents unusual and

often challenging property and liability

exposures. “The safety of SVA’s 3,500 students

has always been a top priority for the school’s

leadership,” says Gary Smith of the SCS

Agency, Chubb’s producer on this account.

Underwriter Kevin Guinan of Chubb’s Long

Island office has made it his priority as well.

“Gary and I have worked closely with SVA’s

heads of security, facility management, student

life, and building and grounds departments to significantly reduce the potential for life hazards and large property

losses on the campus,” says Kevin. In addition to retrofitting the college’s 17-story Lexington Avenue dormitory with

automatic sprinklers and central station monitoring, recent loss prevention efforts have included the certification of

fire safety directors at all dormitory locations.

David Rhodes, President of SVA, places a high value on the commitment demonstrated by his agent and

carrier. “Gary Smith’s uncle Bob and father Dan secured coverage for the college back when my father Silas was its

director in 1947, and Chubb has been our carrier for more than 20 years. What we’ve gained during that time is the

peace of mind that comes from knowing that our insurance team takes a personal interest in providing us with the

best protection available. It’s hard to put a price on that.”

Photo at right: David Rhodes, President, School of Visual Arts, is joined bystudents in one of the college’s studios in New York City.

Photo above: Standing at the School of Visual Art’s 23rd Street entranceare (from left) Diane R. McNally, Chubb Specialty Insurance Practice Leader,and Kevin Guinan, Chubb Commercial Insurance Underwriting Manager, bothof our Long Island branch; and Gary M. Smith, CPCU, Executive VicePresident, and Anthony Charles, President & CEO, both of SCS Agency, Inc.,Great Neck, New York.

12

S c h o o l o f V i s u a l A r t s

14

FAMED ART DEALER LEO CASTELLI ONCE

described art collectors as “a very rare and

special species — they look at art and think about

art and devote all their waking lives to the pursuit

of art.” By that definition, former hedge fund

manager Howard Rachofsky and his wife Cindy

are collectors with a capital “C.” Their 11,000

square foot Dallas home, designed by architect

Richard Meier in the 1990s, is not only filled with

and surrounded by art, but also qualifies as a work

of art itself.

“The Rachofskys built their home and art

collection piece by piece for deeply personal

reasons, and obviously needed more than a simple

homeowner’s policy,” says Bob Gibbs, Chubb’s

Marketing Specialist in Dallas. “The larger and

more precious a collection becomes, the greater

the need for a Valuable Articles policy that

protects against damage, loss or theft while also

providing collection management services.”

The Rachofskys are as passionate about

giving back as they are about collecting. They

have pledged both their home and their

collection to the Dallas Museum of Art, a

bequest that will establish the museum as one of

the largest collections of modern art in the

United States. Their sponsorship participation over the years in Two by Two for AIDS and Art, an annual series of fund

raising events, has helped generate nearly $10 million jointly benefiting The Foundation for AIDS Research and the

Dallas Museum of Art.

“In addition to offering outstanding products and services, Chubb is a well known supporter of the arts,” says

producer Steve Waldman of Waldman Bros. “We like working with companies that support worthy causes, and the

Rachofskys do as well.” For our part, Chubb is pleased to have been selected by a collector with such a discerning eye.

“When considering a purchase for our collection, our goal is to make sure that what we have is as good as we can find

or that it tells a story in a particularly effective way,” says Howard Rachofsky. “We applied much the same criteria when

choosing our insurer.”

Photo at right: Howard and Cindy Rachofsky are pictured outside their Dallashome, designed by noted architect Richard Meier.

Photo above: Inside the Rachofsky home with sculptor Tom Friedman’s Untitled(big/small figure) are (from left) Steve Waldman, Partner, Waldman Bros.,Dallas, along with Bob Gibbs, Marketing Specialist, Chubb Personal Insurance,Dallas, and Joe Lloyd, Signature Underwriting Manager, Chubb PersonalInsurance, Kansas City.

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16

THE WORDS ADORNING THE CUERVO

Family crest — “Abolengo, Prestigio y

Tradición” (Heritage, Prestige and Tradition) —

convey the values that have guided the Cuervo

Family business for more than 200 years. Don

Jose Antonio de Cuervo started it all in 1758

with a land grant from the King of Spain in a

region of Mexico known as Jalisco. By 1795,

the Cuervo Family had begun commercially

producing and distributing Tequila. Today, Jose

Cuervo ranks as one of the top ten spirits brands

worldwide.

Cuervo is not only the oldest incorporated

company on record in Mexico, but also the

oldest and largest Tequila producer in the world.

When visitors tour the Cuervo distillery in

La Rojeña, they can taste premium Tequila

straight from the barrel and see a centuries-old

production process. What may be less obvious

is that Jose Cuervo is a globally recognized

company that posts annual sales of

$500 million, exports 76% of its Tequila

production, and has complex risk management

needs specific to its operations.

Since 2002, Chubb de Mexico has

provided Jose Cuervo with property, ocean

cargo and inland marine coverage. Juan

Domingo Beckmann, Chief Executive Officer of Jose Cuervo, initially chose Chubb because he wanted to work with

an insurer that would commit to helping his company improve its risk profile over the long term. “We are extremely

pleased with the way in which Chubb and Aon have worked together to meet our needs,” says Mr. Beckmann. “We

chose Chubb for its expertise in loss control, claims and underwriting but have been equally impressed with their

commitment to building a long-term relationship with Jose Cuervo.”

Juan Segura Warnholtz, Chubb’s Mexico Country Manager, views the success of the relationship as an outcome

of shared priorities. “Like Chubb, Jose Cuervo operates based on values and principles that distinguish it from

competitors,” he says. “We identify with the pride Jose Cuervo takes in its product and its interest in safeguarding a

reputation that has been centuries in the making.”

J o s e C u e r v o

Photo at right: Pictured in the cantina at Jose Cuervo’s Mexico Cityheadquarters is Juan Domingo Beckmann, Chief Executive Officer of Jose Cuervo.

Photo above: At Jose Cuervo offices are Juan Segura Warnholtz, Chubb'sMexico Country Manager (left), and Christopher Baudouin, President & ChiefExecutive Officer, Aon Risk Services, Mexico City.

MOST WOULD AGREE THAT SOMEONE

who has launched two highly

successful technology companies, jointly owned

three professional sports franchises and appeared

four times on Fortune magazine’s “40 Richest

Under 40” list had earned the right to take a

break. However, Chubb Personal Insurance

customer Raul Fernandez instead put his own

success to work as a platform for advancing

another priority: his passion for building

“enduring community wealth.” A Washington,

D.C. native, Mr. Fernandez has deep roots in the

capital city and a strong desire to improve the

lives of its low-income families.

While CEO at his first company, Proxicom,

he co-founded Venture Philanthropy Partners, a

philanthropic investment organization that helps

to build high-performing nonprofit institutions in

and around Washington. He continues to serve

on its board while leading his second company,

ObjectVideo. His wife Jean-Marie, who shares

his commitment to strengthening families and

communities, is President of the Fernandez

Foundation, a private foundation dedicated to

providing underprivileged children in the

Washington area with superior educational

opportunities.

Working with Jim Gibson of Gibson Builders LLC, Mr. and Mrs. Fernandez began construction of a new home

in 2004 to accommodate their own growing family. “Raul and Jean-Marie needed an insurer that could handle the

complexity of their home’s construction and also provide the comprehensive coverages needed to protect it,” says

Jerry Bartelloni, CFO of The Fernandez Group. In addition to the “smart home” technology you might expect in the

home of ObjectVideo’s CEO, a tour of the Fernandez home reveals the couple’s penchant for surrounding themselves

with things of beauty as well. “This house has been built using the highest quality materials, including Jerusalem

limestone floors, imported biblical stone tiles and a Ludowicci clay tile roof,” says Chubb Personal Insurance

appraiser Rick Albers. “Chubb was the obvious choice for us,” adds Mrs. Fernandez. “It gives us tremendous peace

of mind to know that if we do have a loss, our home’s unique features will be replaced with the same materials and

attention to detail with which it was constructed.”

Photo at right: Raul and Jean-Marie Fernandez arrive at their new Maryland home.

Photo above: On the staircase in the Fernandez home are (from top) Dave Cunningham, Chubb’s Personal Lines Manager in Richmond, Virginia;Rick Albers, Technical Specialist, Chubb Personal Insurance AppraisalDepartment, Washington, D.C.; and Jerry Bartelloni, CFO, The FernandezGroup.

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Raul & Jean-Marie Fernandez

Photo at right: Javier Losada,Risk Manager (left), and FelixPoza, Deputy Risk Manager,both of Inditex, admire thecolorful merchandise at theZara model store located at Inditex’s headquarters in A Coruña, Spain.

Photo at left: Alsophotographed at Inditexheadquarters are members ofthe Madrid-based Chubb teamthat services the Inditexaccount: (from left) SusanaSanchez, Claims Supervisor;Carlos J. Merino, RegionalManager, Chubb’s SouthernEurope Region; and ManuelGonzalez-Paredes, CasualtyUnderwriting Manager.

20

GIVE CUSTOMERS WHAT THEY WANT TO WEAR — BEFORE THEY EVEN KNOW THEY WANT TO WEAR IT —

at the lowest possible price. In essence, this is the business model that has propelled Zara, the flagship brand

of the holding company known as Inditex, to its position as a world leader in the fashion retail sector. Since opening

the first Zara store in the Spanish city of A Coruña in 1975, Inditex founder and Chairman Amancio Ortega has

built a fashion empire consisting of nearly 100 companies engaged in textile design, production and distribution,

apart from more than 3,100 retail locations in 64 countries.

A Chubb customer since 2004, Inditex places a high priority on access to responsive claim and loss prevention

services worldwide. “We open at least one new store every day somewhere in the world,” says Javier Losada, Risk

Manager for Inditex. “We need an insurer that can keep pace with our growth and anticipate changing needs as well

as we can.” For a company whose speed and agility dazzle everyone from competitors to Harvard Business School

professors, finding such an insurer was no easy task. “From the start, we knew that unparalleled claims handling

capabilities and a global network of offices were essential to Inditex,” says Carlos J. Merino, who manages Chubb’s

operations in its Southern Europe Region. “We won them over with our ability to keep the company’s management

informed in real time of its claims worldwide and to handle claims locally.”

Casualty underwriter Manuel Gonzalez-Paredes is part of the local Chubb team in Madrid that has forged a

strong partnership with the Inditex management group. He explains that being a good partner requires not only

an understanding of the customer’s business but of its values as well. “Inditex is known for its outstanding financial

performance as well as for its keen interest in being an environmentally and socially responsible employer,” says

Gonzalez-Paredes. “Our loss prevention programs help Inditex maintain safe workplaces wherever it operates,

whether in New York, Caracas, Paris, Shanghai or any one of its thousands of locations worldwide.”

I n d i t e x

22

CHICAGO-BASED INVENERGY, A LEADING

energy firm focused on the development,

acquisition and management of large-scale power

generation assets, predicts a bright future for an

energy source that is ample, renewable and clean.

The company’s wholly owned affiliate, Invenergy

Wind, operates four active wind farms in the

United States, including the Spring Canyon,

Colorado project pictured here, and has

development programs under way in Canada

and Europe.

Camilo Posada, Chubb’s Energy Resources

Group underwriter in Chicago, has worked closely

with Invenergy’s leadership team to understand the

business and its inherent risks. “Think of a wind

turbine as a huge fan working in reverse,” he

explains. “Rather than using electricity to make

wind, a wind turbine uses wind to make electricity

— which means no greenhouse gas emissions and

less dependence on crude oil.” Posada makes it

sound simple, but he knows that wind farm

operations are anything but. “Invenergy and

Chubb have had to learn together about the

exposures inherent in large scale wind generation

facilities and develop loss prevention programs

that address those exposures,” he says.

Chubb’s relationship with Invenergy began

more than 15 years ago when members of its

leadership team were looking for an insurer with energy risk expertise. “I knew that Invenergy was interested in building

a lasting relationship and would only consider an insurer that specialized in power generation risks,” says Peter Kunz, a

partner of broker Thilman Filippini, an HRH Company. Invenergy also wanted to be certain that its investments were

protected over the long term with an insurer that could be relied upon in the event of a loss. “As owners of a large

portfolio of electricity generation projects in development, construction and operation, we think twice about the

financial health of a potential business partner,” says Alex George of Invenergy. “In addition to the outstanding quality

of Chubb’s products and services, we have great confidence in the superior financial strength that underlies their ability

to pay claims now and in the future.”

I n v e n e r g y

Photo at right: Alex George, Vice President, Operations and AssetManagement, Invenergy, stands in a field of wind turbines at Invenergy’s Spring Canyon, Colorado wind farm.

Photo above: Gathered at Chubb’s Chicago branch are members ofInvenergy’s insurance team, including (from top), Peter Kunz, Partner, and Darren F. Gretz, Account Executive, both of Thilman Filippini, an HRHCompany, Chicago; and Joaquin Hoyos, Energy Resources Practice Leader, and Camilo Posada, Energy Resources Underwriter, both of Chubb’s Chicagobranch.

24

WHEN HOME DEPOT FOUNDER AND FORMER CHAIRMAN BERNIE MARCUS ANNOUNCED HIS PLANS TO

donate $250 million toward developing a world-class aquarium in downtown Atlanta, Chubb was

listening. “Chubb approached us on this account back in July 2004, more than a year before the Aquarium was

scheduled to make its debut,” says producer Mark Jagor of Wells Fargo. “The Marcus Foundation was impressed with

the amount of homework Chubb had done and thrilled about being able to remove insurance from their list of

concerns surrounding the opening.”

This grand scale gift to the people of Georgia features the largest single indoor water pool in the world and

more than 100,000 animals representing 500 species. Since opening on November 23, 2005, the Aquarium has

welcomed more than 4 million guests. An engaging blend of theater and science, the Aquarium’s five major viewing

galleries feature music, continuously changing light shows and seating areas afloat in bubbling fountains.

Neal Howard, a loss prevention specialist in Chubb’s Atlanta Branch, knew from the outset that the sheer size

and complexity of the Aquarium’s operations posed some unique underwriting and loss control challenges. “This

building has more than 328 tons of acrylic windows, and the space it occupies is equivalent to the size of 50 football

fields,” he notes. “Its filtration systems are spread over two stories, with more than 200 pumps that generate over

4,000 horsepower and push more than 15 million gallons of water through the system. In short, there is plenty of

technology behind all of the beauty and drama.”

Chubb’s risk consultants made a number of recommendations after conducting a round of loss control surveys

prior to opening. “We were sold early on when Chubb identified an electrical problem that had the potential to

result in a total loss of power in the event of an emergency,” says Anthony Godfrey, the Aquarium’s Chief Financial

Officer. “The Aquarium is a best-in-class operation, and we need a best-in-class insurer. We feel that we’ve found

that in Chubb.”

Photo at right: As whalesharks frolic overhead, AnthonyGodfrey, Senior Vice Presidentand CFO/Chief AdministrativeOfficer, Georgia Aquarium,explores the Aquarium’sunderwater tunnel.

Photo at left: (from left)Chubb’s Neal Howard, SeniorWorkers CompensationSpecialist, and John P. Kaas,Commercial Practice Leader,both of our Atlanta branch, are joined by George C. JehlenJr., Director of Loss ControlServices, and Mark R. Jagor,Vice President, both of WellsFargo Insurance Services inAtlanta.

G e o r g i a A q u a r i u m

Chubb’s success depends on the performance of each employee. Meetsix leaders whose accomplishmentsillustrate the many individual successesthat have contributed to Chubb’sextraordinary results in 2006.

Lynn Twinn, Vice Presidentand Learning & Development

Manager for Chubb Europe, createsstrategic training programs toenhance the skills of Chubb’sEuropean employees andindependent broker sales force.

In 2006, Lynn began to leadMasterclass Training Schools, part ofa new strategy to extend salestraining to brokers. The schools areweek-long training courses in whichbrokers work with local Chubbemployees to hone their sales skillsand create business developmentstrategies. As a result of thisintensive training course, onebrokerage in Ireland increased itsbusiness with Chubb more than1,100%.

“Many companies say theyprovide excellent service and exceedexpectations,” says Lynn. “WhenChubb says we’ll do this, we actuallydo it. That’s why we’ve just beenvoted the top carrier for brokerservice in the United Kingdom in asurvey of senior broker executives bya leading trade publication.”

After joining Chubb in 2000with more than a decade

of specialty lines underwritingexperience, Shasi Gangadharanquickly rose to Vice President andSpecialty Business Practice Leaderof Chubb’s Asia/Pacific operations.

Working with the SingaporeCountry Manager, Shasi identifiedan opportunity for Chubb toexpand its presence in the Asianmarket through a low-overheadMalaysian business venture. Namedthe Federal Insurance Company ofLabuan, the operation has enabledChubb to write business throughlocal insurers in Malaysia,Indonesia, the Philippines, Indiaand Mauritius and to enter the

markets of Bahrain and Dubai.Labuan’s business is underwrittenand serviced by Chubb’s Singaporeoffice, which reduces the venture’sexpenses.

“Through our Labuanoperation, Chubb is able to writebusiness in the most capital efficientway — with no infrastructure costs— in countries where we were notpreviously represented and tocompete using Chubb’s brand andthe customer relationships of thelocal insurers,” explains Shasi.

Son of a professor of insurance,brother of an insurance agent

and student of numerousunderwriters, Tyrone Bennettdoesn’t merely understand theinsurance industry from every angle;it’s in his blood.

“Chubb is not a company thatgets ahead by blurring the line,”says Tyrone. “Here, you know it’sbetter to fall short of achieving yourown goals and stay within thebounds of integrity than to succeedby doing something that’s out ofbounds.”

The ideal combination ofunderwriting and marketing skills,Tyrone has had no problemachieving his own goals. When heassumed his current position, hebegan to manage an insurance linewith shrinking premiums and poorprofitability. Since then, Tyrone hasconsistently grown Chubb’sHouston specialty business whilerefocusing its underwritingdiscipline and producing profitableresults.

Tyrone has also been lauded forhis ability to train agents: He wasnamed “Instructor of the Year” bythe Independent Insurance Agentsof Houston in 2005 and 2006.

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E m p l o y e e P r o f i l e s

After joining Chubb 15 yearsago as an underwriting

trainee in commercial lines, AmyKendall propelled her career forwardby inventing a new multidisciplinaryposition: She matched her skill setto fill gaps at the St. Louis branch incasualty underwriting and marketing.

Three years later, Amy assumedresponsibility of Chubb’s GrandRapids, Michigan operations, and ayear later she assumed her currentposition of Vice President andBranch Manager in Richmond,Virginia.

“I’ve had a lot of experiencehere with innovative leaders. Theyhave been of tremendous value tome; without them I couldn’t havecome this far,” says Amy, noting thatthe drive to innovate is a commonquality among employees at Chubb.

She’s channeled this attitudeinto her own projects: Amy hasincreased Chubb’s business inVirginia through a program designedto enhance the sales skills of thebranch’s top agents. Over the pastfour years, Amy has helped theRichmond branch achieve healthypremium growth with exceptionalprofitability.

With nearly two decades ofoperations experience,

Audrey Petersen, Vice Presidentand Operations Services Manager ofChubb’s Northeastern United Statesbusiness, knows how to enhance theefficiency of a wide variety ofChubb’s business operations. She hasenhanced the development ofunderwriter assistants through acompetency-based training program,reduced expenses by centralizingsome customer service functions andoptimized Chubb’s working capitalby accelerating the collection ofpremiums.

She also knows how to attractand sharpen the skills of talentedrecruits. Once they’re in the door,

she supports the advancement oftheir careers by coaching andencouraging them to perform atexceptionally high levels.

“If you give Chubb 100%, day inand day out, and you push toimprove operations, help others andbe a solid business partner, thecompany gives you a tremendousamount in return,” Audrey tellsrecruits.

Hired in 1985 as a workerscompensation claim

adjuster, Roly Orama has advancedthrough the ranks of Chubb’s claimdepartment to become Senior VicePresident and Claim Manager forChubb’s North Central UnitedStates operations.

“The Chubb organization judgesyou by your contributions, not whereyou come from or who you are orwhat color your skin is. By valuingperformance, it levels the playingfield and gives employees equalaccess to job opportunities,” saysRoly. “I am active in Chubb’sMinority Development Councilbecause I want to make sure thatpractice continues.”

In his current role, Roly hasworked to enhance Chubb’s claimcapabilities not only by decreasingthe time it takes for customers torecover after a loss but also byexpanding the focus on loss controlto reduce the risk of future loss. Hehas also collaborated with otherbusiness units and with producers toleverage the marketing value ofthese claim capabilities to improvecustomer acquisition and retention.

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28

Officers

Chairman and Chief Executive OfficerJohn D. Finnegan

President and Chief Operating OfficerThomas F. Motamed

Executive Vice PresidentsRobert C. CoxJohn J. DegnanJune E. DrewryPaul J. KrumpAndrew A. McElwee, Jr.Harold L. Morrison, Jr.Michael O’ReillyDino E. RobustoJanice M. Tomlinson

Executive Vice President andGeneral CounselMaureen A. Brundage

Administrative CommitteeW. Brian BarnesMaureen A. BrundageTerrence W. CavanaughRobert C. CoxJohn J. DegnanJune E. DrewryJohn D. FinneganMark E. GreenbergSunita HolzerPaul J. KrumpAndrew A. McElweeHarold L. Morrison Thomas F. MotamedMichael O’ReillyDino E. RobustoHenry B. Schram Janice M. Tomlinson

Senior Vice PresidentsValerie A. AguirreJames E. AltmanJohn C. AndersonJohn L. AngeramiJoel D. AronchickWilliam D. ArrighiGregory P. BarabasDonald E. BarbJohn A. BarrettMark L. BerthiaumeJon C. BidwellPeter G. BoccherJulia T. BolandJames P. BronnerDeborah L. BronsonR. Jeffery BrownAlan C. BrownTimothy D. BuckleyGerard M. ButlerJohn F. CasellaMichael J. CasellaTerrence W. CavanaughGardner R. Cunningham, Jr.Robert F. DaddDavid S. DaltonJames A. DarlingGary R. DelongChristopher N. Di SipioTimothy R. DiveleyKathleen M. DubiaMark D. DugleAlexis R. Durcan, Jr.

Mary M. ElliottKathleen S. EllisTimothy T. EllisMichele N. FincherPhilip W. FiscusSean M. FitzpatrickThomas V. FitzpatrickPhilip G. FolzPaul W. FranklinAnthony S. GalbanThomas J. GanterMichael GarceauJames E. GardnerJohn C. Gibson, Jr.Christopher J. GilesJohn H. GillespieBaxter W. GrahamJeffrey S. GrangeMark E. GreenbergDonna M. GriffinCharles S. GunterMarc R. HacheyJames R. HamiltonSteven D. HernandezJayne E. HillHenry B. HofferJeffrey HoffmanKevin G. HoganKim D. HogrefeSunita HolzerPatricia A. HurleyGerald A. IppolitoHope JarvisDoris M. JohnsonJohn F. KearneyBettina F. KellyJohn J. KennedyJames P. KnightMark P. KorsgaardEric T. KrantzUlli KrellJohn B. KristiansenAndrew N. LaGraveneseJames V. LalorKathleen S. LangnerPaul A. LarsonKevin J. LeidwingerPaul L. LewisRobert A. LippertBeverly J. LuehsAmelia C. LynchMichael J. MaloneyMichael L. MarinaroKathleen P. MarvelRobert A. MarzocchiMelissa S. MaslesDavid P. Mc KeonMichelle D. MiddletonRobert P. MidwoodJohn J. MizziEllen J. MooreFrank MorelliLynn S. NevilleFrances D. O’BrienMoses I. OjeisekhobaMichael W. O’MalleyMichael D. OppeRolando A. OramaDaniel A. PaciccoNancy D. Pate-NelsonRobert A. PatuloJane M. PetersonGary C. PetrosinoSteven R. PozziEdward J. RadzinskiJenifer L. Rinehart

Barbara RingChristoph C. RittersonEric M. RiveraEvan J. RosenbergJudith A. SammarcoCelia SantanaTimothy M. ShannahanRichard I. SimonKevin G. SmithGail W. SojaRichard P. SojaJody E. SpechtEdward G. SpellScott R. SpencerKurt R. StemmlerKenneth J. StephensJohn M. SwordsTimothy J. SzerlongJoel M. TealerClifton E. ThomasBruce W. ThorneKathleen M. TierneyGary TrustPeter J. TuckerWilliam P. TullyWilliam C. Turnbull, Jr.Michele E. TwymanSusan M. VellaPeter H. Vogt, IICharles J. WalkonisSusan C. WaltermireCarole J. WeberJames L. WestJeremy N.R. Winter

Senior Vice President andChief Accounting OfficerHenry B. Schram

Senior Vice Presidents andActuariesW. Brian BarnesJames E. BillerLinda M. GrohRobert J. HopperAdrienne B. KaneMichael F. McManusKeith R. Spalding

Senior Vice Presidents andAssociate General CounselsMatthew CampbellSuzanne JohnsonKirk J. RaslowskyLinda F. Walker

Senior Vice President andTreasurerDouglas A. Nordstrom

Vice PresidentsJames R. AbercrombieJill A. AbereWilliam M. AdamsDouglas A. AhrenbergJames D. AlbertsonBrenda I. AlbiarGeorge N. AllportAngela W. AlperMary S. AquinoMichael ArcuriRonald J. ArigoBrendan ArnottDorothy M. BadgerSybil O. Baffoe

Kirk O. BaileyGregory W. BangsAchiles I. BarbatsoulisDavid A. BarclayFrances M. BarfootCynthia L. BarkmanRichard W. BarnettWilliam E. Barr, Jr.David K. BasileDavid BaumanJohn L. BayleyArthur J. BeaverDonna A. BelvedereR. Kerry BesniaDavid H. BissellStanley V. BloomOdette M. BonvouloirCharles A. BordaDaniel J. BosoldJeffrey M. BrownJeff H. BrundrettJohn E. Bryer, IIIJohn A. Burkhart, IIIJames D. ButchartSabine B. CainWalter K. CainRonald CalavanoW. Michael CamfieldJames M. CarsonJohn C. CavanaughMichael A. ChangBarnes L. ChatelainKenneth ChungRichard A. CiulloThomas C. ClansenLaura B. ClarkFrank L. ClaybrooksArthur W. CohenRichard N. ConsoliJudith A. CookRoberta CorbettBrian B. CottoneEdwin E. CreterRaymond L. Crisci, Jr.William S. CrowleyChristine A. DartMichael D. DaughertyMark W. DavisJanet DecostroDavid S. DeetsCarol A. DeFranceAlex R. DelarichelierePhillip C. DemmelSusan Devries AmelangDebra A. DikenRobert J. DonnellyBrian J. DouglasWendy J. DowdAlfred C. DrowneKeith M. DunfordLeslie L. EdsallRichard J. EdsallTimothy G. EhrhartJames P. EkdahlRobert C. Ellis, Jr.Victoria S. EspositoCraig M. FarinaTimothy J. FarrThomas J. FazioAmy L. FellerJeffrey B. FischerJames A. FiskeBrian J. FlynnPatrick G. FoucheJill A. FrancisJohn B. Fuoss

Frederick W. GaertnerEileen L. GallagherTrevor S. GandyWallace W. Gardner, Jr.Donald M. Garvey, Jr.Robert D. GatesMark D. GatliffPatrick GerrityNed I. GerstmanRalph GiordanoKaren R. GladdenAaron GoldsteinChristine GomesEugene B. GoodridgeDeanne K. GordonFrank F. GoudsmitAnne S. GouinPerry S. GranofJoseph Gresia, Jr.Patricia L. HallNancy Halpin-BirknerRobert A. HamburgerPatricia F. HarrisPeter J. HarrisonWilliam R. HarrisonGary L. HeardMichael W. HeembrockLynne J. HeidelbachLorraine C. HeinenRaymond HendricksonFrederick P. HessenthalerSteven M. HillPamela D. HoffmanRobert S. Holley, Jr.Edward I. HowardMichael S. HoweyThomas B. HowlandJoaquin O. HoyosAnthony IovineRobert A. IskolsMichael E. JacksonSteven JakubowskiMark S. JamesJohn M. JeffreyColleen A. JenningsLatrell JohnsonKenneth C. JonesJohn J. Juarez, Jr.Celine E. KacmarekThomas J. KammererDonald F. KeahonDennis C. KearnsJames R. KebbekusDavid L. KeenanDebra Ann KeiserRobert G. KellyTimothy J. KellyAmy F. KendallThomas R. KerrPatricia J. KeyElsbeth KirkpatrickMargaret A. KloseJeffrey KneeshawCille KochJoseph M. KorkuchDieter W. KorteKathleen W. KoufacosJoseph E. KozlowskiKathleen V. LafeminaAnne La FontaineValerie M. LafontaineBarbara J. LangioneTerri L. LathanMary M. LeahyJames W. LenzKelly Lewis

Robert D. LindbergFrederick W. LobdellMark A. LockeDonna M. LombardiMatthew E. LubinJohn W. LuthringerRobert LynchDavid E. MackMichael G. ManginiChristopher M. MangoLeona E. MantieKeith D. MarksJohn C. MarquesPatricia S. MartzBrian MatesEileen G. MathewsRichard D. MaukAnthony McCullerElizabeth McDaidSandra K. Mc DanielLisa M. McGeeFrances K. Mc GuinnPenny L. McGuireMichelle MclaughlinEdward J. McLoughlin, Jr.Neil W. McPhersonDenise B. MelickRobert MeolaAllison W. MetaScott D. MeyersAnn M. Minzner ConleyJoseph D. MiskellTimothy L. MoehlenpahAndrea M. MollicaTerry D. MontgomeryPaul N. MorrissetteRichard P. MunsonPatrick P. MurphyJeffery A. NeighborsRuth T. NelsonJennifer K. NewsomCatherine J. NikodenDavid B. Norris, Jr.Nancy A. O’DonnellKelly P. O’LearyThomas P. OlsonJohn A. O’MaraKathleen A. OrenczakJohn S. OsabenMark C. PaccioneCatherine M. PadalinoPeter PalermoMichael PalumboLouise T. PatregnaniJoanna B. PerronAudrey L. PetersenIrene D. PetilloDonald W. PetrinMichael S. PhillipsMary Beth PittingerScott F. PringleJennifer L. ProceJames H. ProferesPaul T. PruettWilliam J. PuleoDanette PurkisDavid L. PychMarlin J. QuickRobert S. RaffertyMarjorie D. RainesRichard D. ReedRichard P. ReedRobert ReedyWalead A. RefaiMichael K. Reicher, IIJames L. Rhyner

C h u b b & S o n , a d i v i s i o n o f F e d e r a l I n s u r a n c e C o m p a n y

OfficersChairman, President and Chief Executive OfficerJohn D. Finnegan

Lead DirectorJoel J. Cohen

Vice Chairman and Chief Operating OfficerThomas F. Motamed

Vice Chairman and Chief Administrative OfficerJohn J. Degnan

Vice Chairman and Chief Financial OfficerMichael O’Reilly

Executive Vice PresidentsNed I. GerstmanMarjorie D. Raines

Executive Vice President and General CounselMaureen A. Brundage

Senior Vice PresidentsDaniel J. ConwayFrederick W. GaertnerPaul R. GeyerMark E. GreenbergAndrew A. McElwee, Jr.Glenn A. MontgomeryHenry B. SchramRobert M. Witkoff

Vice PresidentsStephen A. FullerMarc R. HacheyMarylu KorkuchRobert A. MarzocchiThomas J. Swartz, IIISteven M. Versaggi

Vice President, Corporate Counsel and SecretaryW. Andrew Macan

Vice President and TreasurerDouglas A. Nordstrom

T h e C h u b b C o r p o r a t i o n

29

Officers

Chief Executive OfficerJohn D. Finnegan

Chairman, President andChief Operating OfficerThomas F. Motamed

Senior Vice President andChief Administrative OfficerJohn J. Degnan

Senior Vice President andChief Financial OfficerMichael O’Reilly

Senior Vice PresidentsBrendon R. AllanStephen Blasina

Stanley V. BloomPaul ChapmanMichael CollinsAndre DallaireChristopher J. GilesChristopher HamiltonMark T. LingafelterFrederick W. LobdellKevin O’ShielGary C. PetrosinoDoreen Yip

Senior Vice President andGeneral CounselMaureen A. Brundage

Vice PresidentsJames E. AltmanPaul Baldacchino

Kemsley BrennanRoger C.P. BrookhouseJ. Airton CarvalhoMichael J. CasellaTerrence W. CavanaughJackie ChangBay Hon ChinWilliam C. ClarksonIan CookSteve De GruchyMario DelrossoGregory D. DoddsJonathan DohertyMatthew T. DoquileFrederick W. GaertnerShasi GangadharanNed I. GerstmanPaul R. Geyer

Brian K. Gingrich, Sr.Andrew R. GourleyBaxter W. GrahamRick A. GrayJason HowardMichael S. HoweyGeorge X.Z. HuangKaren A. HumphreysJon KayeJames E. KernsHelen KoustasChristopher R. LeesIrene LiangAmelia C. LynchRobert A. MarzocchiDermot McComiskeyDavid P. Mc KeonMark B. Mitchell

Glenn A. MontgomeryDavid B. Norris, Jr.Rolando A. OramaEmma OsborneMatthew PasterfieldMarjorie D. RainesJorge A. RosasFrancis RowShrirang SamantLeo A. SchmidtHenry B. SchramJohn P. SmithJohn X. StabelosJik C. TayJanice M. TomlinsonStephen P. WarrenKyle WilliamsRobert M. Witkoff

Esther WongKiyoshi YamamotoElizabeth M. YashadhanaLorinne Yoong

Vice President and ActuaryW. Brian Barnes

Vice President and SecretaryW. Andrew Macan

Vice President and TreasurerDouglas A. Nordstrom

Officers

Officers

President and Chief Executive OfficerChristopher J. Giles

Senior Vice PresidentsPaul ChapmanGardner R. Cunningham, Jr.Thierry DaucourtJohannes EttenRick A. GrayCarolyn HamiltonAndrew McKeeCarlos Merino

Moses I. OjeisekhobaJalil RehmanFred ShurbajiJohn SimsBernardus Van Der VossenSimon Wood

Senior Vice President andChief Financial OfficerKevin O’Shiel

Senior Vice President andActuaryColin Crouch

Vice PresidentsDavid AdamsJan AuerbachScott BaileyRon BakkerHubert BelangerThierry BourguignonBernhard BuddeRobert CageDavid CasementBijan DaftariGuillaume DealHalcyon Ellis

Richard EveleighMuriel FontugneAndrew FrancisDavid GibbsMarta Gomez-LlorenteErik HasselIsabelle HilaireMonique KooijmanPhilippe LeosticAndreas LuberichsDaniel MaurerSimon MobeyMiguel Molina

Tom NewarkRene NieuwlandBjorn PetersenJonathan PhillipsHugh PollingtonJonathan PooleJohn RoomeFeliciano RuizVittorio ScalaHenrik SchwieningCovington ShacklefordAlan SheilVeronica Somarriba

Chris TaitPeter ThomasHelen TurnerLynn TwinnMonique Van Der LindenBrian VoslohBernd WiemannNigel WilliamsMiles Wright

Vice President, GeneralCounsel and SecretaryRanald T.I. Munro

ChairmanJanice M. Tomlinson

President and Chief Executive OfficerEllen J. Moore

Senior Vice PresidentsJean BertrandGiovanni DamianoPaul N. MorrissetteJames V. NewmanRichard F. Nobles

Andrew SteenDavid B. Williams

Senior Vice President andChief Financial OfficerGeoffrey D. Shields

Vice PresidentsBarry BlackburnLeeAnn BoydNicole BrouillardPatricia EwenPaul JohnstoneGale Lewis

Brad LorimerSusan MacEachernMary MaloneyJeffrey MaritRobert MurrayMichel RousseauSusan Watts

Vice President and ActuaryPhilip Jeffery

Vice President, GeneralCounsel and SecretaryJohn Cairns

F e d e r a l I n s u r a n c e C o m p a n y

Joseph A. RiccioMerrily RiesebeckGary V. RispoliNicholas RizziMark J. RobinsonAnne RoccoEdward F. RochfordBeatriz RodriguezThomas J. RoesselJames C. RomanelliJorge A. RosasVictoria S. RossettiJeffrey W. RyanRuth M. RyanBarbara N. SandelandsFranklin D. Sanders, Jr.Robert F. SantoroPatricia L. SarantMary A. Scelba

Eric D. SchallMelissa P. SchefflerAnthony C. SchiavoneRobert F. SchmidMichael A. SchraerRobert D. SchuckMark L. SchusselJohn F. ScroopeRoma K. SeudatMary T. SheridanAnthony W. ShineDonald L. Siegrist, Jr.Jason SkrantMichael A. SlorJohn P. SmithPatricia S. SmithScott E. SmithRichard E. SoleauVeronica Somarriba

Victor J. SordilloPeter D. SpicerMario A. StassiBrian J. SteeleVictor C. StewmanLloyd J. StoikMichael C. StrakhovBeth A. StrappDorit D. StrausRobert K. StreeterDiane T. StrehleJacquelyn C. StrobelPatrick F. SullivanScott B. TellerJames S. ThieringerJonathan ThomasEric W. ThompsonPeter J. ThompsonJames R. Titterton

John J. TomaineDionysia G. ToregasRichard E. TowleJoel S. TownsendRoy C. Tyson, IIIRichard L. UghettaPaula C. UmreikoJeffrey A. UpdykeEmily J. UrbanLouise E. ValleeNivaldo VenturiniBennett C. VernieroTracey A. VispoliRichard VreelandJill E. WadlundChristine WartellaWalter B. WashingtonMaureen B. WaterburyRyan L. Watson

Thomas E. WeistPatricia S. WhitehouseDavid B. WilliamsGrenes Eugene WilliamsOwen E. WilliamsThomas R. Wing, Jr.Suzanne L. WittBarbara A. WittickBert Wolff, Jr.Archyne S. WoodardGary C. WoodringSteven YacikJack S. ZachariasJohn J. ZanzalariStephen J. ZappasAnn H. ZapraznyCynthia ZegelDominick Zenzola

Vice President and SecretaryW. Andrew Macan

Vice Presidents and ActuariesPeter V. BurchettJoseph E. FreedmanKevin A. KesbyShu C. Lin

Vice President and Coverage CounselLouis Nagy

Vice Presidents and Associate CounselsJoseph M. HobbsJames Sharkey

C h u b b & S o n , a d i v i s i o n o f F e d e r a l I n s u r a n c e C o m p a n y ( c o n t i n u e d )

C h u b b I n s u r a n c e C o m p a n y o f C a n a d a

C h u b b I n s u r a n c e C o m p a n y o f E u r o p e , S . A .

30

Directors

Zoë BairdPresidentThe Markle Foundation

Sheila P. BurkeDeputy Secretary and Chief Operating OfficerSmithsonian Institution

James I. Cash, Jr.Retired ProfessorHarvard Business School

Joel J. CohenLead DirectorThe Chubb CorporationChairman and Co-Chief Executive OfficerSagent Advisors Inc.

John D. FinneganChairman, President and Chief Executive OfficerThe Chubb Corporation

Dr. Klaus J. MangoldExecutive Advisor to the ChairmanDaimlerChrysler AG

Sir David G. Scholey, CBESenior AdvisorUBS Investment Bank

Raymond G.H. SeitzFormer Vice ChairmanLehman Bros. International (Europe)

Lawrence M. SmallSecretarySmithsonian Institution

Daniel E. SomersVice ChairmanBlaylock and Partners LP

Karen Hastie WilliamsRetired PartnerCrowell & Moring LLP

Alfred W. ZollarGeneral ManagerTivoli SoftwareIBM Corporation

The Chubb Corporation

Committees of the Board

Audit CommitteeJoel J. Cohen (Chair)Zoë BairdDaniel E. SomersAlfred W. Zollar

Organization & Compensation CommitteeDaniel E. Somers (Chair)Sheila P. BurkeLawrence M. SmallKaren Hastie Williams

Executive CommitteeJohn D. Finnegan (Chair)James I. Cash, Jr.Joel J. CohenDaniel E. Somers

Finance CommitteeJohn D. Finnegan (Chair)Sheila P. BurkeDr. Klaus J. MangoldSir David G. Scholey, CBERaymond G.H. SeitzAlfred W. Zollar

Corporate Governance & Nominating CommitteeJames I. Cash, Jr. (Chair)Zoë BairdJoel J. CohenKaren Hastie Williams

Pension & Profit Sharing CommitteeSheila P. BurkeDr. Klaus J. MangoldSir David G. Scholey, CBERaymond G.H. SeitzAlfred W. Zollar

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

FORM 10-K≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

OR

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File No. 1-8661

The Chubb Corporation(Exact name of registrant as speciÑed in its charter)

New Jersey 13-2595722(State or other jurisdiction of incorporation or organization) (I.R.S. Employer IdentiÑcation No.)

15 Mountain View Road, P.O. Box 1615Warren, New Jersey 07061-1615

(Address of principal executive oÇces) (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 ExchangeSeries 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 deÑned in Rule 405 ofthe Securities Act. Yes ®„© No ® ©

Indicate by check mark if the registrant is not required to Ñle reports pursuant to Section 13 orSection 15(d) of the Exchange Act. Yes ® © No ®„©

Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to Ñle such reports), and (2) has been subject tosuch Ñling requirements for the past 90 days. Yes ®„© No ® ©

Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant's knowledge, in deÑnitiveproxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ® ©

Indicate by check mark whether the registrant is a large accelerated Ñler, an accelerated Ñler, or anon-accelerated Ñler. See deÑnition of ""accelerated Ñler and large accelerated Ñler'' in Rule 12b-2 ofthe Exchange Act.

Large accelerated Ñler ®„© Accelerated Ñler ® © Non-accelerated Ñler ® ©

Indicate by check mark whether the registrant is a shell company (as deÑned in Rule 12b-2 of theExchange Act). Yes ® © No ®„©

The aggregate market value of common stock held by non-aÇliates of the registrant was$20,459,271,207 as of June 30, 2006, computed on the basis of the closing sale price of the commonstock on that date.

408,589,297Number of shares of common stock outstanding as of February 15, 2007

Documents Incorporated by Reference

Portions of the deÑnitive Proxy Statement for the 2007 Annual Meeting of Shareholders areincorporated by reference in Part III of this Form 10-K.

%%TRANSMSG*** Transmitting Job: Y18846 PCN: 001000000 *** %%PCMSG| |00011|Yes|No|02/21/2007 21:41|0|1|Page is valid, no graphics -- Color: N|

CONTENTS

ITEM DESCRIPTION PAGE

PART I 1 Business 3

1A Risk Factors 12

1B Unresolved StaÅ Comments 16

2 Properties 16

3 Legal Proceedings 16

4 Submission of Matters to a Vote of Security Holders 18

PART II 5 Market for the Registrant's Common Stock andRelated Stockholder Matters 19

6 Selected Financial Data 21

7 Management's Discussion and Analysis of Financial Conditionand Results of Operations 22

7A Quantitative and Qualitative Disclosures About Market Risk 59

8 Consolidated Financial Statements and Supplementary Data 62

9 Changes in and Disagreements with Accountantson Accounting and Financial Disclosure 62

9A Controls and Procedures 62

9B Other Information 63

PART III 10 Directors and Executive OÇcers of the Registrant 65

11 Executive Compensation 65

12 Security Ownership of Certain BeneÑcial Owners and Managementand Related Stockholder Matters 65

13 Certain Relationships and Related Transactions 65

14 Principal Accountant Fees and Services 65

PART IV 15 Exhibits, Financial Statements and Schedules 65

Signatures 66

Index to Financial Statements and Financial Statement Schedules F-1

Exhibits Index E-1

2


PART I.

Item 1. Business

General

The Chubb Corporation (Chubb) was incorporated as a business corporation under the laws ofthe State of New Jersey in June 1967. Chubb and its subsidiaries are referred to collectively as theCorporation. Chubb is a holding company for a family of property and casualty insurance companiesknown informally as the Chubb Group of Insurance Companies (the P&C Group). Since 1882, theP&C Group has provided property and casualty insurance to businesses and individuals around theworld. According to A.M. Best, the P&C Group is the 11th largest U.S. property and casualty insurancegroup based on 2005 net written premiums.

At December 31, 2006, the Corporation had total assets of $50 billion and shareholders' equity of$14 billion. Revenues, income before income tax and assets for each operating segment for the threeyears ended December 31, 2006 are included in Note (15) of the Notes to Consolidated FinancialStatements. The Corporation employed approximately 10,800 persons worldwide on December 31, 2006.

The Corporation's principal executive oÇces are located at 15 Mountain View Road, Warren, NewJersey 07059, and our telephone number is (908) 903-2000.

The Corporation's internet address is www.chubb.com. The Corporation's annual report onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to thosereports Ñled or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 areavailable free of charge on this website as soon as reasonably practicable after they have beenelectronically Ñled with or furnished to the Securities and Exchange Commission. Chubb's CorporateGovernance Guidelines, charters of certain key committees of its Board of Directors, RestatedCertiÑcate of Incorporation, By-Laws, Code of Business Conduct and Code of Ethics for CEO andSenior Financial OÇcers are also available on the Corporation's website or by writing to theCorporation's Corporate Secretary.


The P&C Group is divided into three strategic business units. Chubb Commercial Insurance oÅersa full range of commercial customer insurance products, including coverage for multiple peril,casualty, workers' compensation and property and marine. Chubb Commercial Insurance is known forwriting niche business, where our expertise can add value for our agents, brokers and policyholders.Chubb Specialty Insurance oÅers a wide variety of specialized professional liability products forprivately and publicly owned companies, Ñnancial institutions, professional Ñrms and healthcareorganizations. Chubb Specialty Insurance also includes our surety business. Chubb Personal InsuranceoÅers products for individuals with Ñne homes and possessions who require more coverage choices andhigher limits than standard insurance policies.

In December 2005, the Corporation transferred its ongoing reinsurance assumed business toHarbor Point Limited. Other than pursuant to certain arrangements entered into with Harbor Point,the P&C Group generally no longer engages directly in the reinsurance assumed business. HarborPoint has the right for a transition period of up to two years to underwrite speciÑc reinsurancebusiness on the P&C Group's behalf. The P&C Group retains a portion of any such business and cedesthe balance to Harbor Point.

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 thethree years ended December 31, 2006 are included in Note (15) of the Notes to Consolidated FinancialStatements.

The principal members of the P&C Group are Federal Insurance Company (Federal), PaciÑcIndemnity Company (PaciÑc Indemnity), Vigilant Insurance Company (Vigilant), Great NorthernInsurance Company (Great Northern), Chubb Custom Insurance Company (Chubb Custom), ChubbNational Insurance Company (Chubb National), Chubb Indemnity Insurance Company (Chubb

3


Indemnity), Chubb Insurance Company of New Jersey (Chubb New Jersey), Texas PaciÑc IndemnityCompany, Northwestern PaciÑc Indemnity Company, Executive Risk Indemnity Inc. (Executive RiskIndemnity) and Executive Risk Specialty Insurance Company (Executive Risk Specialty) in the UnitedStates, as well as Chubb Atlantic Indemnity Ltd. (a Bermuda company), Chubb Insurance Company ofCanada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia Limited,Chubb Argentina de Seguros, S.A. and Chubb do Brasil Companhia de Seguros.

Federal is the manager of Vigilant, PaciÑc Indemnity, Great Northern, Chubb National, ChubbIndemnity, Chubb New Jersey, Executive Risk Indemnity and Executive Risk Specialty. Federal alsoprovides certain services to other members of the P&C Group. Acting subject to the supervision andcontrol of the boards of directors of the members of the P&C Group, Federal provides day to dayexecutive management and operating personnel and makes available the economy and Öexibilityinherent 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 thefollowing table:

Direct Reinsurance Reinsurance NetPremiums Premiums Premiums Premiums

Year Written Assumed(a) Ceded(a) Written

(in millions)

2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,001 $1,398 $1,346 $12,053

2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,180 1,120 1,017 12,283

2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,224 954 1,204 11,974

(a) Intercompany items eliminated.

The net premiums written during the last three years for major classes of the P&C Group'sbusiness are included in the Property and Casualty Insurance Ì Underwriting Results section ofManagement'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 the50 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 2006, approximately 80% of theP&C Group's direct business was produced in the United States, where the P&C Group's businessesenjoy broad geographic distribution with a particularly strong market presence in the Northeast. Thefour states accounting for the largest amounts of direct premiums written were New York with 12%,California with 9%, Texas with 5% and New Jersey with 5%. No other state accounted for 5% of suchpremiums. Approximately 10% of the P&C Group's direct premiums written was produced in Europeand 5% was produced in Canada.

Underwriting Results

A frequently used industry measurement of property and casualty insurance underwriting resultsis the combined loss and expense ratio. The P&C Group uses the combined loss and expense ratiocalculated in accordance with statutory accounting principles applicable to property and casualtyinsurance 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) afterreducing both premium amounts by dividends to policyholders. When the combined ratio is under100%, underwriting results are generally considered proÑtable; when the combined ratio is over 100%,underwriting results are generally considered unproÑtable. Investment income is not reÖected in thecombined ratio. The proÑtability of property and casualty insurance companies depends on the resultsof both underwriting operations and investments.

4


The combined loss and expense ratios during the last three years in total and for the major classesof the P&C Group's business are included in the Property and Casualty Insurance Ì UnderwritingOperations section of MD&A.

Another frequently used measurement in the property and casualty insurance industry is the ratioof statutory net premiums written to policyholders' surplus. At December 31, 2006 and 2005, the ratiofor the P&C Group was 1.05 and 1.37, respectively.

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 is represented by approximately 5,000 independent insuranceagencies and accepts business on a regular basis from approximately 500 insurance brokers. In mostinstances, these agencies and brokers also represent 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 servicingthe P&C Group's business. In addition to the administrative offices in Warren and Whitehouse Station,New Jersey, the P&C Group has zone, branch and service offices throughout the United States.

The P&C Group is represented by approximately 3,000 insurance agencies and brokers outside theUnited States. Local branch offices of the P&C Group assist the agencies and brokers in producing andservicing the business. In conducting its foreign business, the P&C Group reduces the risks relating tocurrency fluctuations by generally maintaining investments in those foreign currencies in which theP&C Group has loss reserves and other liabilities. Such investments generally have characteristics similarto the liabilities in those currencies. The net asset or liability exposure to the various foreign currenciesis regularly reviewed.

Business for the P&C Group is also produced through participation in certain underwriting poolsand syndicates. Such pools and syndicates provide underwriting capacity for risks which an individualinsurer cannot prudently underwrite because of the magnitude of the risk assumed or which can bemore eÅectively handled by one organization due to the need for specialized loss control and otherservices.

Reinsurance Ceded

In accordance with the normal practice of the insurance industry, the P&C Group cedesreinsurance to other insurance companies. Reinsurance is ceded to provide greater diversiÑcation ofrisk and to limit the P&C Group's maximum net loss arising from large risks or from catastrophicevents.

A large portion of the P&C Group's ceded reinsurance is eÅected under contracts known astreaties under which all risks meeting prescribed criteria are automatically covered. Most of the P&CGroup's treaty reinsurance arrangements consist of excess of loss and catastrophe contracts thatprotect against a speciÑed part or all of certain types of losses over stipulated amounts arising from anyone occurrence or event. In certain circumstances, reinsurance is also eÅected by negotiation onindividual risks. The amount of each risk retained by the P&C Group is subject to maximum limits thatvary by line of business and type of coverage. Retention limits are regularly reviewed and are revisedperiodically as the P&C Group's capacity to underwrite risks changes. For a discussion of the P&CGroup's reinsurance program and the cost and availability of reinsurance, see the Property andCasualty Insurance Ì Underwriting Results section of MD&A.

Ceded reinsurance contracts do not relieve the P&C Group of the primary obligation to itspolicyholders. Thus, an exposure exists with respect to reinsurance recoverable to the extent that anyreinsurer is unable to meet its obligations or disputes the liabilities assumed under the reinsurancecontracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, coverageinterpretations and other factors. The P&C Group is selective in regard to its reinsurers, placing

5


reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability.The P&C Group monitors the Ñnancial strength of its reinsurers on an ongoing basis.

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 claimsthat have been incurred but not reported. Insurance companies are also required to report as assets theportion of such liability that will be recovered from reinsurers.

The process of establishing the liability for unpaid losses and loss adjustment expenses is complexand imprecise as it must take into consideration many variables that are subject to the outcome offuture events. As a result, informed subjective estimates and judgments as to our ultimate exposure tolosses are an integral component of our loss reserving process.

The anticipated eÅect of inÖation is implicitly considered when estimating liabilities for unpaidlosses and loss adjustment expenses. Estimates of the ultimate value of all unpaid losses are based inpart on the development of paid losses, which reÖect actual inÖation. InÖation is also reÖected in thecase estimates established on reported open claims which, when combined with paid losses, formanother basis to derive estimates of reserves for all unpaid losses. There is no precise method forsubsequently evaluating the adequacy of the consideration given to inÖation, since claim settlementsare aÅected by many factors.

The P&C Group continues to emphasize early and accurate reserving, inventory management ofclaims and suits, and control of the dollar value of settlements. The number of outstanding claims atyear-end 2006 was approximately 14% lower than the number at year-end 2005, due in part to feweroutstanding catastrophe claims. The number of new arising claims during 2006 was 5% lower than inthe prior year.

Additional information related to the P&C Group's estimates related to unpaid losses and lossadjustment expenses and the uncertainties in the estimation process is presented in the Property andCasualty Insurance Ì Loss Reserves section of MD&A.

The table on page 7 presents the subsequent development of the estimated year-end liability forunpaid losses and loss adjustment expenses, net of reinsurance recoverable, for the ten years prior to2006. The Corporation acquired Executive Risk Inc. in 1999. The amounts in the table for the years1996 through 1998 do not include Executive Risk's unpaid losses and loss adjustment expenses.

The top line of the table shows the estimated net liability for unpaid losses and loss adjustmentexpenses recorded at the balance sheet date for each of the indicated years. This liability representsthe estimated amount of losses and loss adjustment expenses for claims arising in all years prior to thebalance sheet date that were unpaid at the balance sheet date, including losses that had been incurredbut not yet reported to the P&C Group.

The upper section of the table shows the reestimated amount of the previously recorded netliability based on experience as of the end of each succeeding year. The estimate is increased ordecreased as more information becomes known about the frequency and severity of losses for eachindividual year. The increase or decrease is reÖected in operating results of the period in which theestimate is changed. The ""cumulative deÑciency (redundancy)'' as shown in the table represents theaggregate change in the reserve estimates from the original balance sheet dates through December 31,2006. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that is relatedto a prior period occurrence generates a deÑciency in each intermediate year. For example, adeÑciency recognized in 2006 relating to losses incurred prior to December 31, 1996 would be includedin the cumulative deÑciency amount for each year in the period 1996 through 2005. Yet, the deÑciencywould be reÖected in operating results only in 2006. The eÅect of changes in estimates of the liabilitiesfor losses occurring in prior years on income before income taxes in each of the past three years isshown in the reconciliation of the beginning and ending liability for unpaid losses and loss adjustmentexpenses in the Property and Casualty Insurance Ì Loss Reserves section of MD&A.

6


ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT

December 31

Year Ended 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

(in millions)

Net Liability for Unpaid Losses and LossAdjustment ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,756 $8,564 $9,050 $9,749 $10,051 $11,010 $12,642 $14,521 $16,809 $18,713 $19,699

Net Liability Reestimated as of:

One year later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,691 8,346 8,855 9,519 9,856 11,799 13,039 14,848 16,972 18,417

Two years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,420 7,900 8,517 9,095 10,551 12,143 13,634 15,315 17,048

Three years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,986 7,565 8,058 9,653 10,762 12,642 14,407 15,667

Four years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,719 7,145 8,527 9,740 11,150 13,246 14,842

Five years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,409 7,571 8,656 9,999 11,605 13,676

Six years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,887 7,694 8,844 10,373 11,936

Seven years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,052 7,822 9,119 10,602

Eight years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,197 8,061 9,324

Nine years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,411 8,247

Ten years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,601

Total Cumulative Net DeÑciency(Redundancy)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (155) (317) 274 853 1,885 2,666 2,200 1,146 239 (296)

Cumulative Net DeÑciency Related toAsbestos and Toxic Waste Claims(Included in Above Total)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,457 1,332 1,264 1,217 1,186 1,125 384 134 59 24

Cumulative Amount ofNet Liability Paid as of:

One year later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,418 1,798 2,520 2,483 2,794 3,085 3,399 3,342 4,031 3,948

Two years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,488 3,444 3,708 4,079 4,669 5,354 5,671 6,095 6,594

Three years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,757 4,161 4,653 5,286 5,981 6,932 7,753 8,039

Four years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,195 4,711 5,351 6,139 7,012 8,390 9,147

Five years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,556 5,133 5,894 6,829 7,894 9,378

Six years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,857 5,481 6,326 7,382 8,635

Seven years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,137 5,807 6,680 7,926

Eight years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,420 6,060 7,040

Nine years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,641 6,335

Ten years later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,879

Gross Liability, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,524 $9,772 $10,357 $11,435 $11,904 $15,515 $16,713 $17,948 $20,292 $22,482 $22,293

Reinsurance Recoverable, End of Year ÏÏÏÏÏ 1,768 1,208 1,307 1,686 1,853 4,505 4,071 3,427 3,483 3,769 2,594

Net Liability, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,756 $8,564 $ 9,050 $ 9,749 $10,051 $11,010 $12,642 $14,521 $16,809 $18,713 $19,699

Reestimated Gross Liability ÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,493 $9,581 $10,830 $12,962 $14,709 $19,119 $19,526 $19,321 $20,397 $21,975

Reestimated Reinsurance Recoverable ÏÏÏ 1,892 1,334 1,506 2,360 2,773 5,443 4,684 3,654 3,349 3,558

Reestimated Net LiabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,601 $8,247 $ 9,324 $10,602 $11,936 $13,676 $14,842 $15,667 $17,048 $18,417

Cumulative Gross DeÑciency(Redundancy)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (31) $ (191) $ 473 $ 1,527 $ 2,805 $ 3,604 $ 2,813 $ 1,373 $ 105 $ (507)

The amounts for the years 1996 through 1998 do not include Executive Risk's unpaid losses and loss adjustment expenses. Executive Riskwas acquired in 1999.

7


The subsequent development of the net liability for unpaid losses and loss adjustment expenses asof year-ends 1996 through 2003 was adversely aÅected by substantial unfavorable development relatedto asbestos and toxic waste claims. The cumulative net deÑciencies experienced related to asbestos andtoxic waste claims were the result of: (1) an increase in the actual number of claims Ñled; (2) anincrease in the estimated number of potential claims; (3) an increase in the severity of actual andpotential claims; (4) an increasingly adverse litigation environment; and (5) an increase in litigationcosts associated with such claims. For the years 1996 through 1999, the unfavorable developmentrelated to asbestos and toxic waste claims was oÅset in varying degrees by favorable loss experience inthe professional liability classes, particularly directors and oÇcers liability and Ñduciary liability. For2000, in addition to the unfavorable development related to asbestos and toxic waste claims, there wassigniÑcant unfavorable development in the commercial casualty and workers' compensation classes.For the years 2001 through 2003, in addition to the unfavorable development related to asbestos andtoxic waste claims, there was signiÑcant unfavorable development in the professional liability clas-ses Ì principally directors and oÇcers liability and errors and omissions liability, due in large part toadverse loss trends related to corporate failures and allegations of management misconduct andaccounting irregularities Ì and the commercial casualty classes and, to a lesser extent, workers'compensation.

Conditions and trends that have aÅected development of the liability for unpaid losses and lossadjustment expenses in the past will not necessarily recur in the future. Accordingly, it is notappropriate to extrapolate future redundancies or deÑciencies based on the data in this table.

The middle section of the table on page 7 shows the cumulative amount paid with respect to thereestimated net liability as of the end of each succeeding year. For example, in the 1996 column, as ofDecember 31, 2006 the P&C Group had paid $5,879 million of the currently estimated $7,601 million ofnet losses and loss adjustment expenses that were unpaid at the end of 1996; thus, an estimated$1,722 million of net losses incurred through 1996 remain unpaid as of December 31, 2006, approxi-mately 55% 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 netliability recorded at the balance sheet date for each of the indicated years and the reestimation ofthese amounts as of December 31, 2006.

The liability for unpaid losses and loss adjustment expenses, net of reinsurance recoverable,reported in the accompanying consolidated Ñnancial statements prepared in accordance with gener-ally accepted accounting principles (GAAP) comprises the liabilities of U.S. and foreign members ofthe P&C Group as follows:

December 31

2006 2005

(in millions)

U.S. subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $16,492 $15,928

Foreign subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,207 2,785

$19,699 $18,713

Members of the P&C Group are required to Ñle annual statements with insurance regulatoryauthorities prepared on an accounting basis prescribed or permitted by such authorities (statutorybasis). The diÅerence between the liability for unpaid losses and loss expenses reported in thestatutory basis Ñnancial statements of the U.S. members of the P&C Group and such liability reportedon a GAAP basis in the consolidated Ñnancial statements is not signiÑcant.

8


Investments

Investment decisions are centrally managed by investment professionals based on guidelinesestablished by management and approved by the respective boards of directors for each company inthe P&C Group.

Additional information about the Corporation's investment portfolio as well as its approach tomanaging risks is presented in the Invested Assets section of MD&A, the Investment Portfolio sectionof Quantitative and Qualitative Disclosures About Market Risk and Note (4) of the Notes toConsolidated Financial Statements.

The investment results of the P&C Group for each of the past three years are shown in thefollowing table.

AveragePercent EarnedInvested Investment

Year Assets(a) Income(b) Before Tax After Tax

(in millions)

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,778 $1,184 4.42% 3.55%2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,570 1,315 4.30 3.452006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,492 1,454 4.34 3.48

(a) Average of amounts for the years presented with Ñxed maturity securities at amortized costand equity securities and other invested assets at market value.

(b) Investment income after deduction of investment expenses, but before applicable income tax.

Competition

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 mutualcompanies, other underwriting organizations and alternative risk sharing mechanisms. Some competi-tors obtain their business at a lower cost through the use of salaried personnel rather than independentagents 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 thebasis of price, but also on the basis of Ñnancial strength, availability of coverage desired by customersand quality of service, including claim adjustment service. The P&C Group's products and services aregenerally designed to serve speciÑc customer groups or needs and to oÅer a degree of customizationthat is of value to the insured. The P&C Group continues to work closely with its customers and toreinforce with them the stability, expertise and added value the P&C Group's products provide.

There are approximately 3,100 property and casualty insurance companies in the United Statesoperating independently or in groups and no single company or group is dominant. However, therelatively large size and underwriting capacity of the P&C Group provide it opportunities not availableto smaller companies.

Regulation and Premium Rates

Chubb is a holding company with subsidiaries primarily engaged in the property and casualtyinsurance business and is therefore subject to regulation by certain states as an insurance holdingcompany. All states have enacted legislation that regulates insurance holding company systems such asthe Corporation. This legislation generally provides that each insurance company in the system isrequired to register with the department of insurance of its state of domicile and furnish informationconcerning the operations of companies within the holding company system that may materially aÅectthe operations, management or Ñnancial condition of the insurers within the system. All transactionswithin a holding company system aÅecting insurers must be fair and equitable. Notice to the insurancecommissioners is required prior to the consummation of transactions aÅecting the ownership orcontrol of an insurer and of certain material transactions between an insurer and any person in itsholding company system and, in addition, certain of such transactions cannot be consummated withoutthe commissioners' prior approval.

9


Companies within the P&C Group are subject to regulation and supervision in the respectivestates in which they do business. In general, such regulation is designed to protect the interests ofpolicyholders, and not necessarily the interests of insurers, their shareholders and other investors. Theextent of such regulation varies but generally has its source in statutes that delegate regulatory,supervisory and administrative powers to a department of insurance. The regulation, supervision andadministration relate, among other things, to: the standards of solvency that must be met andmaintained; 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 thesize of risks that may be insured under a single policy; deposits of securities for the beneÑt ofpolicyholders; approval of policy forms; periodic examinations of the aÅairs of insurance companies;annual and other reports required to be Ñled on the Ñnancial condition of companies or for otherpurposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisionsfor unearned premiums, unpaid losses and loss adjustment expenses, both reported and unreported,and other liabilities.

The extent of insurance regulation on business outside the United States varies signiÑcantlyamong the countries in which the P&C Group operates. Some countries have minimal regulatoryrequirements, while others regulate insurers extensively. Foreign insurers in many countries aresubject to greater restrictions than domestic competitors. In certain countries, the P&C Group hasincorporated insurance subsidiaries locally to improve its competitive position.

The National Association of Insurance Commissioners (NAIC) has a risk-based capital require-ment for property and casualty insurance companies. The risk-based capital formula is used by stateregulatory authorities to identify insurance companies that may be undercapitalized and that meritfurther regulatory attention. The formula prescribes a series of risk measurements to determine aminimum capital amount for an insurance company, based on the proÑle of the individual company.The ratio of a company's actual policyholders' surplus to its minimum capital requirement willdetermine whether any state regulatory action is required. At December 31, 2006, each member of theP&C Group had more than suÇcient capital to meet the risk-based capital requirement. The NAICperiodically reviews the risk-based capital formula and changes to the formula could be considered inthe future.

Regulatory requirements applying to premium rates vary from state to state, but generally providethat rates cannot be excessive, inadequate or unfairly discriminatory. In many states, these regulatoryrequirements can impact the P&C Group's ability to change rates, particularly with respect to personallines products such as automobile and homeowners insurance, without prior regulatory approval. Forexample, in certain states there are measures that limit the use of catastrophe models or credit scoringas well as premium rate freezes or limitations on the ability to cancel or nonrenew certain policies,which can aÅect the P&C Group's ability to charge adequate rates.

Subject to legislative and regulatory requirements, the P&C Group's management determines theprices charged for its policies based on a variety of factors including loss and loss adjustment expenseexperience, inÖation, anticipated changes in the legal environment, both judicial and legislative, andtax law and rate changes. Methods for arriving at prices vary by type of business, exposure assumed andsize of risk. Underwriting proÑtability is aÅected by the accuracy of these assumptions, by thewillingness of insurance regulators to approve changes in those rates that they control and by certainother matters, such as underwriting selectivity and expense control.

In all states, insurers authorized to transact certain classes of property and casualty insurance arerequired to become members of an insolvency fund. In the event of the insolvency of a licensedinsurer 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

10


certain claims against the insolvent insurer. Generally, fund assessments are proportionately based onthe members' written premiums for the classes of insurance written by the insolvent insurer. In certainstates, the P&C Group can recover a portion of these assessments through premium tax oÅsets andpolicyholder surcharges. In 2006, assessments of the members of the P&C Group amounted to$14 million. The amount of future assessments cannot be reasonably estimated.

Insurance regulation in certain states requires the companies in the P&C Group, together with otherinsurers operating in the state, to participate in assigned risk plans, reinsurance facilities and jointunderwriting associations, which are mechanisms that generally provide applicants with various basicinsurance coverages when they are not available in voluntary markets. Such mechanisms are mostprevalent for automobile and workers' compensation insurance, but a majority of states also mandatethat insurers, such as the P&C Group, participate in Fair Plans or Windstorm Plans, which offer basicproperty coverages to insureds where not otherwise available. Some states also require insurers toparticipate in facilities that provide homeowners, crime and other classes of insurance where periodicmarket constrictions may occur. Participation is based upon the amount of a company's voluntarywritten premiums in a particular state for the classes of insurance involved. These involuntary marketplans generally are underpriced and produce unprofitable underwriting results.

In several states, insurers, including members of the P&C Group, participate in market assistanceplans. Typically, a market assistance plan is voluntary, of limited duration and operates under thesupervision of the insurance commissioner to provide assistance to applicants unable to obtaincommercial and personal liability and property insurance. The assistance may range from identifyingsources where coverage may be obtained to pooling of risks among the participating insurers. A fewstates require insurers, including members of the P&C Group, to purchase reinsurance from amandatory reinsurance fund.

Although the federal government and its regulatory agencies generally do not directly regulatethe business of insurance, federal initiatives often have an impact on the business in a variety of ways.Current and proposed federal measures that may signiÑcantly aÅect the P&C Group's business and themarket as a whole include federal terrorism insurance, asbestos liability reform measures, tort reform,natural catastrophes, corporate governance including the increasing focus on public companies andpublic accounting Ñrms, ergonomics, health care reform including the containment of medical costs,medical malpractice reform and patients' rights, privacy, e-commerce, international trade, federalregulation of insurance companies and the taxation of insurance companies.

Companies in the P&C Group are also aÅected by a variety of state and federal legislative andregulatory measures as well as by decisions of their courts that deÑne and extend the risks and beneÑtsfor which insurance is provided. These include: redeÑnitions of risk exposure in areas such as waterdamage, including mold, Öood and storm surge; products liability and commercial general liability;credit scoring; and extension and protection of employee beneÑts, including workers' compensationand disability beneÑts.

Chubb has entered into a settlement agreement with the Attorneys General of New York,Connecticut and Illinois in which, among other things, the Corporation has agreed to no longer paycompensation to agents and brokers in the form of contingent commissions on all lines of its business.A number of other property and casualty insurance carriers and a number of insurance producers alsohave agreed with various regulatory agencies to no longer pay or accept, as applicable, contingentcommissions in some or all lines of business. In addition, a number of states have announced that theyare looking at compensation arrangements and considering regulatory action or reform in this area.The rules that would be imposed if these actions or reforms were adopted range in nature fromdisclosure requirements to prohibition of certain forms of compensation to imposition of new duties oninsurance agents, brokers and/or carriers in dealing with customers. A small number of states haveenacted compensation disclosure rules; however, in the majority of states, these proposals are stillbeing developed. Although the Corporation does not believe that its ceasing to pay contingentcommissions will materially impact its business, the other possible regulatory actions or reforms, if

11


adopted, could have an impact on our ability to renew business or write new business. For additionalinformation, see the Property and Casualty Insurance Ì Regulatory Developments section of MD&A.

Legislative and judicial developments pertaining to asbestos and toxic waste exposures arediscussed in the Property and Casualty Insurance Ì 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 andresidential development activities primarily in central Florida. The real estate operations are in run-oÅ.Additional information related to the Corporation's real estate operations is included in the Corporateand Other Ì Real Estate section of MD&A.

Chubb Financial Solutions

Chubb Financial Solutions (CFS) provided customized Ñnancial products to corporate clients.CFS's business was primarily structured credit derivatives, principally as a counterparty in portfoliocredit default swaps. CFS has been in run-oÅ since April 2003. Additional information related to CFS'soperations is included in the Corporate and Other Ì 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, thatcould have a material eÅect on the Corporation's results of operations, Ñnancial condition or liquidityand that could cause our operating results to vary signiÑcantly from period to period. References to""we,'' ""us'' and ""our'' appearing in this Form 10-K under this heading should be read to refer to theCorporation.

If our property and casualty loss reserves are insuÇcient, our results could be adversely aÅected.

The process of establishing loss reserves is complex and imprecise as it must take into considera-tion many variables that are subject to the outcome of future events. As a result, informed subjectiveestimates and judgments as to our ultimate exposure to losses are an integral component of our lossreserving process. Variations between our loss reserve estimates and the actual emergence of lossescould be material and could have a material adverse eÅect on our results of operations and Ñnancialcondition.

A further discussion of the risk factors related to our property and casualty loss reserves ispresented in the Property and Casualty Insurance Ì Loss Reserves section of MD&A.

The eÅects of emerging claim and coverage issues on our business are uncertain.

We price and establish the terms and conditions of policies based upon an intended scope ofpolicy coverage. However, as industry practices and legal, judicial, social, environmental and otherconditions change, unexpected and unintended issues related to claims and coverage may emerge.These issues may adversely aÅect our business by either extending coverage beyond our underwritingintent or by increasing the number or size of claims. In some instances, these changes may not becomeapparent for some time after we have issued the insurance policies that are aÅected by the changes. Asa result, the full extent of liability under our insurance policies may not be known for many years afterthe policies are issued. Emerging claim and coverage issues could have a material adverse eÅect on ourresults of operations and Ñnancial condition.

Catastrophe losses could materially and adversely aÅect our business.

As a property and casualty insurance holding company, our insurance operations expose us toclaims arising out of catastrophes. Catastrophes can be caused by various natural perils, including

12


hurricanes and other windstorms, earthquakes, winter storms and brush Ñres. Catastrophes can also beman-made, such as a terrorist attack. The frequency and severity of catastrophes are inherentlyunpredictable. It is possible that both the frequency and severity of natural and man-made catastrophicevents will increase.

The extent of losses from a catastrophe is a function of both the total amount of exposure underour insurance policies in the area aÅected by the event and the severity of the event. Mostcatastrophes are restricted to relatively small geographic areas; however, hurricanes and earthquakesmay produce signiÑcant damage in larger areas, especially those that are heavily populated. Natural orman-made catastrophic events could cause claims under our insurance policies to be higher than weanticipated and could cause substantial volatility in our Ñnancial results for any Ñscal quarter or year.Our ability to write new business could also be aÅected. We believe that increases in the value andgeographic concentration of insured property and the eÅects of inÖation could increase the severity ofclaims from catastrophic events in the future. In addition, states have from time to time passedlegislation that has the eÅect of limiting the ability of insurers to manage catastrophe risk, such aslegislation 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-madecatastrophic event could have a material adverse eÅect on our business, results of operations, Ñnancialcondition and liquidity. A further discussion of the risk factors related to catastrophes is presented inthe Property and Casualty Insurance Ì Catastrophe Risk Management section of MD&A.

The failure of the risk mitigation strategies we utilize could have a material adverse eÅect on ourÑnancial condition or results of operations.

We utilize a number of strategies to mitigate our risk exposure, such as:

‚ engaging in vigorous underwriting;

‚ carefully evaluating terms and conditions of our policies;

‚ focusing on our risk aggregations by geographic zones, industry type, credit exposure andother bases; and

‚ ceding reinsurance.

However, there are inherent limitations in all of these tactics and no assurance can be given that anevent or series of unanticipated events will not result in loss levels in excess of our probable maximumloss models, which could have a material adverse eÅect on our Ñnancial condition or results ofoperations.

The availability of reinsurance coverage and our inability to collect amounts due from reinsurerscould have a material adverse eÅect on our Ñnancial condition or results of operations.

The availability and cost of reinsurance are subject to prevailing market conditions. In recentyears, for certain coverages, we have elected not to renew reinsurance treaties that we believed wereno longer economical. We also have increased the amount of the risk we retain in many of the treatiesthat we have renewed. In addition, the lack of private sector catastrophe reinsurance for terrorismlosses and the potential increases in reinsurance prices generally attributable to the continued threatof terrorism could cause us to retain more risk than we otherwise would retain if we were able toobtain reinsurance at lower prices. Accordingly, our net exposure to liability has increased, and maycontinue to increase. This, in turn, could have a material adverse eÅect on our Ñnancial condition orresults of operations.

With respect to reinsurance coverages we have purchased, our ability to recover amounts duefrom reinsurers may be aÅected by the creditworthiness and willingness to pay of the reinsurers fromwhom we have purchased coverage. The inability or unwillingness of any of our reinsurers to meettheir obligations to us could have a material adverse eÅect on our results of operations.

13


Cyclicality of the property and casualty insurance industry may cause Öuctuations in our results.

The property and casualty insurance business historically has been cyclical, experiencing periodscharacterized by intense price competition, relatively low premium rates and less restrictive under-writing standards followed by periods of relatively low levels of competition, high premium rates andmore selective underwriting standards. We expect this cyclicality to continue. The periods of intenseprice competition in the cycle could adversely aÅect our Ñnancial condition, proÑtability or cash Öows.

A number of factors, including many that are volatile and unpredictable, can have a signiÑcantimpact on cyclical trends in the property and casualty insurance industry and the industry'sproÑtability. 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 theoccurrence of man-made disasters (e.g., a terrorist attack);

‚ availability, price and terms of reinsurance;

‚ Öuctuations in interest rates;

‚ changes in the investment environment that aÅect market prices of and income and returns oninvestments; and

‚ inÖationary pressures that may tend to aÅect the size of losses experienced by insurancecompanies.

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 considerappropriate relative to the risk assumed. If we cannot write insurance at appropriate rates, our abilityto transact business would be materially and adversely aÅected.

Payment of obligations under surety bonds could adversely aÅect 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 lossesoccur, they may be mitigated, at times, by the customer's balance sheet, contract proceeds, collateraland bankruptcy recovery. We have substantial commercial and construction surety exposure forcurrent and prior customers. In that regard, we have exposures related to surety bonds issued on behalfof companies that have experienced or may experience deterioration in creditworthiness. If theeconomy were to worsen and impact any of these companies or if the Ñnancial results of thesecompanies were otherwise adversely aÅected, we may experience an increase in Ñled claims and mayincur high severity losses, which could have a material adverse eÅect on our results of operations.

A downgrade in our Ñnancial strength and credit ratings could adversely impact the competitivepositions of our operating businesses.

Financial strength and credit ratings can be important factors in establishing our competitiveposition in the insurance markets. There can be no assurance that our ratings will continue for anygiven period of time or that they will not be changed. If our credit ratings were downgraded in thefuture, we could incur higher borrowing costs and may have more limited means to access capital. Inaddition, a downgrade in our Ñnancial strength ratings could adversely aÅect the competitive positionsof our insurance operations, including a possible reduction in demand for our products in certainmarkets.

14


Our businesses are heavily regulated, and changes in regulation may reduce our proÑtability andlimit our growth.

Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictionsin which they conduct business. This regulation is generally designed to protect the interests ofpolicyholders, and not necessarily the interests of insurers, their shareholders or other investors. Theregulation relates to authorization for lines of business, capital and surplus requirements, investmentlimitations, underwriting limitations, transactions with aÇliates, dividend limitations, changes incontrol, premium rates and a variety of other Ñnancial and nonÑnancial components of an insurancecompany's business.

Virtually all states in which we operate require us, together with other insurers licensed to dobusiness in that state, to bear a portion of the loss suÅered by some insureds as the result of impaired orinsolvent insurance companies. In addition, in various states, our insurance subsidiaries must partici-pate in mandatory arrangements to provide various types of insurance coverage to individuals or otherentities that otherwise are unable to purchase that coverage from private insurers. A few states requireus to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create acredit risk for insurers if not adequately funded by the state and, in some cases, the existence of areinsurance fund could aÅect the prices charged for our policies. The eÅect of these and similararrangements could reduce our proÑtability in any given period or limit our ability to grow ourbusiness.

In recent years, the state insurance regulatory framework has come under increased scrutiny,including scrutiny by federal oÇcials, and some state legislatures have considered or enacted laws thatmay alter or increase state authority to regulate insurance companies and insurance holding compa-nies. Further, the NAIC and state insurance regulators are continually reexamining existing laws andregulations, speciÑcally focusing on modiÑcations to statutory accounting principles, interpretations ofexisting laws and the development of new laws and regulations. Any proposed or future legislation orNAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than currentregulatory requirements or may result in higher costs.

There are a number of investigations underway into business practices in the property and casualtyinsurance industry by various U.S. state and federal authorities as well as by regulators injurisdictions outside the U.S. We cannot predict the outcome of these investigations or relatedlegal proceedings, including any potential amounts that we may be required to pay.

Attorneys General and regulatory authorities of several states, the U.S. Securities and ExchangeCommission, the U.S. Attorney for the Southern District of New York and certain non-U.S. regulatoryauthorities continue to investigate certain business practices in the property and casualty insuranceindustry involving, among other things, (1) the payment of contingent commissions to brokers andagents and (2) loss mitigation and Ñnite reinsurance arrangements. We have received, and maycontinue to receive, subpoenas and other information requests from Attorneys General or otherregulatory agencies regarding similar issues.

Although no regulatory action has been initiated against us and we have settled matters arising outof the investigations into business practices in the property and casualty insurance market by theAttorneys General of Connecticut, Illinois and New York, it is possible that one or more regulatoryauthorities will bring an action against us with respect to some or all of the issues that are the focus ofthe ongoing investigations. In addition, Chubb and certain of its subsidiaries have been named in legalproceedings brought by private plaintiÅs arising out of these investigations. We cannot predict theultimate outcome of these investigations or legal proceedings, including any potential amounts that wemay be required to pay in connection with them.

15


Intense competition for our products could harm our ability to maintain or increase ourproÑtability and premium volume.

The property and casualty insurance industry is highly competitive. We compete not only withother stock companies but also with mutual companies, other underwriting organizations andalternative risk sharing mechanisms. We compete for business not only on the basis of price, but alsoon the basis of Ñnancial strength, availability of coverage desired by customers and quality of service,including claim adjustment service. We may have diÇculty in continuing to compete successfully onany of these bases in the future.

If competition limits our ability to write new business at adequate rates, our results of operationswould be adversely aÅected.

We are dependent on a distribution network comprised of independent insurance brokers andagents 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, ourbusiness is dependent on the willingness of these brokers and agents to recommend our products totheir customers. Deterioration in relationships with our broker and agent distribution network couldmaterially and adversely aÅect our ability to sell our products, which, in turn, could have a materialadverse eÅect on our results of operations and Ñnancial condition.

The inability of our insurance subsidiaries to pay dividends in suÇcient amounts would harm ourability to meet our obligations and to pay future dividends.

As a holding company, Chubb relies primarily on dividends from its insurance subsidiaries to meetits obligations for payment of interest and principal on outstanding debt obligations and to paydividends to shareholders. The ability of our insurance subsidiaries to pay dividends in the future willdepend on their statutory surplus, on earnings and on regulatory restrictions. We are subject toregulation by some states as an insurance holding company system. Such regulation generally providesthat transactions between companies within the holding company system must be fair and equitable.Transfers of assets among aÇliated companies, certain dividend payments from insurance subsidiariesand certain material transactions between companies within the system may be subject to prior noticeto, or prior approval by, state regulatory authorities. The ability of our insurance subsidiaries to paydividends is also restricted by regulations that set standards of solvency that must be met andmaintained, the nature of and limitations on investments and the nature of and limitations on dividendsto shareholders. These regulations may aÅect Chubb's insurance subsidiaries' ability to provide Chubbwith dividends.

Item 1B. Unresolved StaÅ Comments

None.

Item 2. Properties

The executive oÇces of the Corporation are in Warren, New Jersey. The administrative oÇces ofthe P&C Group are located in Warren and Whitehouse Station, New Jersey. The P&C Group maintainszone administrative and branch oÇces in major cities throughout the United States and also has oÇcesin Canada, Europe, Australia, Latin America and Asia. OÇce facilities are leased with the exception ofbuildings in Whitehouse Station, New Jersey and Simsbury, Connecticut. Management considers itsoÇce facilities suitable and adequate for the current level of operations.

Item 3. Legal Proceedings

As previously disclosed, beginning in December 2002, Chubb Indemnity was named in a series ofactions commenced by various plaintiÅs against Chubb Indemnity and other non-aÇliated insurers in

16


the District Courts in Nueces, Travis and Bexar Counties in Texas. The plaintiÅs generally allege thatChubb Indemnity and the other defendants breached duties to asbestos product end-users andconspired to conceal risks associated with asbestos exposure. The plaintiÅs seek to impose liability oninsurers directly. The plaintiÅs seek unspeciÑed monetary damages and punitive damages. Pursuant tothe asbestos reform bill passed by the Texas legislature in May 2005, these actions were transferred tothe Texas state asbestos Multidistrict Litigation on December 1, 2005. Chubb Indemnity is vigorouslydefending all of these actions and has been successful in getting a number of them dismissed throughsummary judgment, special exceptions, or voluntary withdrawal by the plaintiÅ.

Beginning in June 2003, Chubb Indemnity was also named in a number of similar cases inCuyahoga, Mahoning, and Trumbull Counties in Ohio. The allegations and the damages sought in theOhio actions are substantially similar to those in the Texas actions. In May 2005, the Ohio Court ofAppeals sustained the trial court's dismissal of a group of nine cases for failure to state a claim.Following the appellate court's decision, Chubb Indemnity and other non-aÇliated insurers weredismissed from the remaining cases Ñled in Ohio, except for a single case which had been removed tofederal court and transferred to the federal asbestos Multidistrict Litigation. There has been no activityin that case since its removal.

As previously disclosed, Chubb and certain of its subsidiaries have been involved in the ongoinginvestigations of certain market practices in the property and casualty insurance industry by variousAttorneys General and other regulatory authorities of several states, the U.S. Securities and ExchangeCommission, the U.S. Attorney for the Southern District of New York and certain non-U.S. regulatoryauthorities with respect to, among other things, (1) potential conÖicts of interest and anti-competitivebehavior arising from the payment of contingent commissions to brokers and agents and (2) lossmitigation and Ñnite reinsurance arrangements. In connection with these investigations, Chubb andcertain of its subsidiaries have received subpoenas and other requests for information from variousregulators. The Corporation has been cooperating fully with these investigations. Although noregulatory action has been initiated against the Corporation, it is possible that one or more regulatoryauthorities will bring an action against the Corporation with respect to some or all of the issues that arethe focus of these ongoing investigations.

On December 21, 2006, Chubb entered into an Assurance of Discontinuance with the AttorneysGeneral of New York, Connecticut and Illinois, resolving all issues arising out of those oÇcials'investigations of the market practices described above. As part of this agreement, the Corporationagreed to contribute $15 million to a settlement fund established for the beneÑt of certain customers.The Corporation also agreed to pay $2 million to help defray the costs of the investigations by theAttorneys General. In addition, the Corporation agreed to implement certain business reforms,including discontinuing the payment of contingent commissions in the United States on all insurancelines, beginning in 2007.

As previously disclosed, purported class actions arising out of the investigations into the paymentof contingent commissions to brokers and agents have been Ñled in a number of federal and statecourts. On August 1, 2005, Chubb and certain of its subsidiaries were named in a putative class actionentitled In re Insurance Brokerage Antitrust Litigation in the U.S. District Court for the District of NewJersey. This action, brought against several brokers and insurers on behalf of a class of persons whopurchased insurance through the broker defendants, asserts claims under the Sherman Act and statelaw and the Racketeer InÖuenced and Corrupt Organizations Act (""RICO'') arising from the allegedunlawful use of contingent commission agreements.

Chubb and certain of its subsidiaries have also been named as defendants in two purported classactions relating to allegations of unlawful use of contingent commission arrangements that wereoriginally Ñled in state court. The Ñrst was Ñled on February 16, 2005 in Seminole County, Florida. Thesecond was Ñled on May 17, 2005 in Essex County, Massachusetts. Both cases were removed to federalcourt and then transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Courtfor the District of New Jersey for consolidation with the In re Insurance Brokerage Antitrust Litigation.In December 2005, Chubb and certain of its subsidiaries were named in an action similar to the In re

17


Insurance Brokerage Antitrust Litigation. The action is pending in the same court and has been assignedto the judge who is presiding over the In re Insurance Brokerage Antitrust Litigation. The complaint hasnot yet been served in this matter. Separately, in April 2006, Chubb and one of its subsidiaries werenamed in an action similar to the In re Insurance Brokerage Antitrust Litigation. This action was Ñled inthe U.S. District Court for the Northern District of Georgia and subsequently was transferred by theJudicial Panel on Multidistrict Litigation to the U.S. District for the District of New Jersey forconsolidation with the In re Insurance Brokerage Antitrust Litigation.

In these actions, the plaintiÅs generally allege that the defendants unlawfully used contingentcommission agreements. The actions seek treble damages, injunctive and declaratory relief, andattorneys' fees. The Corporation believes it has substantial defenses to all of the aforementioned legalproceedings and intends to defend the actions vigorously. It is possible that the Corporation maybecome involved in additional litigation of this sort.

Information regarding certain litigation to which the P&C Group is a party is included in theProperty and Casualty Insurance Ì Loss Reserves section of MD&A.

Chubb and its subsidiaries are also defendants in various lawsuits arising out of their businesses. Itis the opinion of management that the Ñnal outcome of these matters will not materially aÅect theCorporation's results of operations or Ñnancial condition.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the shareholders during the quarter ended December 31,2006.

Executive OÇcers of the RegistrantYear of

Age(a) Election(b)

John D. Finnegan, Chairman, President and Chief Executive OÇcerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 2002Maureen A. Brundage, Executive Vice President and General Counsel ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 2005Robert C. Cox, Executive Vice President of Chubb & Son, a division of Federal ÏÏÏÏÏÏÏÏÏ 48 2003John J. Degnan, Vice Chairman and Chief Administrative OÇcerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62 1994Paul J. Krump, Executive Vice President of Chubb & Son, a division of Federal ÏÏÏÏÏÏÏÏ 47 2001Andrew A. McElwee, Jr., Executive Vice President of Chubb & Son, a division of Federal ÏÏ 52 1997Thomas F. Motamed, Vice Chairman and Chief Operating OÇcer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 1997Dino E. Robusto, Executive Vice President of Chubb & Son, a division of Federal ÏÏÏÏÏÏ 48 2006Michael O'Reilly, Vice Chairman and Chief Financial OÇcer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 1976Henry B. Schram, Senior Vice President and Chief Accounting OÇcerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 1985

(a) Ages listed above are as of April 24, 2007.

(b) Date indicates year Ñrst elected or designated as an executive oÇcer.

All of the foregoing oÇcers serve at the pleasure of the Board of Directors of the Corporation andhave been employees of the Corporation for more than Ñve years except for Mr. Finnegan andMs. Brundage.

Before joining the Corporation in 2002, Mr. Finnegan was Executive Vice President of GeneralMotors Corporation and Chairman, President and Chief Executive OÇcer of General Motors Accept-ance Corporation (GMAC). Previously, he had also served as President, Vice President and GroupExecutive of GMAC.

Before joining the Corporation in 2005, Ms. Brundage was a partner in the law Ñrm ofWhite & Case LLP, where she headed the securities practice in New York and co-chaired its globalsecurities practice.

18


PART II.

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

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 asreported on the NYSE Composite Tape and the quarterly dividends declared per share for eachquarter of 2006 and 2005. The per share amounts have been retroactively adjusted to reÖect the two-for-one stock split eÅective March 31, 2006.

2006

First Second Third FourthQuarter Quarter Quarter Quarter

Common stock prices

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49.45 $52.55 $52.55 $54.65

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46.80 47.60 47.40 51.35

Dividends declaredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .25 .25 .25 .25

2005

First Second Third FourthQuarter Quarter Quarter Quarter

Common stock prices

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $40.48 $43.14 $45.31 $49.07

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36.67 38.51 42.72 41.93

Dividends declaredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .211/2 .211/2 .211/2 .211/2

At February 15, 2007, there were approximately 5,100 common shareholders of record.

The declaration and payment of future dividends to Chubb's shareholders will be at the discretionof Chubb's Board of Directors and will depend upon many factors, including the Corporation'soperating results, Ñnancial condition and capital requirements, and the impact of regulatory con-straints discussed in Note (19)(g) of the Notes to Consolidated Financial Statements.

The following table summarizes the stock repurchased by Chubb during each month in thequarter ended December 31, 2006.

Total Number of Maximum Number ofTotal Shares Purchased as Shares that May Yet Be

Number of Part of Publicly Purchased UnderShares Average Price Announced Plans or the Plans or

Period Purchased(a) Paid Per Share Programs Programs(b)

October 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 754,830 $53.09 754,830 636,638

November 2006 ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 636,638

December 2006 ÏÏÏÏÏÏÏÏÏÏÏÏ 790,700 53.21 790,700 19,845,938

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,545,530 53.15 1,545,530

(a) The stated amounts exclude 7,616 shares, 13,391 shares and 188,046 shares delivered to Chubbduring the months of October 2006, November 2006 and December 2006, respectively, byemployees of the Corporation to cover option exercise prices and withholding taxes in connectionwith the Corporation's stock-based compensation plans.

(b) On December 8, 2005, the Board of Directors authorized the repurchase of up to 28,000,000 sharesof common stock. No shares remain under the 2005 share repurchase authorization. On Decem-ber 7, 2006, the Board of Directors authorized the repurchase of up to 20,000,000 additional sharesof common stock. The authorization has no expiration date.

19


Stock Performance Graph

The following performance graph compares the performance of Chubb's common stock duringthe Ñve-year period from December 31, 2001 through December 31, 2006 with the performance of theStandard & Poor's 500 Index and the Standard & Poor's Property & Casualty Insurance Index. Thegraph plots the changes in value of an initial $100 investment over the indicated time periods, assumingall dividends are reinvested.

Cumulative Total ReturnBased upon an initial investment of $100 on December 31, 2001

with dividends reinvested

$0

$50

$100

$150

$200

S&P 500 Property & Casualty InsuranceS&P 500Chubb

200620052004200320022001

Chubb S&P 500 S&P 500 Property & Casualty Insurance

200620052004200320022001$0

$50

$100

$150

$200

December 31,

2001 2002 2003 2004 2005 2006

Chubb $100 $77 $103 $119 $155 $171S&P 500 100 78 100 111 117 135S&P 500 Property & Casualty Insurance 100 89 112 124 143 161

Our Ñlings with the Securities and Exchange Commission (SEC) may incorporate information byreference, including this Form 10-K. Unless we speciÑcally state otherwise, the information under thisheading ""Stock Performance Graph'' shall not be deemed to be ""soliciting materials'' and shall not bedeemed to be ""Ñled'' with the SEC or incorporated by reference into any of our Ñlings under theSecurities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

20

%%TRANSMSG*** Transmitting Job: Y18846 PCN: 020000000 *** %%PCMSG| |00033|Yes|No|02/27/2007 22:11|0|1|Page/graphics valid 02/28/2007 05:46 -- Color: N|

Item 6. Selected Financial Data

2006 2005 2004 2003 2002

(in millions except for per share amounts)FOR THE YEARRevenues

Property and Casualty InsurancePremiums Earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,958 $12,176 $11,636 $10,183 $ 8,085Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,485 1,342 1,207 1,083 952

Corporate and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 181 116 44 69Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏ 245 384 218 84 34

Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,003 $14,083 $13,177 $11,394 $ 9,140

IncomeProperty and Casualty InsuranceUnderwriting Income (Loss)(a) ÏÏÏÏÏ $ 1,905 $ 921(b) $ 846 $ 105 $ (626)Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,454 1,315 1,184 1,058 929Other Income (Charges)ÏÏÏÏÏÏÏÏÏÏÏÏ 10 (1) (4) (30) (25)

Property and CasualtyInsurance Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,369 2,235 2,026 1,133 278

Corporate and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (89) (172) (176) (283) (144)Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏ 245 384 218 84 34

Income Before Income TaxÏÏÏÏÏÏÏÏÏÏÏ 3,525 2,447 2,068 934 168Federal and Foreign Income

Tax (Credit)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 997 621 520 125 (55)

Net IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,528 $ 1,826 $ 1,548 $ 809 $ 223

Per Share*Net IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.98 $ 4.47 $ 4.01 $ 2.23 $ .64Dividends Declared on

Common StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.00 .86 .78 .72 .70

AT DECEMBER 31Total AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50,277 $48,061 $44,260 $38,361 $34,081Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,466 2,467 2,814 2,814 1,959Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,863 12,407 10,126 8,522 6,826Book Value Per Share*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.71 29.68 26.28 22.67 19.93

(a) Underwriting income reÖected net losses of $24 million ($16 million after-tax or $0.04 per share) in 2006, $35 million($23 million after-tax or $0.06 per share) in 2005, $75 million ($49 million after-tax or $0.13 per share) in 2004,$250 million ($163 million after-tax or $0.45 per share) in 2003 and $741 million ($482 million after-tax or $1.39 pershare) in 2002 related to asbestos and toxic waste claims.

(b) Underwriting income in 2005 reÖected net costs of $462 million ($300 million after-tax or $.74 per share) related toHurricane Katrina.

* Per share amounts have been retroactively adjusted to reÖect the two-for-one stock split eÅective March 31, 2006.

21


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 addressesthe Ñnancial condition of the Corporation as of December 31, 2006 compared with December 31, 2005and the results of operations for each of the three years in the period ended December 31, 2006. Thisdiscussion should be read in conjunction with the consolidated Ñnancial statements and related notesand the other information contained in this report.

INDEXPAGE

Cautionary Statement Regarding Forward-Looking InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23Critical Accounting Estimates and Judgments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24OverviewÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25Property and Casualty Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

Underwriting Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27Underwriting Results ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27

Net Premiums Written ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27Reinsurance Ceded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28ProÑtability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29

Review of Underwriting Results by Business Unit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30Personal Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30Commercial Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31Specialty Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33Reinsurance AssumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34

Regulatory Developments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35Catastrophe Risk ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36

Natural Catastrophes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36Terrorism Risk and Legislation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36

Loss Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37Estimates and Uncertainties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38

Reserves Other than Those Relating to Asbestos and Toxic Waste Claims ÏÏÏÏÏÏÏÏÏÏÏ 39Reserves Relating to Asbestos and Toxic Waste Claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42

Asbestos Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43Toxic Waste Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46

Reinsurance RecoverableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47Prior Year Loss Development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47

Investment Results ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50Other Income and ChargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50

Corporate and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51Chubb Financial Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51

Realized Investment Gains and LossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53Income TaxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54Capital Resources and Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54

Capital Resources ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54RatingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56Contractual Obligations and OÅ-Balance Sheet Arrangements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57

Invested AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58Change in Accounting Principles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59

22


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this document are ""forward-looking statements'' as that term is deÑned in thePrivate Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are madepursuant to the safe harbor provisions of the PSLRA and include statements regarding expectations as toour loss reserve and reinsurance recoverable estimates, including our estimated gross and net losses fromHurricane Katrina; the impact of future catastrophes on our Ñnancial condition and results of operations;asbestos liability developments; the number and severity of surety-related claims; the cost and availabilityof reinsurance in 2007; premium volume, rates and competition; the impact of investigations into marketpractices in the property and casualty insurance industry and any resulting business reforms; changes toour producer compensation program; our expected income stream from the transaction with Harbor PointLimited; estimates with respect to our credit derivatives exposure; the run-oÅ of our real estate portfolio;and our capital adequacy and funding of liquidity needs. Forward-looking statements are made basedupon management's current expectations and beliefs concerning trends and future developments and theirpotential eÅects on us. These statements are not guarantees of future performance. Actual results may diÅermaterially from those suggested by forward-looking statements as a result of risks and uncertainties, whichinclude, among others, those discussed or identiÑed from time to time in our public Ñlings with theSecurities 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 eÅects of the outbreak or escalation of war or hostilities;

‚ premium pricing and proÑtability or growth estimates overall or by lines of business orgeographic area, and related expectations with respect to the timing and terms of any requiredregulatory approvals;

‚ adverse changes in loss cost trends;

‚ the ability to retain existing business;

‚ our expectations with respect to cash Öow projections and investment income and with respectto 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 coverageand liability, in particular, for asbestos, toxic waste and other mass tort claims;

‚ development of new theories of liability;

‚ our estimates relating to ultimate asbestos liabilities;

‚ the impact from the bankruptcy protection sought by various asbestos producers and otherrelated businesses;

‚ the eÅects of proposed asbestos liability legislation, including the impact of claims patternsarising from the possibility of legislation and those that may arise if legislation is not passed;

‚ the availability of reinsurance coverage;

‚ the occurrence of signiÑcant 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, andin particular, on those companies that have Ñled for bankruptcy or otherwise experienceddeterioration in creditworthiness;

23


‚ the eÅects of disclosures by, and investigations of, public companies relating to possibleaccounting irregularities, practices in the Ñnancial services industry and other corporategovernance issues, including:

‚ claims and litigation arising out of stock option ""backdating,'' spring loading'' and otheroption grant practices by public companies;

‚ the eÅects on the capital markets and the markets for directors and oÇcers and errors andomissions insurance;

‚ claims and litigation arising out of actual or alleged accounting or other corporatemalfeasance by other companies;

‚ claims and litigation arising out of practices in the Ñnancial services industry;

‚ legislative or regulatory proposals or changes;

‚ the eÅects of investigations into market practices, in particular contingent commissions and lossmitigation and Ñnite reinsurance arrangements, in the property and casualty insurance industrytogether with any legal or regulatory proceedings, related settlements and industry reform orother changes with respect to contingent commissions or otherwise arising therefrom;

‚ the impact of legislative and regulatory developments on our business, including those relatingto terrorism and catastrophes;

‚ any downgrade in our claims-paying, Ñnancial strength or other credit ratings;

‚ the ability of our subsidiaries to pay us dividends;

‚ general economic and market conditions including:

‚ changes in interest rates, market credit spreads and the performance of the Ñnancialmarkets;

‚ the eÅects of inÖation;

‚ 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;

‚ changes in the litigation environment; and

‚ our ability to implement management's strategic plans and initiatives.

The Corporation assumes no obligation to update any forward-looking information set forth in thisdocument, which speak as of the date hereof.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The consolidated Ñnancial statements include amounts based on informed estimates and judg-ments of management for transactions that are not yet complete. Such estimates and judgments aÅectthe reported amounts in the Ñnancial statements. Those estimates and judgments that were mostcritical to the preparation of the Ñnancial statements involved the determination of loss reserves andthe recoverability of related reinsurance recoverables. These estimates and judgments, which arediscussed within the following analysis of our results of operations, require the use of assumptionsabout matters that are highly uncertain and therefore are subject to change as facts and circumstancesdevelop. If diÅerent estimates and judgments had been applied, materially diÅerent amounts mighthave been reported in the Ñnancial statements.

24


OVERVIEW

The following highlights do not address all of the matters covered in the other sections ofManagement's Discussion and Analysis of Financial Condition and Results of Operations or contain all ofthe information that may be important to Chubb's shareholders or the investing public. This overviewshould be read in conjunction with the other sections of Management's Discussion and Analysis ofFinancial Condition and Results of Operations.

‚ Net income was $2.5 billion in 2006 compared with $1.8 billion in 2005 and $1.5 billion in 2004.The signiÑcant increase in net income in 2006 was driven by substantially higher underwritingincome in our property and casualty insurance business.

‚ Results in 2005 included a pre-tax realized investment gain of $171 million from a transaction wecompleted in December 2005 involving a new reinsurance company, Harbor Point Limited. Aspart of the transaction, we transferred our continuing reinsurance assumed business and certainrelated assets, including renewal rights, to Harbor Point.

‚ Underwriting results were exceptionally proÑtable in 2006 compared with highly proÑtableresults in 2005 and 2004. Our combined loss and expense ratio was 84.2% in 2006 compared with92.3% in both 2005 and 2004. The impact of catastrophes accounted for 1.4 percentage points ofthe combined ratio in 2006 compared with 5.6 percentage points in 2005 and 2.3 percentagepoints in 2004. The greater catastrophe impact in 2005 was due to costs of $462 million related toHurricane Katrina, including estimated net losses of $403 million and net reinsurance reinstate-ment premium costs of $59 million.

‚ Total net premiums written decreased by 3% in 2006 after increasing by 2% in 2005. Netpremiums written in our insurance business increased 2% in 2006 and 4% in 2005. The relativelylow growth in our insurance business in both years reÖected our continued emphasis onunderwriting discipline in an increasingly competitive market environment. In the reinsuranceassumed business, net premiums written decreased 57% in 2006 and 21% in 2005. The decreasein 2006 was in line with our expectations following the sale of the ongoing business in December2005.

‚ During 2006, we experienced overall favorable development of $296 million on loss reservesestablished as of the previous year end, due primarily to the lower than expected emergence oflosses in the homeowners and commercial property classes.

‚ In December 2006, we entered into a settlement agreement with the Attorneys General of NewYork, Connecticut and Illinois resolving all issues arising out of those oÇcials' investigationswith respect to property and casualty insurance market practices. The settlement did notrequire that we pay a Ñne or penalty. Our cost under the settlement was $17 million.

‚ Property and casualty investment income after tax increased by 10% in 2006 and 11% in 2005.The growth was due to an increase in invested assets over the period. For more information onthis non-GAAP Ñnancial measure, see ""Property and Casualty Insurance Ì Investment Results.''

25


A summary of our consolidated net income is as follows:

Years Ended December 31

2006 2005 2004

(in millions)

Property and casualty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,369 $ 2,235 $ 2,026

Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (89) (172) (176)

Realized investment gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245 384 218

Consolidated income before income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,525 2,447 2,068

Federal and foreign income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 997 621 520

Consolidated net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,528 $ 1,826 $ 1,548

PROPERTY AND CASUALTY INSURANCE

A summary of the results of operations of our property and casualty insurance business is asfollows:


2006 2005 2004

(in millions)

Underwriting

Net premiums written ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,974 $12,283 $12,053

Increase in unearned premiumsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (107) (417)

Premiums earnedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,958 12,176 11,636

Losses and loss expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,574 7,813 7,321

Operating costs and expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,467 3,436 3,516

Increase in deferred policy acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏ (19) (17) (76)

Dividends to policyholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 23 29

Underwriting income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,905 921 846

Investments

Investment income before expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,485 1,342 1,207

Investment expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 27 23

Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,454 1,315 1,184

Other income (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 (1) (4)

Property and casualty income before tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,369 $ 2,235 $ 2,026

Property and casualty investment income after taxÏÏÏÏÏÏÏÏÏÏ $ 1,166 $ 1,056 $ 949

Property and casualty income before tax in 2006 was substantially higher than in 2005 which, inturn, was higher than in 2004. Income in all three years beneÑted from highly proÑtable underwritingresults. Underwriting income in 2006 was substantially higher than in 2005, due largely to signiÑcantlylower catastrophe losses and improvement in our specialty insurance business unit. Underwritingincome increased modestly in 2005 compared with 2004 despite signiÑcantly higher catastrophe losses,primarily from Hurricane Katrina. Results in 2006 and 2005 also beneÑted from signiÑcant increases ininvestment income.

The proÑtability of the property and casualty insurance business depends on the results of bothunderwriting operations and investments. We view these as two distinct operations since theunderwriting functions are managed separately from the investment function. Accordingly, in assess-ing our performance, we evaluate underwriting results separately from investment results.

26


Underwriting Operations

Underwriting Results

We evaluate the underwriting results of our property and casualty insurance business in theaggregate and also for each of our separate business units.

Net Premiums Written

Net premiums written amounted to $12.0 billion in 2006, a decrease of 3% compared with 2005. Amodest increase in premiums from our insurance business was more than oÅset by a decline inpremiums from our reinsurance assumed business. Net premiums written increased 2% in 2005 over2004, as an increase in premiums from our insurance business was partially oÅset by a decline inpremiums from our reinsurance assumed business.

Net premiums written by business unit were as follows:


% Increase % Increase(Decrease) (Decrease)

2006 2006 vs. 2005 2005 2005 vs. 2004 2004

(dollars in millions)

Personal insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,518 6% $ 3,307 6% $ 3,116

Commercial insurance ÏÏÏÏÏÏÏÏÏÏ 5,125 2 5,030 2 4,938

Specialty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,941 (3) 3,042 6 2,860

Total insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,584 2 11,379 4 10,914

Reinsurance assumed ÏÏÏÏÏÏÏÏÏÏÏ 390 (57) 904 (21) 1,139

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,974 (3) $12,283 2 $12,053

Net premiums written from our insurance business grew 2% in 2006 and 4% in 2005. Premiums in2005 were reduced by reinsurance reinstatement premium costs of $102 million related to HurricaneKatrina. Premiums in 2006 beneÑted from a $20 million reduction of previously accrued reinsurancereinstatement premium costs. Premiums in the United States, which represent almost 80% of ourinsurance premiums, grew by 1% in 2006 and 3% in 2005. Insurance premiums outside the U.S. grew 4%in 2006 and 8% in 2005. In local currencies, such growth was 3% and 6% in 2006 and 2005, respectively.

The modest overall growth in net written premiums in our insurance business in both 2006 and2005 reÖected our continued emphasis on underwriting discipline in an increasingly competitivemarket environment. Rates were generally stable, but were under competitive pressure that varied byclass of business and geographic territory. In both years, we retained a high percentage of our existingcustomers and renewed these accounts at prices we believe to be appropriate relative to the exposure.In addition, while we continued to be selective, we found opportunities to write new business atacceptable rates. We expect to see a rate environment in 2007 for each of our business units similar tothat we saw in 2006. Accordingly, we expect that overall premiums in our insurance business will beÖat in 2007 compared with 2006, with low-to-mid-single digit growth for personal insurance, Öatpremiums for commercial insurance and a modest decline in specialty insurance premiums.

Net reinsurance assumed premiums written decreased by 57% in 2006 and 21% in 2005. Premiumsin 2005 included net reinstatement premium revenue of $43 million related to Hurricane Katrina. Asdiscussed below, we sold our ongoing assumed reinsurance business to Harbor Point Limited inDecember 2005.

27


Reinsurance Ceded

Our premiums written are net of amounts ceded to reinsurers who assume a portion of the riskunder the insurance policies we write that are subject to the reinsurance.

Our overall ceded reinsurance premiums in 2005 were lower than those in 2004. During 2005, wediscontinued our professional liability per risk treaty. Underwriting actions we have taken in recentyears have resulted in lower average limits on those large risks we write, which we believe made thistreaty no longer economical. On our casualty clash treaty, which operates like a catastrophe treaty, weincreased our retention from $50 million to $75 million. We did not renew a high excess surety per risktreaty as we believe the cost was not justiÑed. On our commercial property per risk treaty, ourretention remained at $15 million. Our property catastrophe treaty for events in the United States wasmodiÑed to increase the coverage in the northeastern part of the country by $100 million. Ourproperty catastrophe treaty for events outside the United States was modiÑed to increase our retentionfrom $25 million to $50 million.

As a result of the substantial losses incurred by reinsurers from the catastrophes in 2004 and 2005,the cost of property catastrophe reinsurance increased signiÑcantly in 2006 and there were capacityrestrictions in the marketplace.

Although property catastrophe reinsurance rates increased in 2006, our overall ceded reinsurancepremiums for our insurance business, excluding the impact of reinstatement premiums related toHurricane Katrina, were only modestly higher than in 2005 due to modiÑcations to certain of ourreinsurance treaties. On our casualty clash treaty, our initial retention remained at $75 million. Wereduced our reinsurance coverage at the top of the program by $50 million and increased ourparticipation in the program. This treaty now provides coverage of approximately 55% of lossesbetween $75 million and $150 million per insured event. On our commercial property per risk treaty,we increased our retention from $15 million to $25 million. This treaty now provides $425 million ofcoverage per risk in excess of our retention. Our property catastrophe treaty for events in the UnitedStates was modiÑed to increase our initial retention from $250 million to $350 million and to increaseour participation in the program. At the same time, we increased the reinsurance coverage in thenortheastern part of the country by $400 million, enhancing our protection in the region where wehave our greatest concentration of exposure. The treaty now provides coverage of approximately 75%of losses (net of recoveries from other available reinsurance) between $350 million and $1.3 billion,with additional coverage of 80% of losses between $1.3 billion and $2.05 billion in the northeastern partof the country. Our property catastrophe treaty for events outside the United States was modiÑed toincrease our initial retention from $50 million to $75 million. The treaty now provides coverage ofapproximately 90% of losses (net of recoveries from other available reinsurance) between $75 millionand $275 million. Our property reinsurance treaties generally contain terrorism exclusions for actsperpetrated by foreign terrorists.

We do not expect the changes we made to our reinsurance program during 2005 and 2006 to havea material eÅect on the Corporation's results of operations, Ñnancial condition or liquidity.

Our casualty clash treaty and our property reinsurance treaties expire on April 1, 2007. While weexpect that reinsurance rates may rise somewhat in 2007, particularly as they relate to property risks,the Ñnal structure and amount of coverage purchased will be determinants of our ceded reinsurancepremium cost in 2007. We expect that the availability of reinsurance for certain coverages, such asterrorism, will continue to be very limited in 2007.

Most of our ceded reinsurance arrangements consist of excess of loss and catastrophe contractsthat protect against a speciÑed part or all of certain types of losses over stipulated amounts arising fromany one occurrence or event. Therefore, unless we incur losses that exceed our initial retention underthese contracts, we do not receive any loss recoveries. As a result, in certain years, we cede premiumsto other insurance companies and receive few, if any, loss recoveries. However, in a year in whichthere is a signiÑcant catastrophic event (such as Hurricane Katrina) or a series of large individuallosses, we may receive substantial loss recoveries. The impact of ceded reinsurance on net premiumswritten and earned and on net losses and loss expenses incurred for the three years endedDecember 31, 2006 is presented in Note (10) of the Notes to Consolidated Financial Statements.

28


ProÑtability

The combined loss and expense ratio, expressed as a percentage, is the key measure ofunderwriting proÑtability traditionally used in the property and casualty insurance business. Manage-ment evaluates the performance of our underwriting operations and of each of our business unitsusing, among other measures, the combined loss and expense ratio calculated in accordance withstatutory accounting principles. It is the sum of the ratio of losses and loss expenses to premiumsearned (loss ratio) plus the ratio of statutory underwriting expenses to premiums written (expenseratio) after reducing both premium amounts by dividends to policyholders. When the combined ratiois under 100%, underwriting results are generally considered proÑtable; when the combined ratio isover 100%, underwriting results are generally considered unproÑtable.

Statutory accounting principles applicable to property and casualty insurance companies diÅer incertain respects from generally accepted accounting principles (GAAP). Under statutory accountingprinciples, policy acquisition and other underwriting expenses are recognized immediately, not at thetime premiums are earned. Management uses underwriting results determined in accordance withGAAP, among other measures, to assess the overall performance of our underwriting operations. Toconvert statutory underwriting results to a GAAP basis, policy acquisition expenses are deferred andamortized over the period in which the related premiums are earned. Underwriting income deter-mined in accordance with GAAP is deÑned as premiums earned less losses incurred and GAAPunderwriting expenses incurred.

Underwriting results in 2006 were exceptionally proÑtable compared with highly proÑtable resultsin 2005 and 2004. The combined loss and expense ratio for our overall property and casualty businesswas as follows:

Years EndedDecember 31

2006 2005 2004

Loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55.2% 64.3% 63.1%

Expense ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.0 28.0 29.2

Combined loss and expense ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84.2% 92.3% 92.3%

The loss ratio was signiÑcantly lower in 2006 than in 2005, reÖecting the favorable loss experienceresulting from our disciplined underwriting in recent years as well as lower catastrophe losses. The lossratio was modestly higher in 2005 than in 2004 due to higher catastrophe losses, primarily fromHurricane Katrina.

At the end of 2005, we estimated that our net losses from Hurricane Katrina were $403 million andour net reinsurance reinstatement premium costs related to the hurricane were $59 million. In ourinsurance business, estimated net losses were $335 million and reinstatement premium costs were$102 million, for an aggregate cost of $437 million. In our reinsurance assumed business, estimated netlosses were $68 million and net reinstatement premium revenue was $43 million, for a net cost of$25 million. At the end of 2005, we estimated that our gross losses from Hurricane Katrina were about$1.2 billion. Almost all of the losses were from property exposure and business interruption claims. Ournet losses of $403 million were signiÑcantly lower than the gross amount due to a property per risktreaty that limited our net loss per risk and our property catastrophe treaty.

During 2006, a large percentage of our claims from Hurricane Katrina were settled. As a result,there were many adjustments, both favorable and unfavorable, to our loss estimates for individualclaims related to this event. These adjustments produced a reduction in our estimates for gross lossesand reinsurance recoverable of $190 and $175 million, respectively, as well as a $20 million reduction ofpreviously accrued reinsurance reinstatement premium costs. We still have over $500 million ofreinsurance available for this event under our catastrophe treaty if our gross losses are higher than ourcurrent estimate. Therefore, while it is possible that our estimate of ultimate losses related to

29


Hurricane Katrina may change in the future, we do not expect that any such change would have amaterial eÅect on the Corporation's results of operations, Ñnancial condition or liquidity.

Other than the reinsurance recoverable related to Hurricane Katrina, we did not have anyrecoveries from our catastrophe reinsurance treaties during the three year period ended December 31,2006 because there were no other individual catastrophes for which our losses exceeded our initialretention under the treaties.

Our net catastrophe losses incurred in 2006 were $173 million, which were oÅset in part by the$20 million reduction in previously accrued reinsurance reinstatement premium costs related toHurricane Katrina. The net impact of catastrophes in 2006 accounted for 1.4 percentage points of theloss ratio. In 2005, we incurred $630 million of net catastrophe losses and $59 million in related netreinsurance reinstatement premium costs, which in the aggregate accounted for 5.6 percentage pointsof the loss ratio. Losses from catastrophes were $270 million in 2004, which represented 2.3 percentagepoints of the loss ratio. The 2004 catastrophe loss amount reÖected an $80 million reduction in lossreserves related to the September 11, 2001 attack, which reduced the loss ratio for the year by 0.7 of apercentage point.

Our expense ratio increased in 2006 as net premiums written decreased whereas compensationand other operating costs increased. The decrease in the expense ratio in 2005 was due primarily tolower contingent commission expenses. To a lesser extent, the 2005 decrease was due to Öat overheadexpenses compared with 2004 and the discontinuation of a professional liability per risk reinsurancetreaty that resulted in an increase in net premiums written without a commensurate increase inexpenses.

Review of Underwriting Results by Business Unit

Personal Insurance

Net premiums written from personal insurance, which represented 29% of our premiums writtenin 2006, increased by 6% in both 2006 and 2005. Net premiums written for the classes of business withinthe personal insurance segment were as follows:


% Increase % Increase2006 2006 vs. 2005 2005 2005 vs. 2004 2004


Automobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 670 4% $ 645 2% $ 629

HomeownersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,268 8 2,104 8 1,951

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 580 4 558 4 536

Total personalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,518 6 $3,307 6 $3,116

In 2006 and 2005, premium growth was driven by our homeowners business. The growth in ourhomeowners business in both years was due to increased insurance-to-value and, to a lesser extent,modestly higher rates. The in-force policy count for this class of business had minimal growth in bothyears. Homeowners premiums in 2005 were reduced by reinsurance reinstatement premium costs of$17 million related to Hurricane Katrina. Premium growth in our personal automobile business in 2006and 2005 was due to selective initiatives outside the United States. Premiums in the U.S. declined inboth years due to our maintaining underwriting discipline in an increasingly competitive marketplace.Growth in our other personal business, which includes insurance for excess liability, yacht andaccident coverages, was similar in both years.

Our personal insurance business produced proÑtable underwriting results in each of the last threeyears. Overall results have shown substantial improvement in each succeeding year, driven largely by

30


our homeowners results. The combined loss and expense ratios for the classes of business within thepersonal insurance segment were as follows:


2006 2005 2004

AutomobileÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90.4% 95.3% 93.3%

Homeowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74.6 81.2 91.3

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98.6 96.2 96.0

Total personal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81.7% 86.6% 92.5%

Our personal automobile results were proÑtable in each of the past three years. Results in 2006were more proÑtable than in 2005 due to lower claim frequency and favorable loss developmentrelated to prior accident years. Results in 2005 were slightly less proÑtable than in 2004 due to reservestrengthening in the liability component related to prior accident years.

Homeowners results were proÑtable in each of the last three years. Results improved signiÑcantlyin 2005 and again in 2006. The improvement was largely the result of better pricing and a reduction inwater damage losses primarily through contract wording changes related to mold coverage and lossremediation measures that we have implemented over the past few years as well as lower catastrophelosses. The impact of catastrophes accounted for 5.7 percentage points of the combined loss andexpense ratio for this class in 2006 compared with 9.8 percentage points in 2005 and 12.6 percentagepoints in 2004.

Other personal business produced proÑtable results in each of the past three years. Results in 2006were less proÑtable than those in 2005 and 2004. Our excess liability business has deteriorated in eachof the past two years due to inadequate pricing and unfavorable loss development related to prioraccident years. Our yacht business was highly proÑtable in 2006 compared with unproÑtable results in2005 and 2004. Our accident business was highly proÑtable in all three years.

Commercial Insurance

Net premiums written from commercial insurance, which represented 43% of our premiumswritten in 2006, increased by 2% in both 2006 and 2005. Net premiums written for the classes ofbusiness within the commercial insurance segment were as follows:


% Increase % Increase(Decrease) (Decrease)

2006 2006 vs. 2005 2005 2005 vs. 2004 2004


Multiple peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,290 Ì% $1,286 (1)% $1,302

Casualty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,731 (1) 1,755 4 1,682

Workers' compensation ÏÏÏÏÏÏÏÏÏÏÏÏ 901 (3) 930 5 881

Property and marine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,203 14 1,059 (1) 1,073

Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,125 2 $5,030 2 $4,938

Growth in our commercial classes in 2006 and 2005 was limited due to a competitive marketplace.Rates were generally stable but were under competitive pressure in some classes of business,particularly non-catastrophe exposed property risks and certain casualty risks. Multiple peril andproperty and marine premiums in 2005 were reduced by reinsurance reinstatement premium costs of$19 million and $66 million, respectively, related to Hurricane Katrina. In 2006, property and marinepremiums beneÑted from a $20 million reduction of previously accrued reinsurance reinstatementpremium costs. Excluding the reinsurance reinstatement premiums, multiple peril premiums declined

31


1% in 2006 and were Öat in 2005 compared with the respective prior years and property and marinepremiums grew 5% in both 2006 and 2005.

Retention levels of our existing customers remained steady over the last three years. New businessvolume was slightly higher in 2006 compared with 2005, with the increase coming from outside theU.S. New business volume in 2005 was signiÑcantly lower than in 2004 due to decreased submissionactivity, which was the result of our competitors working to retain their better accounts. We havecontinued to maintain our underwriting discipline in the competitive market, renewing business andwriting new business only where we believe we are securing acceptable rates and appropriate termsand conditions for the exposures.

Our commercial insurance business produced proÑtable underwriting results in each of the pastthree years, particularly in 2006 and 2004. These proÑtable results were due in large part to thecumulative eÅect of price increases in prior years, better terms and conditions and more stringent riskselection. Results in each year also beneÑted from low non-catastrophe property losses. Results in 2005were less proÑtable than in 2006 and 2004, largely due to substantially higher catastrophe losses,primarily from Hurricane Katrina. The impact of catastrophes accounted for 8.3 percentage points ofthe combined loss and expense ratio for our commercial insurance business in 2005 whereas suchimpact was negligible in 2006 and 2004.

The combined loss and expense ratios for the classes of business within commercial insurancewere as follows:


2006 2005 2004

Multiple peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.8% 87.8% 76.8%

CasualtyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96.8 96.1 89.8

Workers' compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80.4 84.8 90.9

Property and marineÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72.5 98.8 72.7

Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83.1% 92.4% 82.5%

Multiple peril results were highly proÑtable in each of the past three years. Results in 2005 wereless proÑtable than in 2006 and 2004 largely due to higher catastrophe losses. The impact ofcatastrophes accounted for 2.9 percentage points of the combined loss and expense ratio for this classin 2006 compared with 9.1 percentage points in 2005. Catastrophe losses were negligible for this classin 2004 due to a $30 million reduction in net loss reserves related to the September 11, 2001 attack. Theproperty component of this business beneÑted from low non-catastrophe losses in all three years.Results in the liability component improved in 2005 and again in 2006.

Results for our casualty business were less proÑtable in 2006 and 2005 compared with the highlyproÑtable results in 2004. The automobile component of our casualty business was highly proÑtable ineach of the past three years. Results in the primary liability component were less proÑtable in eachsucceeding year. Results in the excess liability component were unproÑtable in 2006 and 2005compared with proÑtable results in 2004. Results in 2004 for this component beneÑted from a$30 million reduction in net loss reserves related to the September 11, 2001 attack. In 2006 and 2005,excess liability results and, to a lesser extent, primary liability results were adversely aÅected byunfavorable loss development related to older accident years.

Workers' compensation results were highly proÑtable in each of the past three years. Results weremore proÑtable in each succeeding year due to favorable claim cost trends. Results in all three yearsbeneÑted from our disciplined risk selection during the past several years.

Property and marine results were highly proÑtable in 2006 and 2004 compared with marginallyproÑtable results in 2005. The less proÑtable results in 2005 were due to substantially highercatastrophe losses, primarily from Hurricane Katrina. Results in each year beneÑted from relatively

32


few large non-catastrophe losses. The impact of catastrophes was negligible in 2006. Catastrophesaccounted for 27.2 percentage points of the combined loss and expense ratio in 2005 and 1.8 percent-age points in 2004. The impact of catastrophes in 2004 reÖects a $20 million reduction in net lossreserves related to the September 11, 2001 attack.

Specialty Insurance

Net premiums written from specialty insurance, which represented 25% of our premiums writtenin 2006, decreased by 3% in 2006 compared with a 6% increase in 2005. Net premiums written for theclasses of business within the specialty insurance segment were as follows:


% Increase(Decrease) % Increase

2006 2006 vs. 2005 2005 2005 vs. 2004 2004


Professional liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,641 (6)% $2,798 5% $2,654

SuretyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300 23 244 18 206

Total specialty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,941 (3) $3,042 6 $2,860

Growth in net premiums written for the professional liability classes of business was constrainedin both 2006 and 2005 by the continued competitive pressure on rates that began in the latter half of2003 and our commitment to maintain underwriting discipline in this environment. Growth in bothyears was also dampened by the sale of renewal rights, eÅective July 1, 2005, on our hospital medicalmalpractice and managed care errors and omissions business. The net premium growth in 2005 in theprofessional liability classes was due to the non-renewal of a per risk reinsurance treaty.

Rates were generally stable in 2006 and 2005 for most professional liability classes but were lowerin the for-proÑt directors and oÇcers liability component. Retention levels remained strong over thelast three years. New business volume declined in each of the past two years due to the increasedcompetition in the marketplace and, in 2005, our exiting the hospital medical malpractice and managedcare errors and omissions business. We continued to get what we believe are acceptable rates andappropriate terms and conditions on both new business and renewals. In line with our strategy inrecent years of directing our focus to small and middle market publicly traded and privately heldcompanies, the percentage of our book of business represented by large public companies hasdecreased.

The growth in net premiums written for our surety business was substantial in both 2006 and 2005.About half of the growth in both years was due to the non-renewal of a high excess reinsurance treatyduring 2005.

Our specialty insurance business produced highly proÑtable underwriting results in 2006 com-pared with modestly proÑtable results in 2005 and unproÑtable results in 2004. The combined loss andexpense ratios for the classes of business within specialty insurance were as follows:


2006 2005 2004

Professional liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91.8% 99.8% 112.0%

Surety ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44.2 62.9 57.2

Total specialty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87.5% 97.3% 108.2%

Our professional liability business improved substantially in 2005 and again in 2006, producingproÑtable results in 2006 compared with near breakeven results in 2005 and highly unproÑtable resultsin 2004. The Ñdelity component of our professional liability business was highly proÑtable in each ofthe past three years due to favorable loss experience. The results of the directors and oÇcers liability,

33


errors and omissions liability and Ñduciary liability components improved in 2005 and again in 2006,beneÑting from the cumulative eÅect of price increases in prior years, lower policy limits and betterterms and conditions. Results in 2006 also beneÑted from modest favorable loss development related toprior accident years. Conversely, results in 2005 and 2004, but more so in 2004, were adversely aÅectedby unfavorable loss development related to accident years prior to 2003. This adverse development waspredominantly from claims that have arisen due to corporate failures and allegations of managementmisconduct and accounting irregularities. Adverse development was particularly signiÑcant in 2004due to an increase of about $160 million in errors and omissions liability loss reserves in the secondquarter related to investment banks.

Our surety business produced highly proÑtable results in each of the past three years due tofavorable loss experience.

Our surety business tends to be characterized by infrequent but potentially high severity losses.We continue to manage our exposure on an absolute basis and by speciÑc bond type. The majority ofour obligations are intended to be performance-based guarantees. When losses occur, they aremitigated, at times, by the customer's balance sheet, contract payments, collateral and bankruptcyrecoveries.

We continue to have substantial commercial and construction surety exposure for current andprior customers, including exposures related to surety bonds issued on behalf of companies that haveexperienced deterioration in creditworthiness since we issued bonds to them. We therefore mayexperience an increase in Ñled claims and may incur high severity losses. Such losses would berecognized if and when claims are Ñled and determined to be valid, and could have a material adverseeÅect on the Corporation's results of operations and liquidity.

Reinsurance Assumed

In December 2005, we completed a transaction involving a new Bermuda-based reinsurancecompany, Harbor Point Limited. As part of the transaction, we transferred our continuing reinsuranceassumed business and certain related assets, including renewal rights, to Harbor Point. Harbor Pointgenerally did not assume our reinsurance liabilities relating to reinsurance contracts incepting prior toDecember 31, 2005. We retained those liabilities and the related assets.

Other than pursuant to certain arrangements entered into with Harbor Point, we generally nolonger engage directly in the reinsurance assumed business. However, Harbor Point has the right for atransition period of up to two years to underwrite speciÑc reinsurance business on our behalf. Weretain a portion of any such business and cede the balance to Harbor Point in return for a frontingcommission. We will receive additional payments based on the amount of business renewed by HarborPoint, which will be recognized when earned.

Net premiums written from our reinsurance assumed business, which represented 3% of ourpremiums written in 2006, decreased by 57% in 2006 and 21% in 2005. The signiÑcant decrease inpremiums in 2006 was expected in light of the sale of our continuing reinsurance assumed business toHarbor Point. The decrease in premiums in 2005 was in line with our expectations as we hadanticipated fewer attractive opportunities in the reinsurance market. Premiums in 2005 included netreinsurance reinstatement premium revenue of $43 million related to Hurricane Katrina.

Our reinsurance assumed business was proÑtable in 2006, 2005 and 2004. Results in 2006 wereparticularly proÑtable. While the volume of business was substantially lower than in the previous twoyears, results in 2006 beneÑted from signiÑcant favorable loss development related to prior accidentyears. Results in 2005 were similar to those in 2004 despite higher catastrophe losses.

34


Regulatory Developments

To promote and distribute our insurance products, we rely on independent brokers and agents.Accordingly, our business is dependent on the willingness of these brokers and agents to recommend ourproducts to their customers. Prior to 2007, we had agreements in place with certain insurance agents andbrokers under which, in addition to the standard commissions that we pay, we agreed to paycommissions that were contingent on the volume and/or the profitability of business placed with us.

We have been involved in the ongoing investigations of certain business practices in the propertyand casualty insurance industry by various Attorneys General and other regulatory authorities ofseveral states, the U.S. Securities and Exchange Commission, the U.S. Attorney for the SouthernDistrict of New York and certain non-U.S. regulatory authorities with respect to, among other things,(1) potential conÖicts of interest and anti-competitive behavior arising from the payment of contin-gent commissions to brokers and agents and (2) loss mitigation and Ñnite reinsurance arrangements. Inconnection with these investigations, we have received subpoenas and other requests for informationfrom various regulators. We have been cooperating fully with these investigations. Although noregulatory action has been initiated against us, it is possible that one or more regulatory authorities willbring an action against us with respect to some or all of the issues that are the focus of these ongoinginvestigations.

On December 21, 2006, we entered into an Assurance of Discontinuance with the AttorneysGeneral of New York, Connecticut and Illinois, resolving all issues arising out of those oÇcials'investigations of the market practices described above. As part of this agreement, we agreed tocontribute $15 million to a settlement fund established for the beneÑt of certain customers. We alsoagreed to pay $2 million to help defray the costs of the investigations by the Attorneys General. Inaddition, we agreed to implement certain business reforms, including discontinuing the payment ofcontingent commissions in the United States on all insurance lines beginning in 2007. The settlementdid not require that we pay a Ñne or penalty.

In lieu of paying contingent commissions, we will pay, beginning in 2007, guaranteed supplemen-tal compensation to all agents and brokers with whom we previously had contingent commissionagreements. Under this arrangement, agents and brokers will be paid a percentage of written premiumson eligible lines of business in a calendar year based upon their prior performance. We do not believethat our payment of guaranteed supplemental compensation in lieu of contingent commissions or anyof the other business reforms that we are implementing will have a material adverse eÅect on theCorporation's business, results of operations or Ñnancial condition.

Chubb and certain of its subsidiaries have been named in legal proceedings brought by privateplaintiÅs arising out of the investigations into the payment of contingent commissions to brokers andagents. These legal proceedings are further described in Note (14) of the Notes to ConsolidatedFinancial Statements.

We cannot predict at this time the ultimate outcome of the ongoing investigations and legalproceedings referred to above, including any potential amounts that we may be required to pay inconnection with them.

A number of states have announced that they are looking at compensation arrangements in theinsurance industry and are considering regulatory action or reform in this area. Such actions or reformsrange in nature from disclosure requirements to prohibition of certain forms of compensation toimposition of new duties on agents, brokers or insurance companies in dealing with customers. Suchactions or reforms, if adopted, could have an impact on our ability to renew business or write newbusiness.

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Catastrophe Risk Management

Our property and casualty subsidiaries have exposure to losses caused by natural perils such ashurricanes and other windstorms, earthquakes, winter storms and brush Ñres and from man-madecatastrophic events such as terrorism. The frequency and severity of catastrophes are unpredictable.

Natural Catastrophes

The extent of losses from a natural catastrophe is a function of both the total amount of insuredexposure in an area aÅected by the event and the severity of the event. We regularly assess ourconcentration of risk exposures in catastrophe exposed areas globally and have strategies andunderwriting standards to manage this exposure through individual risk selection, subject to regulatoryconstraints, and through the purchase of catastrophe reinsurance. We have invested in modelingtechnologies and a risk concentration management tool that allow us to monitor and control ouraccumulations of potential losses in catastrophe exposed areas in the United States, such as Californiaand the gulf and east coasts, as well as in such areas in other countries. Actual results may diÅermaterially from those suggested by the model. We also continue to actively explore and analyzecredible scientiÑc evidence, including the impact of global climate change, that may aÅect our abilityto manage exposure under the insurance policies we issue.

Despite these eÅorts, the occurrence of one or more severe natural catastrophic events in heavilypopulated areas could have a material adverse eÅect on the Corporation's results of operations,Ñnancial condition or liquidity.

Terrorism Risk and Legislation

The September 11, 2001 attack changed the way the property and casualty insurance industryviews catastrophic risk. That tragic event demonstrated that numerous classes of business we write aresubject to terrorism related catastrophic risks in addition to the catastrophic risks related to naturaloccurrences. This, together with the limited availability of terrorism reinsurance, has required us tochange how we identify and evaluate risk accumulations. We have licensed a terrorism model thatprovides loss estimates under numerous event scenarios. Also, the above noted risk concentrationmanagement tool enables us to identify locations and geographic areas that are exposed to riskaccumulations. The information provided by the model and the tracking tool has resulted in our non-renewing some accounts and has restricted us from writing others. Actual results may diÅer materiallyfrom those suggested by the model.

The Terrorism Risk Insurance Act of 2002 (TRIA) established a temporary program under whichthe federal government will share the risk of loss from certain acts of international terrorism with theinsurance industry. The program, which was applicable to most lines of commercial business, wasscheduled to terminate on December 31, 2005. In December 2005, the federal government extendedTRIA through December 31, 2007. Under the terms of the amended law, certain lines of businesspreviously subject to the provisions of TRIA, including commercial automobile, surety and profes-sional liability insurance, other than directors and oÇcers liability, are excluded from the program. Asa precondition to recovery under TRIA, insurance companies with direct commercial insuranceexposure in the United States for TRIA lines of business are required to make insurance for coveredacts of terrorism available under their policies. Each insurer has a separate deductible that it must meetin the event of an act of terrorism before federal assistance becomes available. The deductible is basedon a percentage of direct U.S. earned premiums for the covered lines of business in the previouscalendar year. For 2007, that deductible is 20% of direct premiums earned in 2006 for these lines ofbusiness. 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 governmentand all insurers of $100 billion. If acts of terrorism result in covered losses exceeding the $100 billionannual limit, insurers are not liable for additional losses. While the provisions of TRIA will serve tomitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial,approximating $1 billion in 2007.

For certain classes of business, such as workers' compensation, terrorism insurance is mandatory. Forthose classes of business where it is not mandatory, policyholders may choose not to accept terrorisminsurance, which would, subject to other statutory or regulatory restrictions, reduce our exposure.

36


It is unclear at this time whether Congress will reauthorize TRIA for periods subsequent toDecember 31, 2007. Regardless of whether or not TRIA is extended, we will continue to manage thistype of catastrophic risk by monitoring terrorism risk aggregations. Nevertheless, given the unpredict-ability of the targets, frequency and severity of potential terrorist events as well as the very limitedterrorism reinsurance coverage available in the market, the occurrence of any such events could havea material adverse eÅect on the Corporation's results of operations, Ñnancial condition or liquidity.

We also have exposure outside the United States to risk of loss from acts of terrorism. In somejurisdictions, we have access to government mechanisms that would mitigate our exposure.

Loss Reserves

Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability of ourproperty and casualty subsidiaries.

Our loss reserves include case estimates for claims that have been reported and estimates forclaims that have been incurred but not reported as well as estimates of the expenses associated withprocessing and settling all reported and unreported claims, less estimates of anticipated salvage andsubrogation recoveries. Estimates are based upon past loss experience modiÑed for current trends aswell as prevailing economic, legal and social conditions. Our loss reserves are not discounted topresent value.

We regularly review our loss reserves using a variety of actuarial techniques. We update thereserve estimates as historical loss experience develops, additional claims are reported and/or settledand new information becomes available. Any changes in estimates are reÖected in operating results inthe period in which the estimates are changed.

Our gross case and incurred but not reported (IBNR) loss reserves and related reinsurancerecoverable by class of business were as follows:

Gross Loss Reserves Reinsurance Net LossDecember 31, 2006 Case IBNR Total Recoverable Reserves

(in millions)

Personal insurance

Automobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 261 $ 178 $ 439 $ 14 $ 425

Homeowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 421 298 719 54 665

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 443 459 902 245 657

Total personal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,125 935 2,060 313 1,747

Commercial insurance

Multiple peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 702 965 1,667 74 1,593

Casualty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,668 3,922 5,590 377 5,213

Workers' compensationÏÏÏÏÏÏÏÏÏÏÏÏ 827 1,223 2,050 310 1,740

Property and marine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 821 393 1,214 536 678

Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,018 6,503 10,521 1,297 9,224

Specialty insurance

Professional liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,542 5,598 8,140 852 7,288

Surety ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 56 78 19 59

Total specialtyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,564 5,654 8,218 871 7,347

Total insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,707 13,092 20,799 2,481 18,318

Reinsurance assumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 464 1,030 1,494 113 1,381

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,171 $14,122 $22,293 $2,594 $19,699

37


Gross Loss Reserves Reinsurance Net LossDecember 31, 2005 Case IBNR Total Recoverable Reserves

(in millions)

Personal insurance

Automobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 260 $ 170 $ 430 $ 12 $ 418

Homeowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 510 307 817 120 697

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 430 382 812 232 580

Total personal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,200 859 2,059 364 1,695

Commercial insurance

Multiple peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 830 939 1,769 173 1,596

Casualty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,645 3,570 5,215 378 4,837

Workers' compensationÏÏÏÏÏÏÏÏÏÏÏÏ 825 1,064 1,889 338 1,551

Property and marine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,381 549 1,930 1,175 755

Total commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,681 6,122 10,803 2,064 8,739

Specialty insurance

Professional liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,886 5,131 8,017 1,240 6,777

Surety ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 55 65 19 46

Total specialtyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,896 5,186 8,082 1,259 6,823

Total insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,777 12,167 20,944 3,687 17,257

Reinsurance assumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 408 1,130 1,538 82 1,456

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,185 $13,297 $22,482 $3,769 $18,713

Loss reserves, net of reinsurance recoverable, increased by $1.0 billion or 5% in 2006. The mostsigniÑcant increases occurred in the commercial casualty, workers' compensation and professionalliability classes of business. The decreases in gross loss reserves and reinsurance recoverable during2006 in the property and marine, multiple peril and homeowners classes were due to payments andreductions in our loss estimates related to Hurricane Katrina. The decrease in reinsurance recoverablein the professional liability classes was due primarily to signiÑcant recoveries related to older accidentyears and the discontinuation of the per risk treaty in 2005.

In establishing the loss reserves of our property and casualty subsidiaries, we consider factscurrently known and the present state of the law and coverage litigation. Based on all informationcurrently available, we believe that the aggregate loss reserves at December 31, 2006 were adequate tocover claims for losses that had occurred as of that date, including both those known to us and thoseyet to be reported. However, as described below, there are signiÑcant uncertainties inherent in theloss reserving process. It is therefore possible that management's estimate of the ultimate liability forlosses that had occurred as of December 31, 2006 may change, which could have a material eÅect onthe Corporation's results of operations and Ñnancial condition.

Estimates and Uncertainties

The process of establishing loss reserves is complex and imprecise as it must take into considera-tion many variables that are subject to the outcome of future events. As a result, informed subjectiveestimates and judgments as to our ultimate exposure to losses are an integral component of our lossreserving process.

Due to the inherent complexity of the loss reserving process and the potential variability of theassumptions used, the actual emergence of losses could vary, perhaps substantially, from the estimateof losses included in our Ñnancial statements, particularly when settlements may not occur until wellinto the future. Our net loss reserves at December 31, 2006 were $19.7 billion. Therefore, a relativelysmall percentage change in the estimate of net loss reserves would have a material eÅect on theCorporation's results of operations.

38


Reserves Other than Those Relating to Asbestos and Toxic Waste Claims. Our loss reservesinclude amounts related to short tail and long tail classes of business. ""Tail'' refers to the time periodbetween the occurrence of a loss and the settlement of the claim. The longer the time span betweenthe incidence of a loss and the settlement of the claim, the more the ultimate settlement amount canvary.

Short tail classes consist principally of homeowners, commercial property and marine business.For these classes, the estimation of loss reserves is less complex because claims are generally reportedand settled shortly after the loss occurs and the claims relate to tangible property.

Most of our loss reserves relate to long tail liability classes of business. Long tail classes includedirectors and oÇcers liability, errors and omissions liability and other professional liability coverages,commercial primary and excess liability, workers' compensation and other liability coverages. Formany liability claims signiÑcant periods of time, ranging up to several years or more, may elapsebetween the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As aresult, loss experience in the more recent accident years for the long tail liability classes has limitedstatistical credibility because a relatively small proportion of losses in these accident years are reportedclaims and an even smaller proportion are paid losses. An accident year is the calendar year in which aloss 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 signiÑcantly aÅected by changingcontract interpretations and the legal environment. Consequently, the estimation of loss reserves forthese classes is more complex and typically subject to a higher degree of variability than for short tailclasses.

Most of our reinsurance assumed business is long tailed casualty reinsurance. Reserve estimatesfor 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 theclaim is reported to the ceding insurer and when it is reported by the ceding insurer to us and by ourdependence on the quality and consistency of the loss reporting by the ceding company.

Our actuaries perform a comprehensive annual review of loss reserves for each of the numerousclasses of business we write prior to the determination of the year end carried reserves. The reviewprocess takes into consideration the variety of trends that impact the ultimate settlement of claims ineach particular class of business. A similar, but somewhat less comprehensive, review is performed forthe major classes of business prior to the determination of the June 30 carried reserves. At the end ofthe Ñrst and third quarters, our actuaries review the emergence of paid and reported losses relative toexpectations and, as necessary, conduct reserve reviews for particular classes of business.

The loss reserve estimation process relies on the basic assumption that past experience, adjustedfor the eÅects of current developments and likely trends, is an appropriate basis for predicting futureoutcomes. As part of that process, our actuaries use a variety of actuarial methods that analyzeexperience, trends and other relevant factors. The principal standard actuarial methods used by ouractuaries in the loss reserve reviews include loss development factor methods, expected loss ratiomethods, Bornheutter-Ferguson methods and frequency/severity methods.

Loss development factor methods generally assume that the losses yet to emerge for an accidentyear are proportional to the paid or reported loss amount observed so far. Reported losses includecumulative paid losses plus case reserves. Historical patterns of the development of paid and reportedlosses by accident year are applied to current paid and reported losses to generate estimated ultimatelosses by accident year.

Expected loss ratio methods use loss ratios for prior accident years, adjusted to reÖect ourevaluation of recent loss trends, the current risk environment, changes in our book of business andchanges in our pricing and underwriting, to determine the appropriate expected loss ratio for a givenaccident year. The accident year expected loss ratio is multiplied by the calendar year earnedpremiums to calculate estimated ultimate losses.

39


Bornheutter-Ferguson methods are combinations of an expected loss ratio method and a lossdevelopment factor method, where the loss development factor method is given more weight as anaccident year matures.

Frequency/severity methods Ñrst project ultimate claim counts (using one or more of the othermethods described above) and then multiply those counts by an estimated average claim cost toestimate ultimate losses. The average claims costs are often estimated by Ñtting historical severity datato an observed trend.

Using the various actuarial methods, our actuaries estimate the ultimate cost of all claims byaccident year for each class of business. From this amount, cumulative paid losses and loss expensesand case reserves are subtracted to estimate the IBNR reserve for each class of business. The IBNRreserve includes a provision for claims that have occurred but have not yet been reported to us, someof which are not yet known to the insured, as well as a provision for future development on reportedclaims. A relatively large proportion of our net loss reserves, particularly for long tail liability classes,are reserves for IBNR losses. In fact, more than 65% of our aggregate net loss reserves at December 31,2006 were for IBNR losses.

In completing their loss reserve analysis, our actuaries are required to determine the mostappropriate actuarial methods to employ for each class of business. Within each class, the business isfurther segregated by accident year and generally by jurisdiction. Each estimation method has its ownpattern, parameter and/or judgmental dependencies, with no estimation method being better than theothers in all situations. The relative strengths and weaknesses of the various estimation methods canalso change over time. In many cases, multiple estimation methods will be valid for the particular factsand circumstances of the relevant class of business. The manner of application and the degree ofreliance on a given method will vary by class of business, by accident year and by jurisdiction based onour actuaries' evaluation of the above dependencies and the potential volatility of the loss frequencyand severity patterns. The estimation methods selected or given weight by our actuaries at a particularvaluation date are those that are believed to produce the most reliable indication for the loss reservesbeing evaluated. These selections incorporate input from claims personnel, pricing actuaries andunderwriting management on loss cost trends and other factors that could aÅect the reserve estimates.

For short tail classes, the emergence of paid and incurred losses is likely indicative of ultimatelosses. For these classes, the loss development factor method is generally relatively straightforward toapply and usually requires only modest extrapolation. For long tail classes, applying the lossdevelopment factor method often requires more judgment in selecting development factors as well asmore signiÑcant extrapolation. For those long tail classes with high frequency and relatively low per-loss severity (e.g. workers' compensation), volatility will often be suÇciently modest for the lossdevelopment factor method to be given signiÑcant weight, except in the most recent accident years.

For certain long tail classes of business, however, anticipated loss experience is less predictablebecause of the small number of claims and/or erratic claim severity patterns. These classes includedirectors and oÇcers liability, errors and omissions liability and commercial excess liability, amongothers. For these classes, the actuarial estimates for the most recent accident years are based on lessextrapolatory methods, such as expected loss ratio and Bornheutter-Ferguson methods. Over time, as agreater number of claims are reported and the statistical credibility of loss experience increases, lossdevelopment factor methods are given increasingly more weight.

Using all the available data, our actuaries select an indicated loss reserve amount for each class ofbusiness based on the various assumptions, projections and methods. The total indicated reserveamount determined by our actuaries is an aggregate of the indicated reserve amounts for the individualclasses of business. The ultimate outcome is likely to fall within a range of potential outcomes aroundthis indicated amount, but the indicated amount is not expected to be precisely the ultimate liability.

Senior management meets with the actuaries at the end of each quarter to review the results ofthe latest loss reserve analysis. Based on this review, management determines the carried reserve for

40


each class of business. In making the determination, management considers numerous factors, such aschanges in actuarial indications in the period, the maturity of the accident year, trends observed overthe recent past and the level of volatility within a particular class of business. Such an assessmentrequires considerable judgment. It is often not possible to determine whether a change in the datarepresents credible actionable information or an anomaly. Even if a change is determined to bepermanent, it is not always possible to determine the extent of the change until sometime later. As aresult, there can be a time lag between the emergence of a change and a determination that the changeshould be reÖected in the carried loss reserves. In general, changes are made more quickly to moremature accident years and less volatile classes of business.

Among the numerous factors that contribute to the inherent uncertainty in the process ofestablishing loss reserves are the following:

‚ changes in the inÖation rate for goods and services related to covered damages such as medicalcare and home repair costs,

‚ changes in the judicial interpretation of policy provisions relating to the determination ofcoverage,

‚ 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 butnot reported as of the date of the Ñnancial 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 eÅects of emerging or potential claims and coverageissues that arise as legal, judicial and social conditions change. These issues can have a negative eÅecton our loss reserves by either extending coverage beyond the original underwriting intent or byincreasing the number or size of claims. Recent examples of such issues include the number ofdirectors and oÇcers liability claims arising out of stock option ""backdating'' practices by certainpublic companies, the number and size of directors and oÇcers liability and errors and omissionsliability claims arising out of investment banking practices and accounting and other corporatemalfeasance, and exposure to claims asserted for bodily injury as a result of long-term exposure toharmful products or substances. As a result of issues such as these, the uncertainties inherent inestimating ultimate claim costs on the basis of past experience have grown, further complicating thealready complex loss reserving process.

As part of our loss reserving analysis, we take into consideration the various factors that contributeto the uncertainty in the loss reserving process. Those factors that could materially aÅect our lossreserve estimates include loss development patterns and loss cost trends, rate and exposure levelchanges, the eÅects of changes in coverage and policy limits, re-underwriting eÅorts and business mixshifts, the eÅects of regulatory and legislative developments, the eÅects of changes in judicialinterpretations, the eÅects of emerging claims and coverage issues, and the eÅects of changes in claimhandling practices. In making estimates of reserves, however, we do not necessarily make an explicitassumption for each of these factors. Moreover, all estimation methods do not utilize the sameassumptions and typically no single method is determinative in the reserve analysis for a class ofbusiness. Consequently, changes in our loss reserve estimates generally are not the result of changes inany one assumption. Instead, the variability will be aÅected by the interplay of changes in multipleassumptions, many of which are implicit to the approaches used.

41


For each class of business, we regularly adjust the assumptions and actuarial methods used in theestimation of loss reserves in response to our actual loss experience as well as our judgments regardingchanges in trends and/or emerging patterns. In those instances where we primarily utilize analyses ofhistorical patterns of the development of paid and reported losses, this may be reÖected, for example,in the selection of revised loss development factors. In those long tail classes of business Ìprofessional liability and commercial casualty Ì that comprise a majority of our loss reserves and forwhich loss experience is less predictable due to potential changes in judicial interpretations, potentiallegislative actions and potential claims issues, this may be reÖected in a judgmental change in ourestimate of ultimate losses for particular accident years.

The future impact of the various factors that contribute to the uncertainty in the loss reservingprocess is extremely diÇcult to predict. There is potential for signiÑcant variation in the developmentof loss reserves, particularly for long tail classes of business. We do not derive statistical lossdistributions or outcome conÑdence levels around our loss reserve estimate. Actuarial ranges ofreasonable estimates are not a true reÖection of the potential volatility between carried loss reservesand 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 thevaluation date whereas the ultimate disposition of losses is subject to the outcome of events andcircumstances that were unknown as of the valuation date.

The following discussion includes disclosure of possible variation from current estimates of lossreserves due to a change in certain key assumptions for particular classes of business. These impactsare estimated individually, without consideration for any correlation among such assumptions oramong lines of business. Therefore, it would be inappropriate to take the amounts and add themtogether in an attempt to estimate volatility for our loss reserves in total. We believe that the estimatedvariation in reserves detailed below is a reasonable estimate of the possible variation that may occur inthe future. However, if such variation did occur, it would likely occur over a period of several yearsand therefore its impact on the Corporation's results of operations would be spread over the sameperiod. It is important to note, however, that there is the potential for future variation greater than theamounts discussed below.

Two of the larger components of our loss reserves relate to the professional liability classes otherthan Ñdelity and commercial excess liability. The respective reported loss development patterns arekey assumptions in estimating loss reserves for these classes of business, both as applied directly tomore mature accident years and as applied indirectly (e.g., via Bornheutter-Ferguson methods) to lessmature accident years.

Reserves for the professional liability classes other than Ñdelity were $6.9 billion, net ofreinsurance, at December 31, 2006. Based on a review of our loss experience, if the loss developmentfactor for each accident year changed such that the cumulative loss development factor for the mostrecent accident year changed by 10%, we estimate that the net reserves for the professional liabilityclasses other than Ñdelity would change by approximately $600 million, in either direction. This degreeof change in the reported loss development pattern is within the historical variation around theaverages in our data.

Reserves for commercial excess liability (excluding asbestos and toxic waste claims) were$2.7 billion, net of reinsurance, at December 31, 2006. These reserves are included within commercialcasualty. Based on a review of our loss experience, if the loss development factor for each accidentyear changed such that the cumulative loss development factor for the most recent accident yearchanged by 15%, we estimate that the net reserves for commercial excess liability would change byapproximately $250 million, in either direction. This degree of change in the reported loss develop-ment 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 toasbestos and toxic waste claims on insurance policies written many years ago is subject to greateruncertainty than other types of claims due to inconsistent court decisions as well as judicial

42


interpretations and legislative actions that in some cases have tended to broaden coverage beyond theoriginal intent of such policies and in others have expanded theories of liability. The insuranceindustry as a whole is engaged in extensive litigation over coverage and liability issues and is thusconfronted with a continuing uncertainty in its eÅorts to quantify these exposures.

Reserves for asbestos and toxic waste claims cannot be estimated with traditional actuarial lossreserving techniques that rely on historical accident year loss development factors. Instead, we rely onan exposure-based analysis that involves a detailed review of individual policy terms and exposures.Because each policyholder presents diÅerent liability and coverage issues, we generally evaluate ourexposure on a policyholder-by-policyholder basis, considering a variety of factors that are unique toeach policyholder. Quantitative techniques have to be supplemented by subjective considerationsincluding management's judgment.

We establish case reserves and expense reserves for costs of related litigation where suÇcientinformation has been developed to indicate the involvement of a speciÑc 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, 2006 for asbestos and toxic waste claimswere adequate. However, given the judicial decisions and legislative actions that have broadened thescope of coverage and expanded theories of liability in the past and the possibilities of similarinterpretations in the future, it is possible that our estimate of loss reserves relating to these exposuresmay increase in future periods as new information becomes available and as claims develop.

Asbestos Reserves. Asbestos remains the most signiÑcant and diÇcult mass tort for the insuranceindustry in terms of claims volume and dollar exposure. Asbestos claims relate primarily to bodilyinjuries asserted by those who came in contact with asbestos or products containing asbestos. Untilrecently, judicial interpretations and legislative actions attempted to maximize insurance availabilityfrom both a coverage and liability standpoint. Early court cases established the ""continuous trigger''theory with respect to insurance coverage. Under this theory, insurance coverage is deemed to betriggered from the time a claimant is Ñrst exposed to asbestos until the manifestation of any disease.This interpretation of a policy trigger can involve insurance companies over many years and increasestheir exposure to liability.

New asbestos claims and new exposures on existing claims have continued despite the fact thatusage of asbestos has declined since the mid-1970's. Each claim Ñling typically names dozens ofdefendants. The plaintiÅs' bar has solicited new claimants through extensive advertising and throughasbestos medical screenings. A vast majority of asbestos bodily injury claims have been Ñled byclaimants who do not show any signs of asbestos related disease. New asbestos cases are often Ñled inthose jurisdictions with a reputation for judges and juries that are extremely sympathetic to plaintiÅs.

Approximately 80 manufacturers and distributors of asbestos products have Ñled for bankruptcyprotection as a result of asbestos-related liabilities. A bankruptcy sometimes involves an agreement to aplan between the debtor and its creditors, including current and future asbestos claimants. Althoughthe debtor is negotiating in part with its insurers' money, insurers are generally given only limitedopportunity to be heard. In addition to contributing to the overall number of claims, bankruptcyproceedings have also caused increased settlement demands against remaining solvent defendants.

There have been several recent positive events in the asbestos environment:

‚ Various challenges to mass screening claimants have been mounted, including a June 2005U.S. District Court decision in Texas. Many believe that this decision is leading to highermedical evidentiary standards. For example, several asbestos injury settlement trusts haverefused new claims that were based on the diagnosis of physicians or screening companiesnamed in the case, citing questions regarding their reliability. Further investigations of themedical screening process for asbestos claims are underway.

43


‚ A number of states have implemented legislative and judicial reforms that focus the courts'attention on the claims of the most seriously injured. Legislation that sets medical criteria thatmust be met for plaintiÅs to proceed with their claims has been enacted in several states and ispending in others. Similarly, judicial reforms such as inactive dockets, which preserve the rightto sue for those who do not currently meet the speciÑc medical criteria, have been establishedin several jurisdictions.

‚ A number of key jurisdictions have adopted venue reform that requires plaintiÅs to have aconnection to the jurisdiction in order to Ñle a complaint.

‚ In recognition that many aspects of bankruptcy plans are unfair to certain classes of claimantsand to the insurance industry, these plans are beginning to be closely scrutinized by the courtsand rejected when appropriate.

Our most signiÑcant individual asbestos exposures involve products liability on the part of""traditional'' defendants who were engaged in the manufacture, distribution or installation of asbestosproducts. We wrote excess liability and/or general liability coverages for these insureds. While theseinsureds are relatively few in number, their exposure has become substantial due to the increasedvolume 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 containasbestos 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 financialresources of traditional asbestos defendants have been depleted, plaintiffs are targeting these viableperipheral parties with greater frequency and, in many cases, for larger awards.

Asbestos claims against the major manufacturers, distributors or installers of asbestos productswere typically presented under the products liability section of primary general liability policies aswell as under excess liability policies, both of which typically had aggregate limits that capped aninsurer'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 oroperators who allegedly had asbestos on their property, under the premises or operations section ofprimary general liability policies. Unlike products exposures, these non-products exposures typicallyhad no aggregate limits on coverage, creating potentially greater exposure. Further, in an eÅort to seekadditional insurance coverage, some insureds with installation activities who have substantially erodedtheir products coverage are presenting new asbestos claims as non-products operations claims orattempting to reclassify previously settled products claims as non-products claims to restore a portionof previously exhausted products aggregate limits. It is diÇcult to predict whether insureds will besuccessful in asserting claims under non-products coverage or whether insurers will be successful inasserting additional defenses. Accordingly, the ultimate cost to insurers of the claims for coverage notsubject to aggregate limits is uncertain.

In establishing our asbestos reserves, we evaluate the exposure presented by each insured. As partof this evaluation, we consider a variety of factors including: the available insurance coverage; limitsand deductibles; the jurisdictions involved; past settlement values of similar claims; the potential roleof other insurance, particularly underlying coverage below our excess liability policies; potentialbankruptcy impact; and applicable coverage defenses, including asbestos exclusions. We have assumeda continuing unfavorable legal environment with no beneÑt from any federal asbestos reformlegislation. Proposed legislation that would have created a $140 billion asbestos trust fund but wouldhave provided neither certainty nor Ñnality was not adopted and the future of federal legislationremains uncertain.

Our actuaries and claim personnel perform periodic analyses of our asbestos related exposures.The analyses during 2004 noted that both the number of peripheral asbestos defendants for whom weestablished reserves and the average severity of these claims were somewhat higher than expected. In

44


addition, there was an increase in our estimate of the ultimate liabilities for one of our traditionalasbestos defendants. The analyses during 2005 noted an increase in our estimate of the ultimateliabilities for two of our asbestos defendants. The analyses during 2006 noted positive developments,including several settlements, related to certain of our traditional asbestos defendants. At the sametime, the analyses indicated that our exposure to loss from claims against our peripheral defendantswas somewhat higher than previously expected. Based on these analyses, which were supported by ouroutside actuarial consultants, we increased our net asbestos loss reserves by $75 million in 2004,$35 million in 2005 and $18 million in 2006.

The following table presents a reconciliation of the beginning and ending loss reserves related toasbestos claims.


2006 2005 2004

(in millions)

Gross loss reserves, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $930 $961 $1,068

Reinsurance recoverable, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 55 56

Net loss reserves, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 880 906 1,012

Net incurred losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 35 75

Net losses paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 109 61 181

Net loss reserves, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 789 880 906

Reinsurance recoverable, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 50 55

Gross loss reserves, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $841 $930 $ 961

The following table presents the number of policyholders for whom we have open asbestos casereserves and the related net loss reserves at December 31, 2006 as well as the net losses paid during2006 by component.

Number of Net Loss Net LossesPolicyholders Reserves Paid

(in millions)

Traditional defendants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 $203 $ 43

Peripheral defendants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 392 451 66

Future claims from unknown policyholders ÏÏÏÏÏÏÏÏÏÏÏÏ 135

$789 $109

SigniÑcant uncertainty remains as to our ultimate liability related to asbestos related claims. Thisuncertainty is due to several factors including:

‚ the long latency period between asbestos exposure and disease manifestation and the resultingpotential for involvement of multiple policy periods for individual claims;

‚ plaintiÅs' increased focus on peripheral defendants;

‚ the volume of claims by unimpaired plaintiÅs and the extent to which they can be precludedfrom making claims;

‚ the eÅorts by insureds to obtain 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 excessliability policies we have issued;

45


‚ inconsistent court decisions and diverging legal interpretations; and

‚ the possibility, however remote, of federal legislation that would address the asbestos problem.

These signiÑcant uncertainties are not likely to be resolved in the near future. While there havebeen some positive legislative and judicial developments in the asbestos arena over the past threeyears, it is too early to call it a trend.

Toxic Waste Reserves. Toxic waste claims relate primarily to pollution and related cleanup costs.Our insureds have two potential areas of exposure Ì hazardous waste dump sites and pollution at theinsured site primarily from underground storage tanks and manufacturing processes.

The federal Comprehensive Environmental Response Compensation and Liability Act of 1980(Superfund) has been interpreted to impose strict, retroactive and joint and several liability onpotentially responsible parties (PRPs) for the cost of remediating hazardous waste sites. Most siteshave multiple PRPs.

Most PRPs named to date are parties who have been generators, transporters, past or presentlandowners or past or present site operators. These PRPs had proper government authorization inmany instances. However, relative fault has not been a factor in establishing liability. Insurancepolicies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases,did not intend to cover the pollution itself. In more recent years, however, policies speciÑcallyexcluded such exposures.

As the costs of environmental clean-up became substantial, PRPs and others increasingly Ñledclaims with their insurance carriers. Litigation against insurers extends to issues of liability, coverageand other policy provisions.

There is substantial uncertainty involved in estimating our liabilities related to these claims. First,the liabilities of the claimants are extremely diÇcult to estimate. At any given waste site, the allocationof remediation costs among governmental authorities and the PRPs varies greatly depending on avariety of factors. Second, diÅerent courts have addressed liability and coverage issues regardingpollution claims and have reached inconsistent conclusions in their interpretation of several issues.These signiÑcant uncertainties are not likely to be resolved deÑnitively in the near future.

Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired onDecember 31, 1995 and has not been re-enacted. Federal legislation appears to be at a standstill. At thistime, it is not possible to predict the direction that any reforms may take, when they may occur or theeÅect that any changes may have on the insurance industry.

Without federal movement on Superfund reform, the enforcement of Superfund liability hasoccasionally shifted to the states. States are being forced to reconsider state-level cleanup statutes andregulations. As individual states move forward, the potential for conÖicting state regulation becomesgreater. In a few states, we have seen cases brought against insureds or directly against insurancecompanies for environmental pollution and natural resources damages. To date, only a few naturalresource claims have been Ñled and they are being vigorously defended. SigniÑcant uncertaintyremains as to the cost of remediating the state sites. Because of the large number of state sites, suchsites 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. Aspart of this evaluation, we consider a variety of factors including: the probable liability, availableinsurance coverage, relevant judicial interpretations, past settlement values of similar claims as well asfacts that are unique to each insured.

Uncertainty remains as to our ultimate liability relating to toxic waste claims. However, toxicwaste losses appear to be developing as expected due to relatively stable claim trends. In many cases,claims are being settled for less than initially anticipated due to more eÇcient site remediation eÅorts.

46


In other cases, we have been successful at buying back our policies, thus removing the threat ofadditional losses in the future.

The following table presents a reconciliation of our beginning and ending loss reserves, net ofreinsurance recoverable, related to toxic waste claims. There are virtually no reinsurance recoveriesrelated to these claims.


2006 2005 2004

(in millions)

Reserves, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $191 $208 $226

Incurred losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 Ì Ì

Losses paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 17 18

Reserves, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $169 $191 $208

Of the net toxic waste loss reserves at December 31, 2006, $82 million was for IBNR losses.

Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable fromreinsurers related to the losses we have incurred. At December 31, 2006, reinsurance recoverableincluded $621 million recoverable with respect to paid losses and loss expenses, which is included inother assets, and $2.6 billion recoverable on unpaid losses and loss expenses.

Reinsurance recoverable on unpaid losses and loss expenses represents an estimate of the portionof our gross loss reserves that will be recovered from reinsurers. Such reinsurance recoverable isestimated as part of our loss reserving process using assumptions that are consistent with theassumptions used in estimating the gross loss reserves. Consequently, the estimation of reinsurancerecoverable is subject to similar judgments and uncertainties as the estimation of gross loss reserves.

Ceded reinsurance contracts do not relieve our primary obligation to our policyholders. Conse-quently, an exposure exists with respect to reinsurance recoverable to the extent that any reinsurer isunable to meet its obligations or disputes the liabilities assumed under the reinsurance contracts. Weare selective in regard to our reinsurers, placing reinsurance with only those reinsurers with strongbalance sheets and superior underwriting ability, and we monitor the Ñnancial strength of ourreinsurers on an ongoing basis. Nevertheless, in recent years, certain of our reinsurers have exper-ienced Ñnancial diÇculties or exited the reinsurance business. In addition, we may become involved incoverage disputes with our reinsurers. A provision for estimated uncollectible reinsurance is recordedbased on periodic evaluations of balances due from reinsurers, the Ñnancial condition of the reinsurers,coverage disputes and other relevant factors.

Prior Year Loss Development

Because loss reserve estimates are subject to the outcome of future events, changes in estimatesare unavoidable given that loss trends vary and time is required for changes in trends to be recognizedand conÑrmed. Reserve changes that increase previous estimates of ultimate cost are referred to asunfavorable or adverse development or reserve strengthening. Reserve changes that decrease previousestimates of ultimate cost are referred to as favorable development or reserve releases.

47


A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three yearsended December 31, 2006 is as follows:

2006 2005 2004

(in millions)

Net loss reserves, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,713 $16,809 $14,521

Net incurred losses and loss expenses related to

Current yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,870 7,650 6,994

Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (296) 163 327

6,574 7,813 7,321

Net payments for losses and loss expenses related to

Current yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,640 1,878 1,691

Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,948 4,031 3,342

5,588 5,909 5,033

Net loss reserves, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,699 $18,713 $16,809

During 2006, we experienced overall favorable prior year development of $296 million, whichrepresented 1.6% of the net loss reserves as of December 31, 2005. This compares with unfavorableprior year development of $163 million during 2005, which represented 1.0% of the net loss reserves atDecember 31, 2004, and $327 million during 2004, which represented 2.3% of the net loss reserves atDecember 31, 2003. Such development was reÖected in operating results in these respective years.

The net favorable development of $296 million in 2006 was due to various factors. The mostsigniÑcant factors were:

‚ We experienced favorable development of about $190 million in the short tail homeowners andcommercial property classes, primarily related to the 2005 accident year. This favorabledevelopment arose from the lower than expected emergence of losses during 2006 relative toexpectations used to establish our loss reserves at the end of 2005. The severity of late reportedproperty claims that emerged during 2006 was lower than expected and case development,including salvage recoveries, on previously reported claims was better than expected. Becausethe incidence of property losses is subject to a considerable element of fortuity, reserveestimates for these classes are based on an analysis of past loss experience on average over aperiod of years. As a result, the favorable development in 2006 was recognized but had arelatively modest eÅect on our determination of carried property loss reserves at December 31,2006.

‚ We experienced favorable development of about $70 million in the Ñdelity classes due to lowerthan expected reported loss emergence, mainly related to more recent accident years. Lossreserve estimates in these classes include an expectation of more large late reported losses thanactually occurred in 2006. However, since we would still expect such losses to occur in a typicalyear, the favorable development in 2006 was given only modest weight in our determination ofcarried Ñdelity loss reserves at December 31, 2006.

‚ We experienced favorable development of about $65 million in the run-oÅ of our reinsuranceassumed business due primarily to better than expected reported loss activity from cedants.

‚ We experienced favorable development of about $45 million in the professional liability classesother than Ñdelity. Favorable development in the 2004 and 2005 accident years more than oÅsetcontinued unfavorable development in accident years 2000 through 2002. Reported loss activityrelated to accident years 2004 and 2005 was less than expected due to a favorable businessclimate, lower policy limits and better terms and conditions. While these accident years aresomewhat immature, we concluded that there was suÇcient evidence to modestly decrease the

48


expected loss ratios for these accident years. On the other hand, we continued to experiencesigniÑcant reported loss activity related to the 2000 through 2002 accident years, largely fromclaims related to corporate failures and allegations of management misconduct and accountingirregularities. As a result, we increased the expected loss ratios for these accident years. The factthat our initial estimates for accident years 2003 and subsequent are developing favorably wasrecognized as one among several factors in the determination of loss reserves for the 2006accident year for these classes. Other factors included the speciÑc aspects of the current claimenvironment and the recent downward trend in prices.

‚ We experienced favorable development of about $25 million in the personal automobile class.Case development during 2006 on previously reported claims was better than expected,reÖecting improved case management. Also, the number of late reported claims was less thanexpected, reÖecting a continuation of recent generally favorable frequency trends. Both ofthese factors were reÖected in the determination of the carried loss reserves for this class atDecember 31, 2006.

‚ We experienced adverse development of about $100 million in the commercial liability classes,including $24 million related to asbestos and toxic waste claims. The adverse development wasprimarily due to reported loss activity in accident years prior to 1997 that was worse thanexpected. Modestly adverse development in the 1997 through 2002 accident years was oÅset byfavorable development in the more recent accident years. The loss activity in accident yearsprior to 1997 primarily related to speciÑc individual excess liability and other liability claims,which are inherently volatile. Therefore, this adverse development had little overall eÅect onour determination of carried loss reserves for these classes at December 31, 2006.

The net unfavorable development of $163 million in 2005 was due to various factors. The mostsigniÑcant were:

‚ We experienced adverse development of about $200 million in the professional liability classesother than Ñdelity. The adverse development resulted from continued signiÑcant reported lossactivity related to accident years 1998 through 2002, largely from claims related to corporatefailures and allegations of management misconduct and accounting irregularities. As a result, weincreased the expected loss ratios for these accident years. Conversely, reported loss activityrelated to accident years 2003 and 2004 was less than expected due to a favorable businessclimate, lower policy limits and better terms and conditions. While these accident years aresomewhat immature, we concluded that there was suÇcient evidence to modestly decrease theexpected loss ratios for these accident years.

‚ We experienced adverse development of about $175 million related to accident years prior to1996, including $35 million related to asbestos claims. The adverse development was due largelyto our strengthening loss reserves for commercial liability classes, primarily commercial excessliability. There was signiÑcant reported loss activity during 2005 related to these older accidentyears, which caused us to extend the expected loss emergence period.

‚ We experienced favorable development of about $160 million in the short tail homeowners andcommercial property classes, primarily related to the 2004 accident year. The favorabledevelopment arose from the lower than expected emergence of late reported losses during 2005relative to expectations used to establish our loss reserves at the end of 2004.

‚ We experienced favorable development of about $60 million in the Ñdelity classes due to lowerthan expected reported loss emergence, mainly related to more recent accident years.

The net unfavorable development of $327 million in 2004 was also the result of various factors. Themost signiÑcant factors were:

‚ We experienced adverse development of about $415 million in the professional liability classesother than Ñdelity. The adverse development resulted from signiÑcant reported loss activity in

49


accident years 1998 through 2002 due in large part to claims related to corporate failures andallegations of management misconduct and accounting irregularities, especially those involvinginvestment banks and other Ñnancial institutions. As a result, we increased the expected lossratios for these accident years.

‚ We experienced adverse development of about $185 million related to accident years prior to1995, including $75 million related to asbestos claims. We strengthened loss reserves for certaincommercial liability classes due to signiÑcant reported loss activity during 2004 related to theseolder accident years.

‚ We experienced adverse development of about $50 million in the workers' compensation classdue primarily to higher average severity of the medical portion of these claims.

‚ We experienced favorable development of about $270 million related to the 2003 accident year,due in large part to an unusually low amount of late reported homeowners and commercialproperty losses.

‚ We experienced favorable development of $80 million due to a reduction of loss reservesrelated to the September 11 attack.

In Item 1 of this report, we present an analysis of our consolidated loss reserve development on acalendar year basis for each of the ten years prior to 2006. The variability in reserve development overthe ten year period illustrates the uncertainty of the loss reserving process.

Our U.S. property and casualty subsidiaries are required to Ñle annual statements with insuranceregulatory 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 presentsaccident year loss development information by line of business for the nine years prior to 2006. It is ourintention to post the Schedule P for our combined U.S. property and casualty subsidiaries on ourwebsite as soon as it becomes available.

Investment Results

Property and casualty investment income before taxes increased by 11% in both 2006 and 2005compared with the respective prior years. Growth in both years was due to an increase in investedassets, which reÖected substantial cash Öow from operations over the period. The after-tax annualizedyield on the investment portfolio that supports our property and casualty insurance business was 3.48%in 2006 compared with 3.45% in 2005 and 3.55% in 2004.

The eÅective tax rate on our investment income was 19.8% in 2006 compared with 19.7% in 2005and 19.8% in 2004. The eÅective tax rate Öuctuates as the result of our holding a diÅerent proportion ofour investment portfolio in tax-exempt securities during each year.

On an after-tax basis, property and casualty investment income increased by 10% in 2006 and 11%in 2005. Management uses property and casualty investment income after-tax, a non-GAAP Ñnancialmeasure, to evaluate its investment performance because it reÖects the impact of any change in theproportion of the investment portfolio invested in tax-exempt securities and is therefore moremeaningful for analysis purposes than investment income before income tax.

Other Income and Charges

Other income and charges, which include miscellaneous income and expenses of the property andcasualty subsidiaries, were not signiÑcant in the last three years.

CORPORATE AND OTHER

Corporate and other includes investment income earned on corporate invested assets, interestexpense and other expenses not allocated to the operating subsidiaries, and the results of our real

50


estate and other non-insurance subsidiaries. The results of Chubb Financial Solutions (CFS), whichwere previously reported separately, are now included in corporate and other. CFS, which providedcustomized Ñnancial products to corporate clients, has been in run-oÅ since April 2003.

Corporate and other also included income from our investment in a corporate joint venture,Allied World Assurance Company, Ltd. We acquired an interest in Allied World in 2001 and used theequity method of accounting for this investment. Income from this investment did not have a materialeÅect on the Corporation's results of operations in any year but did Öuctuate signiÑcantly from quarterto quarter. In July 2006, Allied World sold previously unissued shares of common stock through aninitial public oÅering. As a result of the public oÅering, we no longer consider Allied World to be acorporate joint venture. Accordingly, the equity method of accounting is no longer used for thisinvestment. Instead, our investment in Allied World is now classiÑed as an equity security. As such, it iscarried at market value as of the balance sheet date with unrealized appreciation or depreciationcredited or charged to comprehensive income. Consequently, income from our investment in AlliedWorld will now only include any dividends we receive and gains or losses from any sale of ourinvestment.

Corporate and other produced a loss before taxes of $89 million in 2006 compared with losses of$172 million and $176 million in 2005 and 2004, respectively. The lower loss in 2006 compared with2005 was primarily due to a signiÑcantly smaller loss in our real estate operations and higherinvestment income. Corporate and other results were similar in 2005 and 2004 as an increase ininvestment income in 2005 was substantially oÅset by a larger loss in our real estate operations. Thegrowth in investment income in 2006 and 2005 was due to an increase in corporate invested assets overthe period, resulting from the issuance of Chubb's common stock upon the settlement of equity unitwarrants and purchase contracts and under stock-based employee compensation plans.

Real Estate

Real estate operations resulted in a loss before taxes of $3 million in 2006 compared with losses of$41 million in 2005 and $25 million in 2004. The improvement in real estate results in 2006 was due to asigniÑcant decrease in impairment losses compared with 2005. During 2005, we committed to a plan tosell a parcel of land in New Jersey that we had previously intended to hold and develop. The decisionto sell the property was based on our assessment of the real estate market and our concern aboutzoning issues. As a result of our decision to sell this property, we reassessed the recoverability of itscarrying value. Based on our reassessment, we recognized an impairment loss of $48 million during theyear to reduce the carrying value of the property to its estimated fair value. The loss in 2004 was dueprimarily to the recognition of impairment losses on two commercial properties.

Real estate revenues were $202 million in 2006, $115 million in 2005 and $70 million in 2004. Thehigher revenues in 2006 were due to the sale of one commercial property for approximately$110 million.

At December 31, 2006, we owned approximately $145 million of land and $30 million ofcommercial properties and land parcels under lease. Management believes that it has made adequateprovisions for impairment of real estate assets.

Chubb Financial Solutions

CFS's business was primarily structured credit derivatives, principally as a counterparty inportfolio credit default swap contracts. Chubb guaranteed all of these obligations. In April 2003, theCorporation announced its intention to exit CFS's business. Since that date, CFS has negotiated theearly termination of most of its contractual obligations within its Ñnancial products portfolio. The fewremaining contracts will likely be run oÅ over their remaining lives.

In a typical portfolio credit default swap, CFS participated in the senior layer of a structuredesigned to replicate the performance of a portfolio of corporate or asset-backed securities. The

51


structure of these portfolio credit default swaps generally would require CFS to make payment tocounterparties to the extent cumulative losses, related to credit events of the referenced entitieswithin a portfolio, exceed a speciÑed threshold.

Portfolio credit default swaps are derivatives and are carried in the Ñnancial statements atestimated fair value, which represents management's best estimate of the cost to exit our positions.Credit default swaps tend to be unique transactions and there is no market for trading such exposures.To estimate the fair value of the obligation in each credit default swap, we use internal valuationmodels that are similar to external valuation models. Changes in fair value are included in income inthe period of the change.

CFS produced near breakeven results in 2006 compared with a loss before taxes of $9 million in2005 and $19 million in 2004. The loss in 2005 related to the termination of a principal and interestguarantee contract. The loss in 2004 related to the termination of CFS's obligations under severalportfolio credit default swaps.

CFS's aggregate exposure, or retained risk, from each of its remaining in-force portfolio creditdefault swaps is referred to as notional amount. Notional amounts are used to express the extent ofinvolvement in swap transactions. These amounts are used to calculate the exchange of contractualcash Öows and are not necessarily representative of the potential for gain or loss. The notional amountsare not recorded on the balance sheet.

Since we decided to exit this business, CFS has terminated certain portfolio credit default swapswith the original counterparties at negotiated settlement amounts. CFS has also entered into creditdefault swaps with third parties that eÅectively oÅset existing credit default swaps. As of December 31,2006, the notional amount of such oÅsetting credit default swaps was approximately $1.7 billion.

The notional amount of CFS's remaining credit default swaps was $1.1 billion at December 31,2006. Our realistic loss exposure is a very small portion of the $1.1 billion notional amount as ourposition is senior to subordinated interests of about $600 million in the aggregate. In addition, usingour internal ratings models, we estimate that the credit ratings of the remaining individual portfoliocredit default swaps at December 31, 2006 were AAA.

In addition to portfolio credit default swaps, CFS entered into a derivative contract linked to anequity market index that terminates in 2012 and a few other insigniÑcant transactions.

The notional amount and fair value of our future obligations under derivative contracts were asfollows:

December 31

Notional Amount Fair Value

2006 2005 2006 2005

(in billions) (in millions)

Credit default swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.1 $1.0 $2 $2

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .3 .3 6 7

$1.4 $1.3 $8 $9

52


REALIZED INVESTMENT GAINS AND LOSSES

Net investment gains realized were as follows:


2006 2005 2004

(in millions)

Net realized gains (losses)

Equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 51 $ 75 $ 70

Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (35) 24

Other invested assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 209 162 155

Transfer of reinsurance assumed business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 171 Ì

Personal Lines Insurance Brokerage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 16 Ì

Chubb Institute ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (31)

258 389 218

Other-than-temporary impairment losses

Equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 1 Ì

Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 4 Ì

13 5 Ì

Realized investment gains before tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $245 $384 $218

Realized investment gains after tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $161 $248 $146

The net realized gains on other invested assets represent our share of changes in the estimated fairvalue of limited partnerships in which we have an interest.

In 2005, we transferred our ongoing reinsurance business and certain related assets to HarborPoint Limited. In exchange, we received from Harbor Point $200 million of 6% convertible notes andwarrants to purchase common stock of Harbor Point. The notes and warrants represent in theaggregate on a fully diluted basis approximately 16% of the new company. The transaction resulted in apre-tax gain of $204 million, of which $171 million was recognized as a realized investment gain in2005. The remaining gain of $33 million was deferred and will be recognized based on the timing of theultimate disposition of our economic interest in Harbor Point.

In 2005, we completed the sale of Personal Lines Insurance Brokerage, Inc. Based on the terms ofthe sale, we recognized a gain of $16 million.

In 2004, we sold The Chubb Institute. Under the terms of the sale, we recognized a loss of$31 million.

Decisions to sell equity securities and Ñxed maturities are governed principally by considerationsof investment opportunities and tax consequences. As a result, realized gains and losses on the sale ofthese investments may vary signiÑcantly from period to period. However, such gains and lossesgenerally have little, if any, impact on shareholders' equity as almost all of these investments arecarried at fair value, with the unrealized appreciation or depreciation reÖected in comprehensiveincome.

A primary reason for the sale of Ñxed maturities in each of the last three years has been to improveour after-tax portfolio return without sacriÑcing quality where market opportunities have existed to doso. In addition, in the fourth quarter of 2005, to reduce our income tax liability, we engaged in aprogram to sell taxable and tax-exempt Ñxed maturities to generate realized losses to oÅset a portion ofthe gain related to the Harbor Point transaction.

53


We regularly review those invested assets whose fair value is less than cost to determine if another-than-temporary decline in value has occurred. In evaluating whether a decline in value of anyinvestment is temporary or other than temporary, we consider various quantitative criteria andqualitative factors including the length of time and the extent to which the fair value has been less thanthe cost, the Ñnancial condition and near term prospects of the issuer, whether the issuer is current oncontractually obligated interest and principal payments, our intent and ability to hold the investmentfor a period of time suÇcient to allow us to recover our cost, general market conditions and industry orsector speciÑc factors. If a decline in the fair value of an individual security is deemed to be other thantemporary, the diÅerence between cost and estimated fair value is charged to income as a realizedinvestment loss. The fair value of the investment becomes its new cost basis.

Information related to investment securities in an unrealized loss position at December 31, 2006and 2005 is included in Note (4)(b) of the Notes to Consolidated Financial Statements.

INCOME TAXES

As a result of progress toward the settlement of certain tax matters, we recognized a $10 milliontax beneÑt in the third quarter of 2006.

In connection with the sale of a subsidiary a number of years ago, we agreed to indemnify thebuyer for certain pre-closing tax liabilities. During the Ñrst quarter of 2005, we settled this obligationwith the purchaser. Accordingly, we reduced our income tax liability, which resulted in the recogni-tion of a beneÑt of $22 million.

CAPITAL RESOURCES AND LIQUIDITY

Capital resources and liquidity represent a company's overall Ñnancial strength and its ability togenerate cash Öows, borrow funds at competitive rates and raise new capital to meet operating andgrowth needs.

Capital Resources

Capital resources provide protection for policyholders, furnish the Ñnancial strength to supportthe business of underwriting insurance risks and facilitate continued business growth. At December 31,2006, the Corporation had shareholders' equity of $13.9 billion and total debt of $2.5 billion.

The Board of Directors approved a two-for-one stock split in the form of a stock dividend payableto shareholders of record on March 31, 2006. Share and per share amounts have been adjusted toreÖect the stock split.

In 2003, Chubb issued $460 million of unsecured 2.25% senior notes due in 2008 and 18.4 millionpurchase contracts to purchase its common stock. The notes and purchase contracts were issuedtogether in the form of 7% equity units, each of which initially represented $25 principal amount ofnotes and one purchase contract. In May 2006, the notes were successfully remarketed as required bytheir terms. The interest rate on the notes was reset to 5.472% from 2.25%, eÅective May 16, 2006. Theremarketed notes mature on August 16, 2008. Each purchase contract obligated the holder to purchase,on or before August 16, 2006, for a settlement price of $25, a variable number of shares of Chubb'scommon stock. The number of shares purchased was determined based on a formula that consideredthe market price of Chubb's common stock immediately prior to the time of settlement in relation tothe $29.75 per share sale price of the common stock at the time the equity units were oÅered. Uponsettlement of the purchase contracts, Chubb issued 12,883,527 shares of common stock and receivedproceeds of $460 million.

In 2002, Chubb issued $600 million of unsecured 4% senior notes due in 2007 and 24 millionmandatorily exercisable warrants to purchase its common stock. The notes and warrants were issuedtogether in the form of 7% equity units, each of which initially represented $25 principal amount ofnotes and one warrant. In August 2005, the notes were successfully remarketed as required by their

54


terms. The interest rate on the notes was reset to 4.934%, eÅective August 16, 2005. The remarketednotes mature on November 16, 2007. Each warrant obligated the holder to purchase, on or beforeNovember 16, 2005, for a settlement price of $25, a variable number of shares of Chubb's commonstock. The number of shares purchased was determined based on a formula that considered the marketprice of Chubb's common stock immediately prior to the time of settlement in relation to the$28.32 per share sale price of the common stock at the time the equity units were oÅered. Uponsettlement of the warrants, Chubb issued 17,366,234 shares of common stock and received proceeds of$600 million.

Chubb also has outstanding $225 million of unsecured 3.95% notes due in 2008, $400 million ofunsecured 6% notes due in 2011, $275 million of unsecured 5.2% notes due in 2013, $100 million ofunsecured 6.6% debentures due in 2018 and $200 million of unsecured 6.8% debentures due in 2031.Chubb Executive Risk Inc., a wholly owned subsidiary, has outstanding $75 million of unsecured71/8% notes due in 2007, which are guaranteed by Chubb.

At December 31, 2006, Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, hadoutstanding $125 million of 8.675% capital securities. The sole assets of the Trust were debenturesissued by Chubb Executive Risk. The capital securities were subject to mandatory redemption in 2027upon repayment of the debentures. The capital securities were also subject to mandatory redemptionin certain other speciÑed circumstances beginning in 2007. On February 1, 2007, the debentures wererepaid and the Trust redeemed the capital securities at a price that included a make-whole premium of$5 million in the aggregate.

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 casualtysubsidiaries. In addition, in order to satisfy capital needs as a result of any rating agency capitaladequacy or other future rating issues, or in the event we were to need additional capital to makestrategic investments in light of market opportunities, we may take a variety of actions, which couldinclude the issuance of additional debt and/or equity securities. We believe that our strong Ñnancialposition and conservative debt level provide us with the Öexibility and capacity to obtain fundsexternally through debt or equity Ñnancings on both a short term and long term basis.

In June 2003, a shelf registration statement that Chubb Ñled in March 2003 was declared eÅectiveby the Securities and Exchange Commission. Under the registration statement, up to $2.5 billion ofvarious types of securities could be issued. At December 31, 2006, approximately $650 million remainedunder the shelf registration statement.

In December 2005, the Board of Directors authorized the repurchase of up to 28,000,000 shares ofChubb's common stock. In December 2006, the Board of Directors authorized the repurchase of up toan additional 20,000,000 shares of common stock.

In 2005, we repurchased 2,787,800 shares of Chubb's common stock in open market transactions ata cost of $135 million. In January 2006, we repurchased 5,100,000 shares under an accelerated stockbuyback program at an initial price of $48.91 per share, for a total cost of $249 million. The programwas completed in March, at which time, under the terms of the agreement, we received a priceadjustment based on the volume weighted average price of Chubb's common stock during the programperiod. The price adjustment could be settled, at our election, in Chubb's common stock or cash. Weelected to have the counterparty deliver 125,562 additional shares in settlement of the priceadjustment. During the remainder of 2006, we repurchased 20,140,700 shares in the open market. Inthe aggregate, in 2006, we repurchased 25,366,262 shares of Chubb's common stock at a cost of$1,257 million. As of December 31, 2006, 19,845,938 shares remained under the 2006 share repurchaseauthorization, which has no expiration date. Based on our outlook for 2007, we expect to repurchase allof the shares remaining under the 2006 authorization by the end of 2007.

55


Ratings

Chubb and its insurance subsidiaries are rated by major rating agencies. These ratings reÖect therating agency's opinion of our Ñnancial strength, operating performance, strategic position and abilityto meet our obligations to policyholders.

Credit ratings assess a company's ability to make timely payments of interest and principal on itsdebt. The following table summarizes the Corporation's credit ratings from the major independentrating organizations as of February 26, 2007.

Standard &A.M. Best Poor's Moody's Fitch

Senior unsecured debt ratingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ aa¿ A A2 A°

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ AMB-1° A-1 P-1 F-1

Financial strength ratings assess an insurer's ability to meet its Ñnancial obligations to policyhold-ers. The following table summarizes our property and casualty subsidiaries' Ñnancial strength ratingsfrom the major independent rating organizations as of February 26, 2007.

Standard &A.M. Best Poor's Moody's Fitch

Financial strengthÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A°° AA Aa2 AA

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 willnot be changed.

It is possible that positive or negative rating actions by one or more of the rating agencies mayoccur in the future. If our ratings were downgraded, we may incur higher borrowing costs and mayhave more limited means to access capital. In addition, a downgrade in our Ñnancial strength ratingscould adversely aÅect the competitive position of our insurance operations, including a possiblereduction in demand for our products in certain markets.

Liquidity

Liquidity is a measure of a company's ability to generate suÇcient cash Öows to meet the short andlong term cash requirements of its business operations.

The Corporation's liquidity requirements in the past have been met by funds from operations aswell as the issuance of commercial paper and debt and equity securities. We expect that our liquidityrequirements in the future will be met by these sources of funds or borrowings from our credit facility.

Our property and casualty operations provide liquidity in that premiums are generally receivedmonths or even years before losses are paid under the policies purchased by such premiums.Historically, cash receipts from operations, consisting of insurance premiums and investment income,have provided more than suÇcient funds to pay losses, operating expenses and dividends to Chubb.After satisfying our cash requirements, excess cash Öows are used to build the investment portfolio andthereby increase future investment income.

Our strong underwriting results continued to generate substantial new cash in 2006. New cashfrom operations available for investment by the property and casualty subsidiaries was approximately$2.7 billion in 2006 compared with $3.4 billion in 2005 and $3.8 billion in 2004. New cash available waslower in 2006 than in 2005 due primarily to substantially higher income tax payments and lowerpremium receipts. New cash available in 2005 was lower than in 2004 due to a signiÑcant increase inpaid losses in 2005 whereas premium receipts were only modestly higher compared with 2004. Theincrease in paid losses in 2005 was due primarily to directors and oÇcers liability payments related toaccident years 2002 and prior, payments related to Hurricane Katrina and payments related to twosurety claims.

56


Our property and casualty subsidiaries maintain investments in highly liquid, short-term and othermarketable securities. Accordingly, we do not anticipate selling long-term Ñxed maturity investmentsto meet any liquidity needs.

Chubb's liquidity requirements primarily include the payment of dividends to shareholders andinterest and principal on debt obligations. The declaration and payment of future dividends to Chubb'sshareholders will be at the discretion of Chubb's Board of Directors and will depend upon manyfactors, including our operating results, Ñnancial condition, capital requirements and any regulatoryconstraints.

As a holding company, Chubb's ability to continue to pay dividends to shareholders and to satisfyits debt obligations relies on the availability of liquid assets, which is dependent in large part on thedividend paying ability of its property and casualty subsidiaries. Our property and casualty subsidiariesare subject to laws and regulations in the jurisdictions in which they operate that restrict the amountof dividends they may pay without the prior approval of regulatory authorities. The restrictions aregenerally based on net income and on certain levels of policyholders' surplus as determined inaccordance with statutory accounting practices. Dividends in excess of such thresholds are considered""extraordinary'' and require prior regulatory approval. During 2006, these subsidiaries paid to Chubbdividends totaling $650 million. The maximum dividend distribution that may be made by the propertyand casualty subsidiaries to Chubb during 2007 without prior approval is approximately $1.6 billion.

Chubb has a revolving credit agreement with a group of banks that provides for unsecuredborrowings of up to $500 million. The revolving credit facility terminates on June 22, 2010. On thetermination date of the agreement, any loans then outstanding become payable. There have been noborrowings under this agreement. Various interest rate options are available to Chubb, all of which arebased on market interest rates. The agreement contains customary restrictive covenants including acovenant to maintain a minimum consolidated shareholders' equity, as adjusted. At December 31, 2006,Chubb was in compliance with all such covenants. The facility is available for general corporatepurposes and to support our commercial paper borrowing arrangement.

Contractual Obligations and OÅ-Balance Sheet Arrangements

The following table provides our future payments due by period under contractual obligations asof December 31, 2006, aggregated by type of obligation.

2008 2010and and There-

2007 2009 2011 after Total

(in millions)

Principal due under long-term debtÏÏÏÏÏÏÏÏÏÏ $675 $685 $400 $ 700(a) $2,460

Interest payments on long-term debt ÏÏÏÏÏÏÏÏ 133 156 136 482(a) 907

Future minimum rental payments underoperating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87 149 116 219 571

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $895 $990 $652 $1,401 $3,938

(a) On February 1, 2007, $125 million of 8.675% capital securities due February 2027 were redeemed.

The above table excludes certain commitments totaling $1.5 billion at December 31, 2006 to fundlimited partnership investments. These capital commitments can be called by the partnerships duringthe commitment period (on average, 1 to 5 years) to fund working capital needs or the purchase ofnew investments.

The above table also excludes estimated future cash Öows related to our carried loss reserves atDecember 31, 2006. There is typically no stated contractual commitment associated with property andcasualty insurance loss reserves. The obligation to pay a claim arises only when a covered loss eventoccurs and a settlement is reached. The vast majority of our loss reserves relate to claims for which

57


settlements have not yet been reached. Our loss reserves therefore represent estimates of futurepayments. These estimates are dependent on the outcome of claim settlements that will occur overmany years. Accordingly, the payment of the loss reserves is not Ñxed as to either amount or timing.

Our gross liability for unpaid losses and loss expenses was $22.3 billion at December 31, 2006. Ofthis $22.3 billion liability, we estimate that approximately $5.1 billion will be paid in 2007, an aggregate$7.1 billion will be paid in 2008 and 2009, and an aggregate $3.8 billion will be paid in 2010 and 2011.The estimate is based on our historical loss payment patterns. The ultimate amount and timing of losspayments will likely diÅer from our estimate and the diÅerences could be material. We expect thatthese loss payments will be funded, in large part, by future cash receipts from operations.

The Corporation does not have any oÅ-balance sheet arrangements that are reasonably likely tohave a material eÅect on the Corporation's Ñnancial condition, results of operations, liquidity or capitalresources, other than as disclosed in Note (14) of the Notes to Consolidated Financial Statements.

INVESTED ASSETS

The main objectives in managing our investment portfolios are to maximize after-tax investmentincome and total investment returns while minimizing credit risks in order to provide maximumsupport to the insurance underwriting operations. Investment strategies are developed based on manyfactors including underwriting results and our resulting tax position, regulatory requirements, Öuctua-tions in interest rates and consideration of other market risks. Investment decisions are centrallymanaged by investment professionals based on guidelines established by management and approved bythe boards of directors of Chubb and the respective operating companies.

Our investment portfolio is primarily comprised of high quality bonds, principally tax-exempt,U.S. Treasury and government agency, mortgage-backed securities and corporate issues as well asforeign government and corporate bonds that support our international operations. In addition, theportfolio includes equity securities, primarily publicly traded common stocks, and other investedassets, primarily private equity limited partnerships, all of which are held with the objective of capitalappreciation.

In our U.S. operations, during 2006, 2005 and 2004, we invested new cash in tax-exempt bonds and,to a lesser extent, equity securities. In 2005 and 2004, we also invested new cash in taxable bonds,whereas in 2006 we decreased our holdings of taxable bonds, principally U.S. Treasury securities. In2005, the taxable bonds we invested in were primarily mortgage-backed securities and, to a lesserextent, corporate bonds. In 2004, the taxable bonds were primarily U.S. Treasury securities andmortgage-backed securities and, to a lesser extent, corporate bonds. Our objective is to achieve theappropriate mix of taxable and tax-exempt securities in our portfolio to balance both investment andtax strategies. At December 31, 2006, 65% of our U.S. Ñxed maturity portfolio was invested in tax-exempt bonds compared with 60% at December 31, 2005 and 59% at December 31, 2004.

Fixed maturity securities that we have the ability and intent to hold to maturity are classiÑed asheld-to-maturity. All our other Ñxed maturities, which may be sold prior to maturity to support ourinvestment strategies, such as in response to changes in interest rates and the yield curve or tomaximize after-tax returns, are classiÑed as available-for-sale. Fixed maturities classiÑed as held-to-maturity are carried at amortized cost while Ñxed maturities classiÑed as available-for-sale are carriedat market value. About 1% of the Ñxed maturity portfolio was classiÑed as held-to-maturity atDecember 31, 2006, 2005 and 2004.

Changes in the general interest rate environment aÅect the returns available on new Ñxedmaturity investments. While a rising interest rate environment enhances the returns available on newinvestments, it reduces the market value of existing Ñxed maturity investments and thus the availabilityof gains on disposition. A decline in interest rates reduces the returns available on new investments butincreases the market value of existing investments, creating the opportunity for realized investmentgains on disposition.

58


The unrealized appreciation before tax of investments carried at market value, which includesÑxed maturities classiÑed as available-for-sale and equity securities, was $603 million, $478 million and$961 million at December 31, 2006, 2005 and 2004, respectively. Such unrealized appreciation isreÖected in comprehensive income, net of applicable deferred income tax.

The unrealized market appreciation before tax of those Ñxed maturities carried at amortized costwas $7 million, $11 million and $21 million at December 31, 2006, 2005 and 2004, respectively. Suchunrealized appreciation was not reÖected in the consolidated Ñnancial statements.

Changes in unrealized market appreciation or depreciation of Ñxed maturities were due primarilyto Öuctuations in interest rates.

CHANGE IN ACCOUNTING PRINCIPLES

EÅective December 31, 2006, we adopted Statement of Financial Accounting Standards(SFAS) No. 158, Employers' Accounting for DeÑned BeneÑt Pension and Other Postretirement Plans,an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires an employer torecognize the overfunded or underfunded status of a deÑned beneÑt postretirement plan as an asset orliability in its balance sheet and to recognize changes in the funded status in comprehensive income inthe year in which the changes occur. Retrospective application is not permitted. The adoption ofSFAS No. 158 reduced shareholders' equity at December 31, 2006 by $281 million. Adoption of theStatement did not have any eÅect on the Corporation's net income in 2006 and will not in future years.The adoption of the SFAS No. 158 is discussed further in Note (2)(c) of the Notes to ConsolidatedFinancial Statements.

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 Ñnancialinstruments. Our primary exposure to market risks relates to our investment portfolio, which issensitive to changes in interest rates and, to a lesser extent, credit quality, prepayment, foreigncurrency exchange rates and equity prices. We also have exposure to market risks through our debtobligations. Analytical tools and monitoring systems are in place to assess each of these elements ofmarket risk.

Investment Portfolio

Interest rate risk is the price sensitivity of a security that promises a Ñxed return to changes ininterest rates. Changes in market interest rates directly aÅect the market value of our Ñxed incomesecurities. We view the potential changes in price of our Ñxed income investments within the overallcontext of asset and liability management. Our actuaries estimate the payout pattern of our liabilities,primarily our property and casualty loss reserves, to determine their duration, which is the presentvalue of the weighted average payments expressed in years. We set duration targets for our Ñxedincome investment portfolios after consideration of the duration of these liabilities and other factors,which we believe mitigates the overall eÅect of interest rate risk for the Corporation.

The following table provides information about our Ñxed maturity investments, which aresensitive to changes in interest rates. The table presents cash Öows of principal amounts and relatedweighted average interest rates by expected maturity dates at December 31, 2006 and 2005. The cash

59


Öows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities,expected payment patterns. Actual cash Öows could diÅer from the expected amounts.

At December 31, 2006

Total

EstimatedThere- Amortized Market

2007 2008 2009 2010 2011 after Cost Value

(in millions)

Tax-exempt ÏÏÏÏÏÏÏÏÏÏÏ $ 915 $ 868 $1,007 $1,094 $1,492 $12,073 $17,449 $17,755

Average interest rate 5.3% 5.2% 5.0% 4.7% 4.3% 4.1% Ì Ì

Taxable Ì other thanmortgage-backedsecurities ÏÏÏÏÏÏÏÏÏÏÏ 757 1,151 1,834 1,278 1,053 3,831 9,904 9,879


Mortgage-backedsecurities ÏÏÏÏÏÏÏÏÏÏÏ 473 675 583 550 523 1,602 4,406 4,339


Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,145 $2,694 $3,424 $2,922 $3,068 $17,506 $31,759 $31,973


Total


2006 2007 2008 2009 2010 after Cost Value

(in millions)

Tax-exempt ÏÏÏÏÏÏÏÏÏÏÏ $ 742 $ 715 $ 942 $1,031 $1,092 $11,131 $15,653 $15,965


Taxable Ì other thanmortgage-backedsecurities ÏÏÏÏÏÏÏÏÏÏÏ 912 1,261 1,415 1,659 1,257 3,662 10,166 10,267


Mortgage-backedsecurities ÏÏÏÏÏÏÏÏÏÏÏ 411 446 704 579 539 1,671 4,350 4,302


Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,065 $2,422 $3,061 $3,269 $2,888 $16,464 $30,169 $30,534

Credit risk is the potential loss resulting from adverse changes in the issuer's ability to repay thedebt obligation. We have consistently invested in high quality marketable securities. As a result, webelieve that we have minimal credit quality risk. About 75% of the taxable bonds in our portfolio areissued by the U.S. Treasury or U.S. government agencies or rated AA or better by Moody's or Standardand Poor's. Of the tax-exempt bonds, about 95% are rated AA or better with about 70% rated AAA.About 2% of our bond portfolio is below investment grade. Our taxable bonds have an average maturityof Ñve years, while our tax-exempt bonds mature on average in nine years.

Prepayment risk refers to the changes in prepayment patterns related to decreases and increasesin interest rates that can either shorten or lengthen the expected timing of the principal repaymentsand thus the average life of a security, potentially reducing or increasing its eÅective yield. Such riskexists primarily within our portfolio of mortgage-backed securities. We monitor such risk regularly.

Mortgage-backed securities comprised 31% and 30% of our taxable bond portfolio at year-end 2006and 2005, respectively. About 67% of our mortgage-backed securities holdings at December 31, 2006related to residential mortgages consisting of government agency pass-through securities, governmentagency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs backed bygovernment agency collateral or single family home mortgages. The majority of the CMOs are activelytraded in liquid markets and market value information is readily available from broker/dealers. An

60


additional 25% of our mortgage-backed securities were call protected, AAA rated commercialmortgage-backed securities. The remaining mortgage-backed holdings were all investment grade,predominantly commercial mortgage-backed securities.

Foreign currency risk is the sensitivity to foreign exchange rate Öuctuations of the market valueand investment income related to foreign currency denominated Ñnancial instruments. The functionalcurrency of our foreign operations is generally the currency of the local operating environment sincebusiness is primarily transacted in such local currency. We reduce the risks relating to currencyÖuctuations by generally maintaining investments in those foreign currencies in which our propertyand casualty subsidiaries have loss reserves and other liabilities. Such investments generally havecharacteristics similar to our liabilities in those currencies. At December 31, 2006, the property andcasualty subsidiaries held non-U.S. investments of $5.7 billion supporting their international opera-tions. These investments have quality and maturity characteristics similar to our domestic portfolio.The principal currencies creating foreign exchange rate risk for the property and casualty subsidiariesare the Canadian dollar, the British pound sterling and the euro.

The following table provides information about those Ñxed maturity investments that aredenominated in these currencies. The table presents cash Öows of principal amounts in U.S. dollarequivalents by expected maturity dates at December 31, 2006. Actual cash Öows could diÅer from theexpected amounts.


Total


2007 2008 2009 2010 2011 after Cost Value

(in millions)

Canadian dollarÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $112 $213 $211 $210 $214 $552 $1,512 $1,527

British pound sterling ÏÏÏÏÏÏÏÏÏÏÏ 28 123 244 243 124 565 1,327 1,309

Euro ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 50 180 94 170 589 1,159 1,151

Equity price risk is the potential loss in market value of our equity securities resulting fromadverse changes in stock prices. In general, equities have more year-to-year price variability thanintermediate term high grade bonds. However, returns over longer time frames have been consistentlyhigher. Our publicly traded equity securities are high quality, diversiÑed across industries and readilymarketable. A hypothetical decrease of 10% in the market price of each of the equity securities held atDecember 31, 2006 and 2005 would have resulted in a decrease of $196 million and $117 million,respectively, in the fair value of the equity securities portfolio.

Our other invested assets comprise investments in private equity limited partnerships. Limitedpartnership investments by their nature are less liquid and involve more risk than other investments.We actively manage our market risk through type of asset class and domestic and internationaldiversiÑcation. We review the performance of these investments on a quarterly basis and we obtainaudited Ñnancial statements. A hypothetical decrease of 10% in the fair value of each of our limitedpartnership investments at December 31, 2006 and 2005 would have resulted in a decrease of$152 million and $104 million, respectively.

All of the above risks are monitored on an ongoing basis. A combination of in-house systems andproprietary models and externally licensed software are used to analyze individual securities as well aseach portfolio. These tools provide the portfolio managers with information to assist them in theevaluation of the market risks of the portfolio.

61


Debt

We also have interest rate risk on our debt obligations. The following table provides information aboutour long term debt obligations and related interest rate swap at December 31, 2006. For debt obligations, thetable presents expected cash flow of principal amounts and related weighted average interest rates bymaturity date. For the interest rate swap, the table presents the notional amount and related average interestrates by maturity date.


EstimatedThere- Market

2007 2008 2009 2010 2011 after Total Value

(in millions)

Long-term debt

Expected cash Öows of principalamounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $675 $685 $ Ì $ Ì $400 $ 700(b) $2,460 $2,504

Average interest rate ÏÏÏÏÏÏÏÏÏÏ 5.2% 5.0% Ì Ì 6.0% 6.5%

Interest rate swap

Notional amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì $ Ì $ Ì $ 125(b) $ 125 $ 6

Variable pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.4%(a)

Fixed receive rate ÏÏÏÏÏÏÏÏÏÏÏÏ 8.675%

(a) 3 month LIBOR rate plus 204 basis points

(b) On February 1, 2007, $125 million of 8.675% capital securities due February 1, 2027 were redeemedand the interest rate swap was terminated.

Item 8. Consolidated Financial Statements and Supplementary Data

Consolidated financial statements of the Corporation at December 31, 2006 and 2005 and for each of thethree years in the period ended December 31, 2006 and the report thereon of our independent registeredpublic accounting firm, and the Corporation's unaudited quarterly financial data for the two-year periodended December 31, 2006 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, 2006, an evaluation of the effectiveness of the design and operation of theCorporation's disclosure controls and procedures was performed under the supervision and with theparticipation of the Corporation's management, including the chief executive officer and chief financialofficer. Based on that evaluation, the chief executive officer and chief financial officer concluded that theCorporation's disclosure controls and procedures were effective as of the evaluation date.

During the three month period ended December 31, 2006, there were no changes in internalcontrol over Ñnancial reporting that have materially aÅected, or are reasonably likely to materiallyaÅect, the Corporation's internal control over Ñnancial reporting.

62


Management's Report on Internal Control over Financial Reporting

Management of the Corporation is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of1934. The Corporation's internal control over financial reporting was designed under the supervision of andwith the participation of the Corporation's management, including Chubb's chief executive officer and chieffinancial officer, to provide reasonable assurance regarding the reliability of the Corporation's financialreporting 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 Ñnancial reporting may not prevent ordetect all misstatements. Therefore, even those systems determined to be eÅective can provide onlyreasonable assurance with respect to Ñnancial statement preparation and presentation.

Management conducted an assessment of the eÅectiveness of the Corporation's internal controlover Ñnancial reporting as of December 31, 2006. In making this assessment, management used theframework set forth in Internal Control Ì Integrated Framework issued by the Committee of Sponsor-ing Organizations of the Treadway Commission. Based on this assessment, management has deter-mined that, as of December 31, 2006, the Corporation's internal control over Ñnancial reporting iseÅective.

Management's assessment of the eÅectiveness of internal control over Ñnancial reporting as ofDecember 31, 2006 has been audited by Ernst & Young LLP, the independent registered publicaccounting Ñrm who also audited the Corporation's consolidated Ñnancial statements. Their attestationreport on management's assessment of the Corporation's internal control over Ñnancial reporting isshown on page 64.

Item 9B. Other Information

None.

63


Report of Independent Registered Public Accounting Firm

Ernst & Young LLP5 Times SquareNew York, New York 10036

The Board of Directors and ShareholdersThe Chubb Corporation

We have audited management's assessment, included in the accompanying Management's Reporton Internal Control over Financial Reporting, that The Chubb Corporation maintained eÅectiveinternal control over Ñnancial reporting as of December 31, 2006, based on criteria established inInternal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (the COSO criteria). The Corporation's management is responsible formaintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅective-ness of internal control over Ñnancial reporting. Our responsibility is to express an opinion onmanagement's assessment and an opinion on the eÅectiveness of the Corporation's internal controlover Ñnancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether eÅective internal control over Ñnancial reporting was maintainedin all material respects. Our audit included obtaining an understanding of internal control overÑnancial reporting, evaluating management's assessment, testing and evaluating the design andoperating eÅectiveness of internal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over Ñnancial reporting is a process designed to provide reasonableassurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements forexternal purposes in accordance with generally accepted accounting principles. A company's internalcontrol over Ñnancial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reÖect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of Ñnancial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company's assets that could have a material eÅect on the Ñnancial statements.

Because of its inherent limitations, internal control over Ñnancial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subjectto the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that The Chubb Corporation maintained eÅectiveinternal control over Ñnancial reporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, The Chubb Corporation maintained, in allmaterial respects, eÅective internal control over Ñnancial reporting as of December 31, 2006, based onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of The Chubb Corporation as ofDecember 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity,cash Öows and comprehensive income for each of the three years in the period ended December 31,2006, and our report dated February 26, 2007 expressed an unqualiÑed opinion thereon.

/s/ ERNST & YOUNG LLP

February 26, 2007

64


PART III.

Item 10. Directors and Executive OÇcers of the Registrant

Information regarding Chubb's directors is incorporated by reference from Chubb's deÑnitiveProxy Statement for the 2007 Annual Meeting of Shareholders under the caption ""Our Board ofDirectors.'' Information regarding Chubb's executive oÇcers is included in Part I of this report underthe caption ""Executive OÇcers of the Registrant.'' Information regarding Section 16 reportingcompliance of Chubb's directors, executive oÇcers and 10% beneÑcial owners is incorporated byreference from Chubb's deÑnitive Proxy Statement for the 2007 Annual Meeting of Shareholders underthe caption ""Section 16(a) BeneÑcial Ownership Reporting Compliance.'' Information regardingChubb's Code of Ethics for CEO and Senior Financial OÇcers is included in Item 1 of this reportunder the caption ""Business Ì General.'' Information regarding the Audit Committee of Chubb'sBoard of Directors and its Audit Committee Ñnancial experts is incorporated by reference fromChubb's deÑnitive Proxy Statement for the 2007 Annual Meeting of Shareholders under the captions""Corporate Governance Ì Audit Committee'' and ""Committee Assignments.''

Item 11. Executive Compensation

Incorporated by reference from Chubb's deÑnitive Proxy Statement for the 2007 Annual Meetingof Shareholders, under the captions ""Corporate Governance Ì Directors' Compensation,'' ""Compen-sation Discussion and Analysis'' and ""Executive Compensation.''

Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related StockholderMatters

Incorporated by reference from Chubb's deÑnitive Proxy Statement for the 2007 Annual Meetingof Shareholders, under the captions ""Security Ownership of Certain BeneÑcial Owners and Manage-ment'' and ""Equity Compensation Plan Information.''

Item 13. Certain Relationships and Related Transactions

Incorporated by reference from Chubb's deÑnitive Proxy Statement for the 2007 Annual Meetingof Shareholders, under the caption ""Certain Transactions and Other Matters.''

Item 14. Principal Accountant Fees and Services

Incorporated by reference from Chubb's deÑnitive Proxy Statement for the 2007 Annual Meetingof Shareholders, under the caption ""Proposal 3: RatiÑcation of Appointment of Independent Auditor.''

PART IV.

Item 15. Exhibits, Financial Statements and Schedules

The Ñnancial statements and schedules listed in the accompanying index to Ñnancial statementsand Ñnancial statement schedules are Ñled as part of this report.

The exhibits listed in the accompanying index to exhibits are Ñled as part of this report.

65


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.


(Registrant)

February 22, 2007

By /s/ John D. Finnegan

(John D. Finnegan Chairman, President andChief Executive OÇcer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant and in the capacities and on the datesindicated:

Signature Title Date

Chairman, President, Chief February 22, 2007/s/ John D. FinneganExecutive OÇcer and(John D. Finnegan)Director

/s/ Zo e Baird Director February 22, 2007

(Zo e Baird)

/s/ Sheila P. Burke Director February 22, 2007

(Sheila P. Burke)

/s/ James I. Cash, Jr. Director February 22, 2007

(James I. Cash, Jr.)

/s/ Joel J. Cohen Director February 22, 2007

(Joel J. Cohen)

/s/ Klaus J. Mangold Director February 22, 2007

(Klaus J. Mangold)

66


Signature Title Date

Director February 22, 2007/s/ David G. Scholey

(David G. Scholey)

/s/ Raymond G.H. Seitz Director February 22, 2007

(Raymond G.H. Seitz)

/s/ Lawrence M. Small Director February 22, 2007

(Lawrence M. Small)

/s/ Daniel E. Somers Director February 22, 2007

(Daniel E. Somers)

/s/ Karen Hastie Williams Director February 22, 2007

(Karen Hastie Williams)

/s/ Alfred W. Zollar Director February 22, 2007

(Alfred W. Zollar)

/s/ Michael O'Reilly Vice Chairman and February 22, 2007Chief Financial OÇcer(Michael O'Reilly)

/s/ Henry B. Schram Senior Vice President and February 22, 2007Chief Accounting OÇcer(Henry B. Schram)

67



INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(Item 15(a))

Form 10-KPage

Report of Independent Registered Public Accounting Firm F-2

Consolidated Statements of Income for the Years Ended December 31, 2006,2005 and 2004 F-3

Consolidated Balance Sheets at December 31, 2006 and 2005 F-4

Consolidated Statements of Shareholders' Equity for the Years EndedDecember 31, 2006, 2005 and 2004 F-5

Consolidated Statements of Cash Flows for the Years Ended December 31,2006, 2005 and 2004 F-6

Consolidated Statements of Comprehensive Income for the Years EndedDecember 31, 2006, 2005 and 2004 F-7

Notes to Consolidated Financial Statements F-8

Supplementary Information (unaudited)

Quarterly Financial Data F-32

Schedules:

I Ì Consolidated Summary of Investments Ì Other than Investments inRelated Parties at December 31, 2006 S-1

II Ì Condensed Financial Information of Registrant at December 31, 2006and 2005 and for the Years Ended December 31, 2006, 2005 and 2004 S-2

III Ì Consolidated Supplementary Insurance Information at and for theYears Ended December 31, 2006, 2005 and 2004 S-5

All other schedules are omitted since the required information is not present or is not present inamounts suÇcient to require submission of the schedule, or because the information required isincluded in the Ñnancial statements and notes thereto.

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ERNST & YOUNG LLP5 Times SquareNew York, New York 10036

The Board of Directors and ShareholdersThe Chubb Corporation

We have audited the accompanying consolidated balance sheets of The Chubb Corporation as of December 31,2006 and 2005, and the related consolidated statements of income, shareholders' equity, cash Öows and comprehensiveincome for each of the three years in the period ended December 31, 2006. Our audits also included the Ñnancialstatement schedules listed in the Index at Item 15(a). These Ñnancial statements and schedules are the responsibility ofthe Corporation's management. Our responsibility is to express an opinion on these Ñnancial statements and schedulesbased 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 aboutwhether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accountingprinciples used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the consolidatedÑnancial position of The Chubb Corporation at December 31, 2006 and 2005, and the consolidated results of itsoperations and its cash Öows for each of the three years in the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles. Also, in our opinion, the related Ñnancial statement schedules, whenconsidered in relation to the basic Ñnancial statements taken as a whole, present fairly in all material respects theinformation set forth therein.

As discussed in Note (2)(c) to the Ñnancial statements, in 2006, the Corporation changed its method ofaccounting for its deÑned beneÑt pension and other postretirement plans.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the eÅectiveness of The Chubb Corporation's internal control over Ñnancial reporting as ofDecember 31, 2006, based on criteria established in Internal Control Ì Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2007 expressed anunqualiÑed opinion thereon.

/s/ Ernst & Young LLP

February 26, 2007

F-2

%%TRANSMSG*** Transmitting Job: E18846 PCN: 005000000 *** %%PCMSG| |00014|Yes|No|02/27/2007 08:14|0|1|Page is valid, no graphics -- Color: N|


Consolidated Statements of Income

In Millions,Except For Per Share Amounts


2006 2005 2004

RevenuesPremiums Earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,958 $12,176 $11,636

Investment IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,580 1,408 1,256

Other Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 220 115 67

Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245 384 218

TOTAL REVENUES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,003 14,083 13,177

Losses and Expenses

Losses and Loss Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,574 7,813 7,321

Amortization of Deferred Policy Acquisition CostsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,919 2,931 2,843

Other Insurance Operating Costs and Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 550 512 630

Investment Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 29 25

Other Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 207 161 111

Corporate Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194 190 179

TOTAL LOSSES AND EXPENSES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,478 11,636 11,109

INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX ÏÏÏÏÏÏ 3,525 2,447 2,068

Federal and Foreign Income Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 997 621 520

NET INCOMEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,528 $ 1,826 $ 1,548

Net Income Per Share

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.13 $ 4.61 $ 4.08

DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.98 4.47 4.01

See accompanying notes.

F-3



Consolidated Balance Sheets

In MillionsDecember 31

2006 2005

AssetsInvested Assets

Short Term InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,254 $ 1,899Fixed Maturities

Held-to-Maturity Ì Tax Exempt (market $142 and $216)ÏÏÏÏÏÏÏÏÏÏÏ 135 205Available-for-Sale

Tax Exempt (cost $17,314 and $15,449) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,613 15,750Taxable (cost $14,310 and $14,515) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,218 14,568

Equity Securities (cost $1,561 and $1,045)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,957 1,169Other Invested AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,516 1,043

TOTAL INVESTED ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,693 34,634

Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 36Securities Lending Collateral ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,620 2,077Accrued Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 411 391Premiums ReceivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,314 2,319Reinsurance Recoverable on Unpaid Losses and Loss ExpensesÏÏÏÏÏÏÏÏÏÏÏ 2,594 3,769Prepaid Reinsurance Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 354 244Deferred Policy Acquisition CostsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,480 1,445Real Estate Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 201 367Investment in Partially Owned Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 260Deferred Income Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 591 623Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 467 467Other AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,514 1,429

TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50,277 $48,061

LiabilitiesUnpaid Losses and Loss ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22,293 $22,482Unearned Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,546 6,361Securities Lending Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,620 2,077Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,466 2,467Dividend Payable to ShareholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104 90Accrued Expenses and Other LiabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,385 2,177

TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,414 35,654

Commitments and Contingent Liabilities (Note 9 and 14)

Shareholders' EquityPreferred Stock Ì Authorized 8,000,000 Shares;

$1 Par Value; Issued Ì None ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌCommon Stock Ì Authorized 1,200,000,000 Shares;

$1 Par Value; Issued 411,276,940 and 420,864,596 Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏ 411 210Paid-In Surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,539 2,364Retained Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,711 9,600Accumulated Other Comprehensive IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202 368Treasury Stock, at Cost Ì 2,787,800 Shares in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (135)

TOTAL SHAREHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,863 12,407

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏ $50,277 $48,061


F-4



Consolidated Statements of Shareholders' Equity

In MillionsYears Ended December 31

2006 2005 2004

Preferred StockBalance, Beginning and End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì

Common StockBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 210 196 196Two-for-One Stock SplitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 210 Ì ÌTreasury Shares Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) Ì ÌRepurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21) Ì ÌShares Issued Upon Settlement of Equity Unit Purchase

Contracts and Warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 9 ÌShares Issued Under Stock-Based Employee

Compensation PlansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5 Ì

Balance, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 411 210 196

Paid-In SurplusBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,364 1,319 1,319Two-for-One Stock SplitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210) Ì ÌTreasury Shares Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (377) Ì ÌRepurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (987) Ì ÌShares Issued Upon Settlement of Equity Unit Purchase

Contracts and Warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 447 591 ÌChanges Related to Stock-Based Employee Compensation

(includes tax benefit (charge) of $46, $84 and $(2))ÏÏÏÏÏÏÏ 302 454 Ì

Balance, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,539 2,364 1,319

Retained EarningsBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,600 8,119 6,869Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,528 1,826 1,548Dividends Declared (per share $1.00, $.86 and $.78) ÏÏÏÏÏÏÏ (417) (345) (298)

Balance, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,711 9,600 8,119

Accumulated Other Comprehensive IncomeUnrealized Appreciation of Investments

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 311 624 673Change During Year, Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81 (313) (49)


Foreign Currency Translation GainsBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 79 12Change During Year, Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 (22) 67


DeÑned BeneÑt Postretirement PlansBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì ÌAdjustment to Recognize Funded Status at

December 31, 2006, Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (281) Ì Ì

Balance, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (281) Ì Ì

Accumulated Other Comprehensive Income, Endof Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202 368 703

Treasury Stock, at CostBalance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (135) (211) (529)Repurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (249) (135) ÌCancellation of Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 384 Ì ÌShares Issued Under Stock-Based Employee

Compensation PlansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 211 318

Balance, End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (135) (211)

TOTAL SHAREHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,863 $12,407 $10,126


F-5



Consolidated Statements of Cash Flows


2006 2005 2004

Cash Flows from Operating ActivitiesNet Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,528 $ 1,826 $ 1,548Adjustments to Reconcile Net Income to Net CashProvided by Operating ActivitiesIncrease in Unpaid Losses and Loss Expenses, NetÏÏÏÏÏÏ 986 1,904 2,288Increase in Unearned Premiums, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 107 417Decrease (Increase) in Premiums ReceivableÏÏÏÏÏÏÏÏÏÏÏ 5 17 (149)Increase in Reinsurance Recoverable on Paid Losses ÏÏÏÏÏÏ (225) (51) (44)Increase in Deferred Policy Acquisition Costs ÏÏÏÏÏÏÏÏÏÏ (19) (17) (76)Deferred Income TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108 84 85Amortization of Premiums and Discounts on

Fixed MaturitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 233 217 98Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81 91 106Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (245) (384) (218)Other, NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (126) (38) 34

NET CASH PROVIDED BY OPERATINGACTIVITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,342 3,756 4,089

Cash Flows from Investing ActivitiesProceeds from Fixed Maturities

Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,623 7,481 3,920Maturities, Calls and Redemptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,579 1,683 2,048

Proceeds from Sales of Equity SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186 330 402Purchases of Fixed Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,758) (12,206) (11,465)Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (377) (428) (494)Investments in Other Invested Assets, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (264) (66) 12Decrease (Increase) in Short Term Investments, Net ÏÏÏÏÏ (355) (591) 1,388Increase (Decrease) in Net Payable from SecurityTransactions not Settled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 (111) 127

Purchases of Property and Equipment, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (53) (40) (65)Other, NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 97 (1)

NET CASH USED IN INVESTING ACTIVITIES ÏÏÏÏ (2,369) (3,851) (4,128)Cash Flows from Financing Activities

Repayment of Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (301) ÌIncrease (Decrease) in Funds Held UnderDeposit ContractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29) (276) 44

Proceeds from Common Stock Issued Upon Settlement ofEquity Unit Purchase Contracts and Warrants ÏÏÏÏÏÏÏÏÏÏ 460 600 Ì

Proceeds from Issuance of Common Stock Under Stock-Based Employee Compensation PlansÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 531 258

Repurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,228) (135) ÌDividends Paid to Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (403) (330) (291)Other, NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 18

NET CASH PROVIDED BY (USED IN)FINANCING ACTIVITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (971) 89 29

Net Increase (Decrease) in CashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 (6) (10)Cash at Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 42 52

CASH AT END OF YEARÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 38 $ 36 $ 42


F-6



Consolidated Statements of Comprehensive Income


2006 2005 2004

Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,528 $1,826 $1,548

Other Comprehensive Income (Loss)

Change in Unrealized Appreciation of Investments,Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81 (313) (49)

Foreign Currency Translation Gains (Losses), Net of Tax ÏÏÏ 34 (22) 67

115 (335) 18

COMPREHENSIVE INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,643 $1,491 $1,566


F-7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of SigniÑcant Accounting Policies Equity securities, which include common stocks andnon-redeemable preferred stocks, are carried at market(a) Basis of Presentationvalue as of the balance sheet date.

The Chubb Corporation (Chubb) is a holding com-pany with subsidiaries principally engaged in the prop- Unrealized appreciation or depreciation of equity secu-erty and casualty insurance business. The property and rities and Ñxed maturities carried at market value iscasualty insurance subsidiaries (the P&C Group) under- excluded from net income and credited or charged, netwrite most lines of property and casualty insurance in the of applicable deferred income tax, directly to comprehen-United States, Canada, Europe, Australia and parts of sive income.Latin America and Asia. The geographic distribution ofproperty and casualty business in the United States is Other invested assets, which include private equitybroad with a particularly strong market presence in the limited partnerships, are carried at estimated fair value.Northeast. Fair value represents the Corporation's equity in the net

assets of the partnerships. Changes in fair value areThe accompanying consolidated Ñnancial statementsincluded in income as realized investment gains or losses.have been prepared in accordance with U.S. generally

accepted accounting principles and include the accountsRealized gains and losses on the sale of investments areof Chubb and its subsidiaries (collectively, the Corpora-

determined on the basis of the cost of the speciÑction). SigniÑcant intercompany transactions have beeninvestments sold and are credited or charged to income.eliminated in consolidation.When the market value of any investment is lower than

The consolidated Ñnancial statements include amounts its cost, an assessment is made to determine whether thebased on informed estimates and judgments of manage- decline is temporary or other-than-temporary. If thement for transactions that are not yet complete. Such decline is deemed to be other-than-temporary, the invest-estimates and judgments aÅect the reported amounts of ment is written down to market value and the amount ofassets and liabilities and disclosure of contingent assets the writedown is charged to income as a realized invest-and liabilities at the date of the Ñnancial statements and ment loss. The market value of the investment becomesthe reported amounts of revenues and expenses during its new cost basis.the reporting period. Actual results could diÅer fromthose estimates. The Corporation engages in a securities lending pro-

gram to generate additional income, whereby certain ofCertain amounts in the consolidated Ñnancial state-its invested assets are loaned to other institutions forments for prior years have been reclassiÑed to conformshort periods of time. The Corporation maintains eÅec-with the 2006 presentation.tive control over securities loaned and therefore contin-

On March 3, 2006, the Board of Directors approved a ues to report such securities as invested assets. Thetwo-for-one stock split payable to shareholders of record market value of the loaned securities was $2,857 millionon March 31, 2006. All share and per share amounts and $2,801 million at December 31, 2006 and 2005,have been retroactively adjusted to reÖect the stock split. respectively. Of these amounts, $2,499 million and

$2,511 million, respectively, comprised available-for-sale(b) Invested Assets Ñxed maturities and the balance comprised equity

securities.Short term investments, which have an original matur-ity of one year or less, are carried at amortized cost,which approximates market value. The Corporation's policy is to require initial collateral

equal to at least 102% of the market value of the loanedFixed maturities, which include bonds and redeemablesecurities. In those instances where cash collateral ispreferred stocks, are purchased to support the invest-obtained from the borrower, the collateral is invested byment strategies of the Corporation. These strategies area lending agent in accordance with the Corporation'sdeveloped based on many factors including rate of re-guidelines. The cash collateral is recognized as an assetturn, maturity, credit risk, tax considerations and regula-with a corresponding liability for the obligation to returntory requirements. Fixed maturities that may be soldthe collateral. In instances where non-cash collateral isprior to maturity to support the investment strategies ofobtained from the borrower, the Corporation does notthe Corporation are classiÑed as available-for-sale andrecognize the receipt of the collateral held by the lendingcarried at market value as of the balance sheet date.agent or the obligation to return the collateral as thereThose Ñxed maturities that the Corporation has theexists no right to sell or repledge the collateral. Theability and positive intent to hold to maturity are classi-market value of the non-cash collateral held wasÑed as held-to-maturity and carried at amortized cost.$346 million and $863 million at December 31, 2006 and

Premiums and discounts arising from the purchase of 2005, respectively. The Corporation retains a portion ofÑxed maturities are amortized using the interest method the income earned from the cash collateral or receives aover the estimated remaining term of the securities. For fee from the borrower. Under the terms of the securitiesmortgage-backed securities, prepayment assumptions are lending program, the lending agent indemniÑes the Cor-reviewed periodically and revised as necessary. poration against borrower defaults.

F-8


(c) Premium Revenues and Related Expenses Loss reserves are regularly reviewed using a variety ofactuarial techniques. Reserve estimates are updated as

Insurance premiums are earned on a monthly pro rata historical loss experience develops, additional claims arebasis over the terms of the policies and include estimates reported and/or settled and new information becomesof audit premiums and premiums on retrospectively available. Any changes in estimates are reÖected in oper-rated policies. Assumed reinsurance premiums are ating results in the period in which the estimates areearned over the terms of the reinsurance contracts. changed.Unearned premiums represent the portion of direct and

Reinsurance recoverable on unpaid losses and lossassumed premiums written applicable to the unexpiredexpenses represents an estimate of the portion of grossterms of the insurance policies and reinsurance contractsloss reserves that will be recovered from reinsurers.in force. Amounts recoverable from reinsurers are estimated in a

Ceded reinsurance premiums are charged to income manner consistent with the gross losses associated withover the terms of the reinsurance contracts. Prepaid the reinsured policies. A provision for estimated uncol-reinsurance premiums represent the portion of premi- lectible reinsurance is recorded based on periodic evalua-ums ceded to reinsurers applicable to the unexpired tions of balances due from reinsurers, the Ñnancialterms of the reinsurance contracts in force. condition of the reinsurers, coverage disputes and other

relevant factors.Reinsurance reinstatement premiums are recognized in

the same period as the loss event that gave rise to the (e) Financial Productsreinstatement premiums.

Credit derivatives, principally portfolio credit defaultswaps, are carried at estimated fair value as of the balanceAcquisition costs that vary with and are primarilysheet date. Changes in fair value are recognized in in-related to the production of business are deferred andcome in the period of the change and are included inamortized over the period in which the related premiumsother revenues.are earned. Such costs include commissions, premium

taxes and certain other underwriting and policy issuanceAssets and liabilities related to the credit derivatives

costs. Commissions received related to reinsurance pre-are included in other assets and other liabilities.

miums ceded are considered in determining net acquisi-tion costs eligible for deferral. Deferred policy acquisition

(f) Real Estatecosts are reviewed to determine whether they are recov-erable from future income. If such costs are deemed to be Real estate properties are carried at cost less accumu-unrecoverable, they are expensed. Anticipated invest- lated depreciation and any writedowns for impairment.ment income is considered in the determination of the

Real estate properties are reviewed for impairmentrecoverability of deferred policy acquisition costs.whenever events or circumstances indicate that the car-rying value of such properties may not be recoverable. In

(d) Unpaid Losses and Loss Expenses performing the review for recoverability of carryingvalue, estimates are made of the future undiscounted

Unpaid losses and loss expenses (also referred to as cash Öows from each of the properties during the periodloss reserves) include the accumulation of individual case the property will be held and upon its eventual disposi-estimates for claims that have been reported and esti- tion. If the expected future undiscounted cash Öows aremates of claims that have been incurred but not reported less than the carrying value of any property, an impair-as well as estimates of the expenses associated with ment loss is recognized, resulting in a writedown of theprocessing and settling all reported and unreported carrying value of the property. Measurement of suchclaims, less estimates of anticipated salvage and subro- impairment is based on the fair value of the property.gation recoveries. Estimates are based upon past lossexperience modiÑed for current trends as well as prevail- ProÑts on land, residential unit and commercial build-ing economic, legal and social conditions. Loss reserves ing sales are recognized at closing, subject to complianceare not discounted to present value. with applicable accounting guidelines.

F-9


(g) Investment in Partially Owned Company (l) Foreign Exchange

Assets and liabilities relating to foreign operations areInvestment in partially owned company included thetranslated into U.S. dollars using current exchange ratesCorporation's minority interest in a corporate joint ven-as of the balance sheet date. Revenues and expenses areture, Allied World Assurance Holdings, Ltd. The equitytranslated into U.S. dollars using the average exchangemethod of accounting was used for this investment.rates during the year.

In July 2006, Allied World sold previously unissued The functional currency of foreign operations is gener-shares of common stock through an initial public oÅer- ally the currency of the local operating environmenting. As a result of the public oÅering, the Corporation since business is primarily transacted in such local cur-no longer considers Allied World to be a corporate joint rency. Translation gains and losses, net of applicableventure. Accordingly, the equity method of accounting is income tax, are excluded from net income and areno longer used for this investment. Instead, the invest- credited or charged directly to comprehensive income.ment in Allied World is now classiÑed as an equitysecurity. As such, it is carried at market value as of the (m) Cash Flow Informationbalance sheet date.

In the statement of cash Öows, short term investmentsare not considered to be cash equivalents. The eÅect of

(h) Goodwill changes in foreign exchange rates on cash balances wasimmaterial.

Goodwill represents the excess of the purchase priceover the fair value of net assets of entities acquired. In 2005, the Corporation transferred its ongoing rein-Goodwill is tested for impairment at least annually. surance assumed business and certain related assets to

Harbor Point Limited (see Note (3)). In exchange, theCorporation received from Harbor Point $200 million of

(i) Property and Equipment6% convertible notes and warrants to purchase commonstock of Harbor Point.

Property and equipment used in operations, includingcertain costs incurred to develop or obtain computer In 2005, a mortgage payable of $42 million was as-software for internal use, are capitalized and carried at sumed by an unaÇliated joint venture in connection withcost less accumulated depreciation. Depreciation is calcu- the disposition of the Corporation's interest in a variablelated using the straight-line method over the estimated interest entity in which it was the primary beneÑciary.useful lives of the assets.

These noncash transactions have been excluded fromthe consolidated statement of cash Öows.

(j) Income Taxes

(n) Accounting Pronouncements Not Yet AdoptedChubb and its domestic subsidiaries Ñle a consolidated

In June 2006, the Financial Accounting Standardsfederal income tax return.Board (FASB) issued FASB Interpretation No. 48(FIN 48), Accounting for Uncertainty in Income Taxes,Deferred income tax assets and liabilities are recognizedan interpretation of Statement of Financial Accountingfor the expected future tax effects attributable to tempo-Standards (SFAS) No. 109. FIN 48 clariÑes the account-rary differences between the financial reporting and taxing for uncertainty in income taxes recognized in anbases of assets and liabilities, based on enacted tax ratesenterprise's Ñnancial statements. The Interpretationand other provisions of tax law. The effect on deferred taxprescribes a recognition threshold and measurement at-assets and liabilities of a change in tax laws or rates istribute for the Ñnancial statement recognition and mea-recognized in income in the period in which such changesurement of a tax position taken or expected to be takenis enacted. Deferred tax assets are reduced by a valuationin a tax return. FIN 48 is eÅective for the Corporationallowance if it is more likely than not that all or somefor the year beginning January 1, 2007. The adoption ofportion of the deferred tax assets will not be realized.FIN 48 is not expected to have a signiÑcant eÅect on theCorporation's Ñnancial position or results of operations.The Corporation does not consider the earnings of its

foreign subsidiaries to be permanently reinvested. Ac-In September 2006, the FASB issued SFAS No. 157,cordingly, provision has been made for the expected U.S.

Fair Value Measurements. SFAS No. 157 deÑnes fairfederal income tax liabilities applicable to undistributedvalue, establishes a framework for measuring fair valueearnings of foreign subsidiaries.and expands disclosures about fair value measurements.SFAS No. 157 applies whenever other accounting pro-nouncements require or permit assets or liabilities to be(k) Stock-Based Employee Compensationmeasured at fair value. The Statement does not expand

The fair value method of accounting is used for stock- the use of fair value to any new circumstances.based employee compensation plans. Under the fair SFAS No. 157 is eÅective for the Corporation for thevalue method, compensation cost is measured based on year beginning January 1, 2008. The adoption of SFASthe fair value of the award at the grant date and recog- No. 157 is not expected to have a signiÑcant eÅect on thenized over the service period. Corporation's Ñnancial position or results of operations.

F-10


(2) Adoption of New Accounting Pronouncements (3) Transfer of Ongoing Reinsurance Assumed Business

In December 2005, the Corporation completed a(a) EÅective January 1, 2006, the Corporationtransaction involving a new Bermuda based reinsuranceadopted SFAS No. 123 (revised 2004), Share-Basedcompany, Harbor Point Limited.Payment, which revised SFAS No. 123, Accounting for

Stock-Based Compensation. SFAS No. 123(R) requiresAs part of the transaction, the Corporation transferredcompanies to adopt the fair value method of accounting

its ongoing reinsurance assumed business and certainfor stock-based employee compensation plans. The fairrelated assets, including renewal rights, to Harbor Point.value method of accounting for stock-based employeeIn exchange, the Corporation received from Harborcompensation plans as deÑned in SFAS No. 123(R) isPoint $200 million of 6% convertible notes and warrantssimilar in most respects to the fair value method deÑnedto purchase common stock of Harbor Point. The notesin SFAS No. 123. Since the Corporation had previouslyand warrants represent in the aggregate on a fully dilutedadopted the fair value method of accounting forbasis approximately 16% of the new company.stock-based employee compensation plans, the adoption

of SFAS No. 123(R) did not have a signiÑcant eÅect on Harbor Point generally did not assume the reinsurancethe Corporation's Ñnancial position or results of liabilities relating to reinsurance contracts incepting prioroperations. to December 31, 2005. Those liabilities and the related

assets were retained by the P&C Group.(b) EÅective January 1, 2006, the Corporationadopted FASB StaÅ Position (FSP) Nos. 115-1 and Other than pursuant to certain arrangements entered124-1, The Meaning of Other-Than-Temporary Impair- into with Harbor Point, the P&C Group generally noment and Its Application to Certain Investments. The longer engages directly in the reinsurance assumed busi-FSP addresses the determination as to when an invest- ness. Harbor Point has the right for a transition period ofment is considered impaired, whether that impairment is up to two years to underwrite speciÑc reinsurance busi-other-than-temporary and the measurement of an impair- ness on the P&C Group's behalf. The P&C Groupment loss. The FSP clariÑes that an investor shall recog- retains a portion of any such business and cedes thenize an impairment loss when the impairment is deemed balance to Harbor Point in return for a frontingto be other-than-temporary even if a decision to sell the commission.impaired security has not been made. The FSP nulliÑes

The transaction resulted in a pre-tax gain of $204 mil-certain requirements and carries forward other require-lion, of which $171 million was recognized in 2005 andments of Emerging Issues Task Force Issue No. 03-1,$33 million was deferred. The portion of the gain thatThe Meaning of Other-Than-Temporary Impairmentwas deferred was based on the Corporation's economicand Its Application to Certain Investments. The imple-interest in Harbor Point.mentation of the guidance in the FSP did not have a

signiÑcant eÅect on the Corporation's Ñnancial position The Corporation will receive additional paymentsor results of operations. based on the amount of P&C Group business renewed

by Harbor Point. The Corporation will recognize these(c) EÅective December 31, 2006, the Corporationamounts in income when earned.adopted SFAS No. 158, Employers' Accounting for De-

Ñned BeneÑt Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and132(R). SFAS No. 158 requires an employer to recog-nize the overfunded or underfunded status of a deÑnedbeneÑt postretirement plan as an asset or liability in itsbalance sheet and to recognize changes in the fundedstatus in comprehensive income in the year in which thechanges occur. Retrospective application is not permit-ted. Any gains or losses and prior service cost that havenot yet been included in net beneÑt costs as of the end ofthe year in which SFAS No. 158 is adopted shall bereported as an adjustment of the ending balance ofaccumulated other comprehensive income, net of tax.

The adoption of SFAS No. 158 as of December 31,2006 increased other liabilities by $432 million, increaseddeferred income tax assets by $151 million and decreasedaccumulated other comprehensive income, a componentof shareholders' equity, by $281 million. Adoption of theStatement did not have any eÅect on the Corporation'sresults of operations in 2006 and will not in future years.

F-11


(4) Invested Assets and Related Income

(a) The amortized cost and estimated market value of Ñxed maturities were as follows:

December 312006 2005

Gross Gross Estimated Gross Gross EstimatedAmortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market

Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value(in millions)

Held-to-maturity Ì Tax exemptÏÏÏÏÏÏÏÏ $ 135 $ 7 $ Ì $ 142 $ 205 $ 11 $ Ì $ 216

Available-for-saleTax exempt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,314 341 42 17,613 15,449 362 61 15,750

TaxableU.S. Government and government

agency and authority obligations ÏÏÏÏ 1,936 1 26 1,911 2,770 6 17 2,759Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,379 42 24 2,397 2,608 56 35 2,629Foreign bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,589 39 57 5,571 4,747 107 17 4,837Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏ 4,406 21 88 4,339 4,350 34 81 4,303Redeemable preferred stocks ÏÏÏÏÏÏÏ Ì Ì Ì Ì 40 Ì Ì 40

14,310 103 195 14,218 14,515 203 150 14,568

Total available-for-saleÏÏÏÏÏÏÏÏÏÏÏ 31,624 444 237 31,831 29,964 565 211 30,318

Total Ñxed maturities ÏÏÏÏÏÏÏÏÏÏÏ $31,759 $451 $237 $31,973 $30,169 $576 $211 $30,534

The amortized cost and estimated market value of Ñxed maturities at December 31, 2006 by contractual maturity wereas follows:

EstimatedAmortized Market

Cost Value

(in millions)Held-to-maturity

Due in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 35 $ 36Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 57Due after Ñve years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 48Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1

$ 135 $ 142

Available-for-saleDue in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 944 $ 944Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,725 7,736Due after Ñve years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,378 10,483Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,171 8,329

27,218 27,492

Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,406 4,339

$31,624 $31,831

Actual maturities could diÅer from contractual maturities because borrowers may have the right to call or prepayobligations.

(b) The components of unrealized appreciation or depreciation of investments carried at market value were as follows:December 312006 2005(in millions)

Equity securitiesGross unrealized appreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $417 $162Gross unrealized depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 38

396 124

Fixed maturitiesGross unrealized appreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 444 565Gross unrealized depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 237 211

207 354

603 478Deferred income tax liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211 167

$392 $311

F-12


When the market value of any investment is lower than its cost, an assessment is made to determine whether thedecline is temporary or other-than-temporary. The assessment is based on both quantitative criteria and qualitativeinformation and considers a number of factors including, but not limited to, the length of time and the extent to whichthe market value has been less than the cost, the Ñnancial condition and near term prospects of the issuer, whether theissuer is current on contractually obligated interest and principal payments, the intent and ability of the Corporation tohold the investment for a period of time suÇcient to allow for the recovery of cost, general market conditions andindustry or sector speciÑc factors. Based on a review of the securities in an unrealized loss position at December 31, 2006and 2005, management believes that none of the declines in market value at those dates were other-than-temporary.

The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2006, theaggregate market value and gross unrealized depreciation by investment category and length of time that individualsecurities have continuously been in an unrealized loss position.

Less Than 12 Months 12 Months or More Total

Estimated Gross Estimated Gross Estimated GrossMarket Unrealized Market Unrealized Market UnrealizedValue Depreciation Value Depreciation Value Depreciation

(in millions)

Fixed maturities Ó available-for-sale

Tax exempt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,136 $ 4 $2,985 $ 38 $ 4,121 $ 42

Taxable

U.S. Government and governmentagency and authority obligations ÏÏÏÏÏ 1,014 8 766 18 1,780 26

Corporate bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 3 928 21 1,157 24

Foreign bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,893 37 976 20 3,869 57

Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏ 584 4 2,763 84 3,347 88

4,720 52 5,433 143 10,153 195

Total fixed maturities Ó available-for-sale ÏÏ 5,856 56 8,418 181 14,274 237

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148 12 68 9 216 21

$6,004 $68 $8,486 $190 $14,490 $258

The total gross unrealized depreciation amount at December 31, 2006 comprised approximately 1,420 securities, ofwhich 1,380 were fixed maturities. Almost all of the fixed maturities in an unrealized loss position were investment gradesecurities depressed due to changes in interest rates from the date of purchase. There were no securities with a marketvalue less than 80% of the security's amortized cost for six continuous months. Securities in an unrealized loss position forless than twelve months comprised approximately 600 securities, of which 99% were securities with a market value toamortized cost ratio at or greater than 95%. Securities in an unrealized loss position for twelve months or more comprisedapproximately 820 securities, of which 97% were securities with a market value to amortized cost ratio at or greaterthan 95%.

The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2005, theaggregate market value and gross unrealized depreciation by investment category and length of time that individualsecurities have continuously been in an unrealized loss position.

Less Than 12 Months 12 Months or More Total

Estimated Gross Estimated Gross Estimated GrossMarket Unrealized Market Unrealized Market UnrealizedValue Depreciation Value Depreciation Value Depreciation

(in millions)

Fixed maturities Ó available-for-sale

Tax exemptÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,984 $ 40 $ 829 $ 21 $ 4,813 $ 61

Taxable

U.S. Government and government agencyand authority obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 978 6 438 11 1,416 17

Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 948 23 303 12 1,251 35

Foreign bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,284 14 80 3 1,364 17

Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,804 32 1,319 49 3,123 81

5,014 75 2,140 75 7,154 150

Total Ñxed maturities Ó available-for-saleÏÏ 8,998 115 2,969 96 11,967 211

Equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186 26 67 12 253 38

$9,184 $141 $3,036 $108 $12,220 $249

F-13


The change in unrealized appreciation of investments In September 2005, the Corporation sold Personalcarried at market value was as follows: Lines Insurance Brokerage, Inc., an insurance brokerage

subsidiary. In September 2004, the Corporation soldYears Ended December 31The Chubb Institute, Inc., its post secondary educational2006 2005 2004subsidiary.(in millions)

Change in unrealized appreciation of(5) Deferred Policy Acquisition Costsequity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 272 $ (29) $ 21

Change in unrealized appreciation of Policy acquisition costs deferred and the related amor-Ñxed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (147) (453) (96) tization charged against income were as follows:

125 (482) (75)Years Ended December 31Deferred income tax (credit) ÏÏÏÏÏÏÏÏÏ 44 (169) (26)

2006 2005 2004$ 81 $(313) $(49)

(in millions)

Balance, beginning of year ÏÏÏÏÏÏ $ 1,445 $ 1,435 $ 1,344The unrealized appreciation of Ñxed maturities carriedCosts deferred during yearat amortized cost is not reÖected in the Ñnancial state-

Commissions and brokerageÏÏÏ 1,534 1,636 1,634ments. The change in unrealized appreciation of ÑxedPremium taxes and assessments 265 260 256

maturities carried at amortized cost was a decrease of Salaries and operating costs ÏÏÏÏ 1,139 1,052 1,029$4 million, $10 million and $14 million for the years

2,938 2,948 2,919ended December 31, 2006, 2005 and 2004, respectively. Increase (decrease) due to

foreign exchange ÏÏÏÏÏÏÏÏÏÏÏÏ 16 (7) 15Amortization during year ÏÏÏÏÏÏÏ (2,919) (2,931) (2,843)(c) The sources of net investment income were asBalance, end of year ÏÏÏÏÏÏÏÏÏÏÏ $ 1,480 $ 1,445 $ 1,435follows:


2006 2005 2004 (6) Real Estate(in millions)

The components of real estate assets were as follows:Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,433 $1,296 $1,156

December 31Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 30 30Short term investmentsÏÏÏÏÏÏÏÏÏÏÏÏ 74 53 44 2006 2005OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 29 26 (in millions)

Gross investment income ÏÏÏÏÏÏÏÏ 1,580 1,408 1,256Mortgages receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1 $ 19Investment expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 29 25Income producing properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32 144

$1,546 $1,379 $1,231 Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 21Land under development and unimproved land ÏÏÏÏÏÏÏÏÏ 145 183

$201 $367(d) Realized investment gains and losses were as follows:

Years Ended December Impairment losses of $11 million, $66 million and31

$27 million were recognized in 2006, 2005 and 2004,2006 2005 2004

respectively, to write down the carrying value of certain(in millions)

properties to their estimated fair value.Fixed maturitiesGross realized gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 29 $ 74 $ 97

Depreciation expense related to income producingGross realized losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) (109) (73)properties was $4 million in 2006 and $6 million in 2005Other-than-temporary impairments ÏÏÏÏÏÏ (3) (4) Ìand 2004.(5) (39) 24

Equity securitiesGross realized gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 84 92 (7) Property and EquipmentGross realized losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9) (9) (22)

Property and equipment included in other assets wereOther-than-temporary impairments ÏÏÏÏÏÏ (10) (1) Ì

as follows:41 74 70

Other invested assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 209 162 155 December 31Transfer of reinsurance businessÏÏÏÏÏÏÏÏÏ Ì 171 Ì 2006 2005Sale of Personal Lines Insurance

(in millions)Brokerage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 16 ÌSale of The Chubb Institute ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (31) Cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $814 $804

Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 451 419$245 $384 $218$363 $385

In December 2005, the Corporation transferred itsongoing reinsurance assumed business and certain re- Depreciation expense related to property and equip-lated assets to Harbor Point Limited. This transaction is ment was $77 million, $85 million and $100 million forfurther described in Note (3). 2006, 2005 and 2004, respectively.

F-14


(8) Debt and Credit Arrangements At December 31, 2006, Chubb was a party to acancelable interest rate swap agreement with a notional(a) Long term debt consisted of the following:amount of $125 million that replaced the Ñxed rate of the

December 31capital securities with the 3-month LIBOR rate plus 204

2006 2005basis points. The swap agreement had a maturity date of

(in millions)February 1, 2027 and provided only for the exchange of

4.934% notes due November 16, 2007 ÏÏÏÏÏÏÏ $ 600 $ 600 interest on the notional amount. The fair value of the7±% notes due December 15, 2007ÏÏÏÏÏÏÏÏÏÏ 75 75swap was included in other assets, oÅset by a correspond-3.95% notes due April 1, 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 225 225

5.472% notes due August 16, 2008* ÏÏÏÏÏÏÏÏÏ 460 460 ing increase to long term debt. On February 1, 2007, the6% notes due November 15, 2011 ÏÏÏÏÏÏÏÏÏÏÏ 400 400 interest rate swap was terminated.5.2% notes due April 1, 2013ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 275 2756.6% debentures due August 15, 2018 ÏÏÏÏÏÏÏ 100 100 The amounts of long term debt due annually during8.675% capital securities due February 1, 2027 ÏÏ 125 125 the Ñve years subsequent to December 31, 2006 are as6.8% debentures due November 15, 2031ÏÏÏÏÏ 200 200 follows:

2,460 2,460Years EndingFair value of interest rate swapÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 7December 31

$2,466 $2,467(in millions)

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $675* These notes bore an interest rate of 2.25% at December 31, 2005.2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 685The interest rate was reset to 5.472% in May 2006 pursuant to the2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ìremarketing of these notes as described below.2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 400In June 2003, Chubb issued $460 million of unsecured

2.25% senior notes due August 16, 2008 and 18.4 million Chubb Ñled a shelf registration statement which thepurchase contracts to purchase Chubb's common stock. Securities and Exchange Commission declared eÅectiveThe notes and purchase contracts were issued together in June 2003, under which up to $2.5 billion of variousin the form of 7% equity units. Each equity unit initially types of securities could be issued. At December 31,represented one purchase contract and $25 principal 2006, approximately $650 million remained under theamount of notes. In May 2006, the notes were success- shelf.fully remarketed as required by their terms. The interest

(b) Interest costs of $134 million, $135 million andrate on the notes was reset to 5.472% from 2.25%,$139 million were incurred in 2006, 2005 and 2004,eÅective May 16, 2006. The remarketed notes are duerespectively. Interest paid was $129 million, $138 millionAugust 16, 2008. The purchase contracts are furtherand $136 million in 2006, 2005 and 2004, respectively.described in Note (19)(c).

(c) Chubb has a revolving credit agreement with aThe 4.934% notes, the 3.95% notes, the 6% notes, thegroup of banks that provides for unsecured borrowings5.2% notes, the 6.6% debentures and the 6.8% deben-of up to $500 million. The revolving credit facilitytures are all unsecured obligations of Chubb.terminates on June 22, 2010. On the termination date of

The 71/8% notes are obligations of Chubb Executive the agreement, any loans then outstanding become paya-Risk Inc., a wholly owned subsidiary, and are fully and ble. There have been no borrowings under this agree-unconditionally guaranteed by Chubb. ment. Various interest rate options are available to

Chubb, all of which are based on market interest rates.Executive Risk Capital Trust, wholly owned by ChubbChubb pays a fee to have this revolving credit facilityExecutive Risk, had outstanding $125 million of 8.675%available. The agreement contains customary restrictivecapital securities at December 31, 2006. The proceedscovenants including a covenant to maintain a minimumfrom the issuance of the capital securities were used byconsolidated shareholders' equity, as adjusted. At De-the Trust to acquire $125 million of Chubb Executivecember 31, 2006, Chubb was in compliance with all suchRisk 8.675% junior subordinated deferrable interest de-covenants. The facility is available for general corporatebentures due February 1, 2027. The sole assets of thepurposes and to support Chubb's commercial paperTrust were the debentures. The debentures and theborrowing arrangement.related income eÅects were eliminated in the consoli-

dated Ñnancial statements. The capital securities weresubject to mandatory redemption on February 1, 2027,upon repayment of the debentures. The capital securitieswere also subject to mandatory redemption in certainother speciÑed circumstances beginning in 2007. OnFebruary 1, 2007, the debentures were repaid and theTrust redeemed the capital securities at a price thatincluded a make-whole premium of $5 million in theaggregate.

F-15


(9) Unpaid Losses and Loss Expenses (b) A reconciliation of the beginning and endingliability for unpaid losses and loss expenses, net of

(a) The process of establishing loss reserves is com- reinsurance recoverable, and a reconciliation of the netplex and imprecise as it must take into consideration liability to the corresponding liability on a gross basis is asmany variables that are subject to the outcome of future follows:events. As a result, informed subjective estimates and

2006 2005 2004judgments as to the P&C Group's ultimate exposure to

(in millions)losses are an integral component of the loss reserving

Gross liability, beginning of year ÏÏÏÏÏÏÏÏ $22,482 $20,292 $17,948process. The loss reserve estimation process relies on the Reinsurance recoverable,

beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,769 3,483 3,427basic assumption that past experience, adjusted for theNet liability, beginning of yearÏÏÏÏÏÏÏÏÏ 18,713 16,809 14,521eÅects of current developments and likely trends, is an

appropriate basis for predicting future outcomes. Net incurred losses and lossexpenses related to

Most of the P&C Group's loss reserves relate to long Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,870 7,650 6,994Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (296) 163 327tail liability classes of business. For many liability claims

6,574 7,813 7,321signiÑcant periods of time, ranging up to several years orNet payments for losses and lossmore, may elapse between the occurrence of the loss, the

expenses related toreporting of the loss and the settlement of the claim. The Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,640 1,878 1,691

Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,948 4,031 3,342longer the time span between the incidence of a loss and5,588 5,909 5,033the settlement of the claim, the more the ultimate settle-

Net liability, end of year ÏÏÏÏÏÏÏÏÏÏÏÏ 19,699 18,713 16,809ment amount can vary.Reinsurance recoverable,

end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,594 3,769 3,483There are numerous factors that contribute to theinherent uncertainty in the process of establishing loss Gross liability, end of yearÏÏÏÏÏÏÏÏÏÏÏ $22,293 $22,482 $20,292reserves. Among these factors are changes in the inÖationrate for goods and services related to covered damages The gross liability for unpaid losses and loss expenses andsuch as medical care and home repair costs; changes in reinsurance recoverable included $178 million and $107 mil-the judicial interpretation of policy provisions relating to lion, respectively, at December 31, 2006 and $967 millionthe determination of coverage; changes in the general and $756 million, respectively, at December 31, 2005 relatedattitude of juries in the determination of liability and to Hurricane Katrina. The gross liability for unpaid lossesdamages; legislative actions; changes in the medical con- and loss expenses and reinsurance recoverable includeddition of claimants; changes in the estimates of the $359 million and $316 million, respectively, at December 31,number and/or severity of claims that have been in- 2006, $413 million and $354 million, respectively, at Decem-curred but not reported as of the date of the Ñnancial ber 31, 2005, and $700 million and $582 million, respec-statements; and changes in the P&C Group's book of tively, at December 31, 2004 related to the September 11,business, underwriting standards and/or claim handling 2001 attack.procedures.

Because loss reserve estimates are subject to the outcomeIn addition, the uncertain eÅects of emerging or poten- of future events, changes in estimates are unavoidable given

tial claims and coverage issues that arise as legal, judicial that loss trends vary and time is required for changes inand social conditions change must be taken into consid- trends to be recognized and confirmed. During 2006, theeration. These issues can have a negative eÅect on loss P&C Group experienced overall favorable development ofreserves by either extending coverage beyond the original $296 million on net unpaid losses and loss expenses estab-underwriting intent or by increasing the number or size lished as of the previous year end. This compares withof claims. As a result of such issues, the uncertainties unfavorable prior year development of $163 million in 2005inherent in estimating ultimate claim costs on the basis of and $327 million in 2004. Such development was reflectedpast experience have grown, further complicating the in operating results in these respective years.already complex loss reserving process.

The net favorable development of $296 million inManagement believes that the aggregate loss reserves 2006 was due to various factors. Favorable development

of the P&C Group at December 31, 2006 were adequate of about $190 million was experienced in the short tailto cover claims for losses that had occurred as of that homeowners and commercial property classes, primarilydate, including both those known and those yet to be related to the 2005 accident year. This favorable develop-reported. In establishing such reserves, management con- ment arose from the lower than expected emergence ofsiders facts currently known and the present state of the losses during 2006 relative to expectations used to estab-law and coverage litigation. However, given the signiÑ- lish loss reserves at the end of 2005. Favorable develop-cant uncertainties inherent in the loss reserving process, ment of about $70 million was experienced in the Ñdelityit is possible that management's estimate of the ultimate classes due to lower than expected reported loss emer-liability for losses that occurred as of December 31, 2006 gence, mainly related to more recent accident years.may change, which could have a material eÅect on the Favorable development of about $65 million was exper-Corporation's results of operations and Ñnancial ienced in the run-oÅ of the reinsurance assumed businesscondition. due primarily to better than expected reported loss

F-16


activity from cedants. Favorable development of about The net unfavorable development of $327 million in$45 million was experienced in the professional liability 2004 was also the result of various factors. Unfavorableclasses other than Ñdelity. Favorable development in the development of about $415 million was experienced in2004 and 2005 accident years more than oÅset continued the professional liability classes other than Ñdelity. Theunfavorable development in the 2000 to 2002 accident adverse development resulted from signiÑcant reportedyears. Reported loss activity related to accident years loss activity in accident years 1998 through 2002 due in2004 and 2005 was less than expected due to a favorable large part to claims related to corporate failures andbusiness climate, lower policy limits and better terms and allegations of management misconduct and accountingconditions. On the other hand, the P&C Group contin- irregularities, especially those involving investment banksued to experience signiÑcant reported loss activity related and other Ñnancial institutions. Unfavorable develop-to the 2000 through 2002 accident years, largely from ment of about $185 million was experienced related toclaims related to corporate failures and allegations of accident years prior to 1995, including $75 million re-management misconduct and accounting irregularities. lated to asbestos claims. Loss reserves for certain com-Favorable development of about $25 million was exper- mercial liability classes were strengthened due toienced in the personal automobile class. Case develop- signiÑcant reported loss activity during 2004 related toment during 2006 on previously reported claims was these older accident years. Unfavorable development ofbetter than expected, reÖecting improved case manage- about $50 million was experienced in the workers' com-ment. The number of late reported claims was also less pensation class due primarily to higher average severity ofthan expected, reÖecting a continuation of recent gener- the medical portion of these claims. Favorable develop-ally favorable frequency trends. Unfavorable development of about $270 million was experienced related toment of about $100 million was experienced in the the 2003 accident year, due in large part to an unusuallycommercial liability classes, including $24 million related low amount of late reported homeowners and commer-to asbestos and toxic waste claims. Reported loss activity cial property losses. Favorable development of $80 mil-in accident years prior to 1997 was worse than expected, lion was experienced due to a reduction of loss reservesprimarily related to speciÑc individual excess liability and related to the September 11 attack.other liability claims.

(c) The estimation of loss reserves relating to asbestosThe net unfavorable development of $163 million in and toxic waste claims on insurance policies written

2005 was the result of various factors. Unfavorable many years ago is subject to greater uncertainty thandevelopment of about $200 million was experienced in other types of claims due to inconsistent court decisionsthe professional liability classes other than Ñdelity. Ad- as well as judicial interpretations and legislative actionsverse development related to accident years 1998 that in some cases have tended to broaden coveragethrough 2002, largely from claims related to corporate beyond the original intent of such policies and in othersfailures and allegations of management misconduct and have expanded theories of liability. The insurance indus-accounting irregularities, was oÅset in part by favorable try as a whole is engaged in extensive litigation over thesedevelopment related to accident years 2003 and 2004. coverage and liability issues and is thus confronted with aReported loss activity related to accident years 2003 and continuing uncertainty in its eÅorts to quantify these2004 was less than expected due to a favorable business exposures.climate, lower policy limits and better terms and condi-tions. Unfavorable development of about $175 million Asbestos remains the most signiÑcant and diÇcult masswas experienced related to accident years prior to 1996, tort for the insurance industry in terms of claims volumeincluding $35 million related to asbestos claims. The and dollar exposure. Asbestos claims relate primarily toadverse development was due largely to the strengthen- bodily injuries asserted by those who came in contacting of loss reserves for commercial liability classes, prima- with asbestos or products containing asbestos. Earlyrily commercial excess liability. There was signiÑcant court cases established the ""continuous trigger'' theoryreported loss activity during 2005 related to these older with respect to insurance coverage. Under this theory,accident years, which resulted in a lengthening of the insurance coverage is deemed to be triggered from theexpected loss emergence period. Favorable development time a claimant is Ñrst exposed to asbestos until theof about $160 million was experienced in the short tail manifestation of any disease. This interpretation of ahomeowners and commercial property classes, primarily policy trigger can involve insurance companies overrelated to the 2004 accident year. The favorable develop- many years and increases their exposure to liability.ment arose from the lower than expected emergence oflate reported losses during 2005 relative to expectations New asbestos claims and new exposures on existingused to establish loss reserves at the end of 2004. claims have continued despite the fact that usage of asbestosFavorable development of about $60 million was exper- has declined since the mid-1970's. Each claim filing typi-ienced in the Ñdelity classes due to lower than expected cally names dozens of defendants. The plaintiffs' bar hasreported loss emergence, mainly related to more recent solicited new claimants through extensive advertising andaccident years. through asbestos medical screenings. A vast majority of

asbestos bodily injury claims are filed by claimants who donot show any signs of asbestos related disease. New asbestoscases are often filed in those jurisdictions with a reputationfor judges and juries that are extremely sympathetic toplaintiffs.

F-17


Approximately 80 manufacturers and distributors of asbestos products and by property owners or operatorsasbestos products have Ñled for bankruptcy protection as who allegedly had asbestos on their property, under thea result of asbestos related liabilities. A bankruptcy some- premises or operations section of primary general liabilitytimes involves an agreement to a plan between the debtor policies. Unlike products exposures, these non-productsand its creditors, including current and future asbestos exposures typically had no aggregate limits on coverage,claimants. Although the debtor is negotiating in part creating potentially greater exposure. Further, in an ef-with its insurers' money, insurers are generally given fort to seek additional insurance coverage, some insuredsonly limited opportunity to be heard. In addition to with installation activities who have substantially erodedcontributing to the overall number of claims, bankruptcy their products coverage are presenting new asbestosproceedings have also caused increased settlement de- claims as non-products operations claims or attemptingmands against remaining solvent defendants. to reclassify previously settled products claims as non-

products claims to restore a portion of previously ex-There have been several recent positive events in the hausted products aggregate limits. It is diÇcult to predict

asbestos environment. Various challenges to mass screen- whether insureds will be successful in asserting claimsing claimants have been mounted. Also, a number of under non-products coverage or whether insurers will bestates have implemented legislative and judicial reforms successful in asserting additional defenses. Accordingly,that focus the courts' attention on the claims of the most the ultimate cost to insurers of the claims for coverageseriously injured. Legislation that sets medical criteria not subject to aggregate limits is uncertain.that must be met for plaintiÅs to proceed with theirclaims has been enacted in several states and is pending In establishing asbestos reserves, the exposurein others. Similarly, judicial reforms such as inactive presented by each insured is evaluated. As part of thisdockets, which preserve the right to sue for those who evaluation, consideration is given to a variety of factorsdo not currently meet the speciÑc medical criteria, have including the available insurance coverage; limits andbeen established in several jurisdictions. In addition, a deductibles; the jurisdictions involved; past settlementnumber of key jurisdictions have adopted venue reform values of similar claims; the potential role of otherthat requires plaintiÅs to have a connection to the insurance, particularly underlying coverage below excessjurisdiction in order to Ñle a complaint. Finally, in recog- liability policies; potential bankruptcy impact; and appli-nition that many aspects of bankruptcy plans are unfair cable coverage defenses, including asbestos exclusions.to certain classes of claimants and to the insurance

SigniÑcant uncertainty remains as to the ultimate liabil-industry, these plans are beginning to be closely scruti-ity of the P&C Group related to asbestos related claims.nized by the courts and rejected when appropriate.This uncertainty is due to several factors including the

The P&C Group's most signiÑcant individual asbestos long latency period between asbestos exposure and dis-exposures involve products liability on the part of ""tradi- ease manifestation and the resulting potential for involve-tional'' defendants who were engaged in the manufac- ment of multiple policy periods for individual claims;ture, distribution or installation of asbestos products. plaintiÅs' increased focus on peripheral defendants; theThe P&C Group wrote excess liability and/or general volume of claims by unimpaired plaintiÅs and the extentliability coverages for these insureds. While these in- to which they can be precluded from making claims; thesureds are relatively few in number, their exposure has eÅorts by insureds to obtain coverage not subject tobecome substantial due to the increased volume of aggregate limits; the number of insureds seeking bank-claims, the erosion of the underlying limits and the ruptcy protection as a result of asbestos related liabilities;bankruptcies of target defendants. the ability of claimants to bring a claim in a state in which

they have no residency or exposure; the impact of theThe P&C Group's other asbestos exposures involve exhaustion of primary limits and the resulting increase in

products and non-products liability on the part of claims on excess liability policies that have been issued;""peripheral'' defendants, including a mix of manufactur- inconsistent court decisions and diverging legal interpre-ers, distributors and installers of certain products that tations; and the possibility, however remote, of federalcontain asbestos in small quantities and owners or opera- legislation that would address the asbestos problem.tors of properties where asbestos was present. Generally, These signiÑcant uncertainties are not likely to be re-these insureds are named defendants on a regional rather solved in the near future.than a nationwide basis. As the Ñnancial resources oftraditional asbestos defendants have been depleted, plain- Toxic waste claims relate primarily to pollution andtiÅs are targeting these viable peripheral parties with related cleanup costs. The P&C Group's insureds havegreater frequency and, in many cases, for larger awards. two potential areas of exposure: hazardous waste dump

sites and pollution at the insured site primarily fromAsbestos claims against the major manufacturers, dis- underground storage tanks and manufacturing processes.

tributors or installers of asbestos products were typicallypresented under the products liability section of primary The federal Comprehensive Environmental Responsegeneral liability policies as well as under excess liability Compensation and Liability Act of 1980 (Superfund)policies, both of which typically had aggregate limits that has been interpreted to impose strict, retroactive andcapped an insurer's exposure. In recent years, a number joint and several liability on potentially responsible par-of asbestos claims by insureds are being presented as ties (PRPs) for the cost of remediating hazardous waste""non-products'' claims, such as those by installers of sites. Most sites have multiple PRPs.

F-18


Most PRPs named to date are parties who have been (10) Reinsurancegenerators, transporters, past or present landowners or

In the ordinary course of business, the P&C Grouppast or present site operators. Insurance policies issued toassumes and cedes reinsurance with other insurancePRPs were not intended to cover the clean-up costs ofcompanies. Reinsurance is ceded to provide greater di-pollution and, in many cases, did not intend to cover theversiÑcation of risk and to limit the P&C Group'spollution itself. As the costs of environmental clean-upmaximum net loss arising from large risks or catastrophicbecame substantial, PRPs and others increasingly Ñledevents.claims with their insurance carriers. Litigation against

insurers extends to issues of liability, coverage and other A large portion of the P&C Group's ceded reinsur-policy provisions. ance is eÅected under contracts known as treaties under

which all risks meeting prescribed criteria are automati-There is substantial uncertainty involved in estimating cally covered. Most of these arrangements consist of

the P&C Group's liabilities related to these claims. First, excess of loss and catastrophe contracts that protectthe liabilities of the claimants are extremely diÇcult to against a speciÑed part or all of certain types of lossesestimate. At any given waste site, the allocation of over stipulated amounts arising from any one occurrenceremediation costs among governmental authorities and or event. In certain circumstances, reinsurance is alsothe PRPs varies greatly depending on a variety of factors. eÅected by negotiation on individual risks.Second, diÅerent courts have addressed liability and

Ceded reinsurance contracts do not relieve the P&Ccoverage issues regarding pollution claims and haveGroup of the primary obligation to its policyholders.reached inconsistent conclusions in their interpretationThus, an exposure exists with respect to reinsuranceof several issues. These signiÑcant uncertainties are notceded to the extent that any reinsurer is unable orlikely to be resolved deÑnitively in the near future.unwilling to meet its obligations assumed under thereinsurance contracts. The P&C Group monitors theUncertainties also remain as to the Superfund lawÑnancial strength of its reinsurers on an ongoing basis.itself. Superfund's taxing authority expired on Decem-

ber 31, 1995 and has not been re-enacted. Federal Premiums earned and insurance losses and loss ex-legislation appears to be at a standstill. At this time, it is penses are reported net of reinsurance in the consoli-not possible to predict the direction that any reforms dated statements of income.may take, when they may occur or the eÅect that any

The eÅect of reinsurance on the premiums written andchanges may have on the insurance industry.earned of the P&C Group was as follows:

Without federal movement on Superfund reform, the Years Ended December 31enforcement of Superfund liability has occasionally 2006 2005 2004shifted to the states. States are being forced to reconsider (in millions)state-level cleanup statutes and regulations. As individual

Direct premiums written ÏÏÏÏÏÏÏÏÏ $12,224 $12,180 $12,001states move forward, the potential for conÖicting state Reinsurance assumed ÏÏÏÏÏÏÏÏÏÏÏÏ 954 1,120 1,398regulation becomes greater. In a few states, cases have Reinsurance ceded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,204) (1,017) (1,346)been brought against insureds or directly against insur- Net premiums written ÏÏÏÏÏÏÏÏÏ $11,974 $12,283 $12,053ance companies for environmental pollution and natural

Direct premiums earned ÏÏÏÏÏÏÏÏÏ $12,084 $12,111 $11,664resources damages. To date, only a few natural resourcesReinsurance assumed ÏÏÏÏÏÏÏÏÏÏÏÏ 971 1,175 1,368claims have been Ñled and they are being vigorouslyReinsurance ceded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,097) (1,110) (1,396)

defended. SigniÑcant uncertainty remains as to the costNet premiums earnedÏÏÏÏÏÏÏÏÏÏ $11,958 $12,176 $11,636of remediating the state sites. Because of the large num-

ber of state sites, such sites could prove even more costlyThe ceded reinsurance premiums written and earnedin the aggregate than Superfund sites.

in 2006 included $283 million and $190 million, respec-tively, ceded to Harbor Point.In establishing toxic waste reserves, the exposure

presented by each insured is evaluated. As part of this Ceded losses and loss expenses, which reduce lossesevaluation, consideration is given to the probable liability, and loss expenses incurred, were $86 million, $1,031 mil-available insurance coverage, relevant judicial interpreta- lion and $803 million in 2006, 2005 and 2004, respec-tions, past settlement values of similar claims as well as facts tively. The 2005 ceded amount included $775 millionthat are unique to each insured. related to Hurricane Katrina and the 2006 amount re-

Öected a $175 million reduction of ceded losses and lossManagement believes that the loss reserves carried at expenses related to the hurricane.

December 31, 2006 for asbestos and toxic waste claimswere adequate. However, given the judicial decisions andlegislative actions that have broadened the scope ofcoverage and expanded theories of liability in the pastand the possibilities of similar interpretations in thefuture, it is possible that the estimate of loss reservesrelating to these exposures may increase in future periodsas new information becomes available and as claimsdevelop.

F-19


(11) Federal and Foreign Income Tax

(a) Income tax expense consisted of the following components:


2006 2005 2004

(in millions)Current tax

United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $735 $421 $338ForeignÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 116 97

Deferred tax expense, principally United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108 84 85

$997 $621 $520

Federal and foreign income taxes paid were $847 million, $409 million and $378 million in 2006, 2005 and 2004,respectively.

(b) The eÅective income tax rate is diÅerent than the statutory federal corporate tax rate. The reasons for thediÅerent eÅective tax rate were as follows:


2006 2005 2004

% of % of % ofPre-Tax Pre-Tax Pre-Tax

Amount Income Amount Income Amount Income

(in millions)Income before federal and foreign income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,525 $2,447 $2,068

Tax at statutory federal income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,234 35.0% $ 856 35.0% $ 724 35.0%Tax exempt interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (215) (6.1) (195) (8.0) (174) (8.4)Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22) (.6) (40) (1.6) (30) (1.5)

Actual taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 997 28.3% $ 621 25.4% $ 520 25.1%

(c) The tax eÅects of temporary diÅerences that gave rise to deferred income tax assets and liabilities were as follows:

December 31

2006 2005

(in millions)Deferred income tax assets

Unpaid losses and loss expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 690 $ 734Unearned premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 363 365Foreign tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 524 388Employee compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 135Postretirement beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 132 13

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,876 1,635

Deferred income tax liabilitiesDeferred policy acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 430 430Unremitted earnings of foreign subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 487 319Unrealized appreciation of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211 167Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 157 96

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,285 1,012

Net deferred income tax assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 591 $ 623

Although realization of deferred income tax assets is not assured, management believes that it is more likely than notthat the deferred tax assets will be realized. Accordingly, no valuation allowance was recorded at December 31, 2006 or2005.

(d) The Corporation Ñles income tax returns with the U.S. Internal Revenue Service (IRS) as well as with variousstate and foreign tax authorities. The U.S. income tax returns of the Corporation for years prior to 2002 are no longersubject to examination by the IRS. The examination of the Corporation's U.S. income tax returns for 2002 and 2003 isexpected to be completed in 2007. Management does not anticipate any adjustments for tax years that remain subject toexamination that would have a material eÅect on the Corporation's Ñnancial position or results of operations.

F-20


(12) Stock-Based Employee Compensation Plans

The Corporation has two stock-based employee compensation plans, the Long-Term Stock Incentive Plan and theStock Purchase Plan. The compensation cost charged against income with respect to these plans was $88 million,$65 million and $66 million in 2006, 2005 and 2004, respectively. The total income tax beneÑt included in income withrespect to these stock-based compensation arrangements was $31 million in 2006 and $22 million in 2005 and 2004.

As of December 31, 2006, there was $90 million of unrecognized compensation cost related to nonvested awards.That cost is expected to be charged against income over a weighted average period of 1.7 years.

(a) The Long-Term Stock Incentive Plan provides for the granting of restricted stock units, restricted stock,performance shares, stock options, and other stock-based awards to key employees. The maximum number of shares ofChubb's common stock in respect to which stock-based awards may be granted under the Plan is 15,834,000 shares. AtDecember 31, 2006, 9,883,000 shares were available for grant under the Plan.

During 2004, the Corporation changed the emphasis of its equity compensation program from stock options to otherequity awards.

Restricted Stock Units, Restricted Stock and Performance Shares

Restricted stock unit awards are payable in cash, in shares of Chubb's common stock, or in a combination of both.Restricted stock units are not considered to be outstanding shares of common stock, have no voting rights and aresubject to forfeiture during the restriction period. Holders of restricted stock units may receive dividend equivalents.Restricted stock awards consist of shares of Chubb's common stock granted at no cost to the employees. Shares ofrestricted stock become outstanding when granted, receive dividends and have voting rights. The shares are subject toforfeiture and to restrictions that prevent their sale or transfer during the restriction period. Performance share awardsare based on the achievement of performance goals over performance cycle periods. Performance share awards arepayable in cash, in shares of Chubb's common stock or in a combination of both.

An amount equal to the fair value at the date of grant of restricted stock unit awards, restricted stock awards andperformance share awards is expensed over the vesting period. The weighted average fair value per share of the restrictedstock units and restricted stock granted was $47.54, $39.67 and $35.01 in 2006, 2005 and 2004, respectively. Theweighted average fair value per share of the performance shares granted was $44.73, $37.02 and $32.74 in 2006, 2005and 2004, respectively.

Additional information with respect to restricted stock units and restricted stock and performance shares is as follows:

Restricted Stock Units andRestricted Stock Performance Shares*

Weighted Average Weighted AverageNumber Grant Date Number Grant Dateof Shares Fair Value of Shares Fair Value

Nonvested, January 1, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,516,096 $35.00 1,625,150 $34.84Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,136,270 47.54 689,880 44.73Vested ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (686,179) 27.01 (824,664) 32.74ForfeitedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (136,657) 39.83 (18,014) 40.58

Nonvested, December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,829,530 39.98 1,472,352 40.58

* The number of shares earned may range from 0% to 200% of the performance shares shown in the table above. The performance shares earned in2006 were 143% of the vested shares shown in the table, or 1,179,270 shares.

The total fair value of restricted stock units and restricted stock that vested during 2006, 2005 and 2004 was$34 million, $20 million and $15 million, respectively. The total fair value of performance shares that vested during 2006and 2004 was $63 million and $14 million, respectively. No performance shares were granted that would have vestedduring 2005.

F-21


Stock Options

Stock options are granted at exercise prices not less than the fair market value of Chubb's common stock on the dateof grant. The terms and conditions upon which options become exercisable may vary among grants. Options expire nolater than ten years from the date of grant.

An amount equal to the fair market value of stock options at the date of grant is expensed over the period that suchoptions become exercisable. The weighted average fair value per stock option granted during 2006, 2005 and 2004 was$7.65, $7.56 and $7.50, respectively. The fair value of each stock option was estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted average assumptions.

2006 2005 2004

Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.8% 4.0% 3.4%Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.9% 22.1% 25.9%Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.0% 2.0% 2.2%Expected average term (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.4 3.5 4.2

Additional information with respect to stock options is as follows:

Weighted AverageNumber Weighted Average Remaining Aggregateof Shares Exercise Price Contractual Term Intrinsic Value

(in years) (in millions)

Outstanding, January 1, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,355,796 $33.10GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 564,411 50.97Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,332,706) 33.08Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (79,445) 39.97

Outstanding, December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,508,056 33.94 4.1 $220

Exercisable, December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,218,976 33.74 4.0 217

The total intrinsic value of the stock options exercised during 2006, 2005 and 2004 was $110 million, $229 millionand $77 million, respectively. The Corporation received cash of $185 million, $528 million and $203 million during2006, 2005 and 2004, respectively, from the exercise of stock options. The tax beneÑt realized with respect to stockoptions exercised during 2006, 2005 and 2004 was $40 million, $69 million and $23 million, respectively.

(b) Under the Stock Purchase Plan, substantially all employees are eligible to purchase shares of Chubb's commonstock at a Ñxed price at the end of the oÅering period. The price is determined on the date the purchase rights aregranted and the oÅering period cannot exceed 27 months. The number of shares an eligible employee may purchase isbased on the employee's compensation. An amount equal to the fair market value of purchase rights at the date of grantis expensed over the oÅering period.

During 2004, 1,660,678 shares were issued with respect to purchase rights that were granted in 2002. TheCorporation received cash of $55 million related to the issuance of such shares. The intrinsic value of the purchaserights exercised during 2004 and the tax beneÑt realized with respect to the exercise of the rights were insigniÑcant. Nopurchase rights have been granted since 2002.

(13) Employee BeneÑts

(a) The Corporation has several non-contributory deÑned beneÑt pension plans covering substantially all employees.Prior to 2001, beneÑts were generally based on an employee's years of service and average compensation during the lastÑve years of employment. EÅective January 1, 2001, the Corporation changed the formula for providing pension beneÑtsfrom the Ñnal average pay formula to a cash balance formula. Under the cash balance formula, a notional account isestablished for each employee, which is credited semi-annually with an amount equal to a percentage of eligiblecompensation based on age and years of service plus interest based on the account balance. Employees hired prior to2001 will generally be eligible to receive vested beneÑts based on the higher of the Ñnal average pay or cash balanceformulas.

The Corporation's funding policy is to contribute amounts that meet regulatory requirements plus additionalamounts determined by management based on actuarial valuations, current market conditions and other factors. Thismay result in no contribution being made in a particular year.

The Corporation also provides certain other postretirement beneÑts, principally health care and life insurance, toretired employees and their beneÑciaries and covered dependents. Substantially all employees hired before January 1,1999 may become eligible for these beneÑts upon retirement if they meet minimum age and years of servicerequirements. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type ofcoverage and years of service with the Corporation. Life insurance coverage is non-contributory.

The Corporation funds a portion of the health care beneÑts obligation where such funding can be accomplished on atax eÅective basis. BeneÑts are paid as covered expenses are incurred.

The Corporation uses December 31 as the measurement date for its pension and other postretirement beneÑt plans.

F-22


The following table sets forth the plans' funded status and amounts recognized in the balance sheets:

OtherPostretirement

Pension BeneÑts BeneÑts

2006 2005 2006 2005

(in millions)

BeneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,533 $1,293 $269 $275Plan assets at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,304 1,031 26 22

Funded status at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 262 243 253Unrecognized net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (391) Ì (55)Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (13) Ì 4

Net liability (asset) recognizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 229 $ (142) $243 $202

Amounts in accumulated other comprehensive income not yet recognized as componentsof net beneÑt costs:

Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 393 $ 31Prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 (3)

$ 404 $ 28

The accumulated beneÑt obligation for the pension plans was $1,224 million and $1,000 million at December 31,2006 and 2005, respectively. The accumulated beneÑt obligation is the present value of pension beneÑts earned as of themeasurement date based on employee service and compensation prior to that date. It diÅers from the pension beneÑtobligation in the above table in that the accumulated beneÑt obligation includes no assumptions about futurecompensation levels.

The weighted average assumptions used to determine the beneÑt obligations were as follows:

OtherPostretirement


2006 2005 2006 2005

Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.75% 5.75% 5.75% 5.75%

Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.5 4.5 Ì Ì

The Corporation made pension plan contributions of $109 million and $127 million during 2006 and 2005,respectively. The Corporation made other postretirement beneÑt plan contributions of $2 million and $8 million during2006 and 2005, respectively.

The components of net pension and other postretirement beneÑt costs were as follows:

OtherPostretirement


2006 2005 2004 2006 2005 2004

(in millions)

Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 67 $ 58 $ 50 $ 9 $ 8 $ 8Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75 69 61 14 15 15Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (85) (74) (67) (2) (1) ÌAmortization of net loss and prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 20 15 1 Ì 1

Net beneÑt costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 91 $ 73 $ 59 $22 $22 $24

The estimated aggregate net loss and prior service cost that will be amortized from accumulated other comprehensiveincome into net beneÑt costs during 2007 for the pension and other postretirement beneÑt plans is $27 million.

The weighted average assumptions used to determine net pension and other postretirement beneÑt costs were asfollows:

OtherPension BeneÑts Postretirement BeneÑts

2006 2005 2004 2006 2005 2004

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.75% 6.25% 6.5% 5.75% 6.25% 6.5%

Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.5 4.5 4.5 Ì Ì Ì

Expected long term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.0 8.25 8.5 8.0 8.25 8.5

F-23


The weighted average health care cost trend rate assumptions used to measure the expected cost of medical beneÑtswere as follows:

December 31

2006 2005

Health care cost trend rate for next year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.5% 9.5%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.0% 5.0%

Year that the rate reaches the ultimate trend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2014 2013

The health care cost trend rate assumption has a signiÑcant eÅect on the amount of the accumulated otherpostretirement beneÑt obligation and the net other postretirement beneÑt cost reported. To illustrate, a one percentincrease or decrease in the trend rate for each year would increase or decrease the accumulated other postretirementbeneÑt obligation at December 31, 2006 by approximately $48 million and the aggregate of the service and interest costcomponents of net other postretirement beneÑt cost for the year ended December 31, 2006 by approximately $5 million.

Pension plan and other postretirement beneÑt plan assets are invested with the long term objective of earningsuÇcient amounts to cover expected beneÑt obligations, while assuming a prudent level of risk. The Corporation seeksto obtain a rate of return that over time equals or exceeds the returns of the broad markets in which the plan assets areinvested. The target allocation of plan assets is 55% to 65% invested in equity securities, with the remainder invested inÑxed maturities. The portfolio is rebalanced periodically to remain within the target allocation range. The Corporationdetermined the expected long term rate of return assumption for each asset class based on an analysis of the historicalreturns and the expectations for future returns. The expected long-term rate of return for the portfolio is a weightedaggregation of the expected returns for each asset class.

Plan assets are currently invested in a diversiÑed portfolio of predominately U.S. equity securities and Ñxed maturities.The plan assets weighted average allocation was as follows:

December 31

2006 2005

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62% 60%

Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 40

100% 100%

The estimated beneÑts expected to be paid in each of the next Ñve years and in the aggregate for the following Ñveyears are as follows:

OtherYears Ending PostretirementDecember 31 Pension BeneÑts BeneÑts

(in millions)2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50 $ 82008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 92009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61 102010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62 112011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67 122012-2016 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 483 79

(b) The Corporation has a deÑned contribution beneÑt plan, the Capital Accumulation Plan, in which substantiallyall employees are eligible to participate. Under this plan, the employer makes a matching contribution annually equal to100% of each eligible employee's pre-tax elective contributions, up to 4% of the employee's eligible compensation.Contributions are invested at the election of the employee in Chubb's common stock or in various other investmentfunds. Employer contributions charged against income were $25 million in 2006 and 2005 and $24 million in 2004.

F-24


(14) Commitments and Contingent Liabilities state court. The Ñrst was Ñled on February 16, 2005 inSeminole County, Florida. The second was Ñled on

(a) Chubb and certain of its subsidiaries have been May 17, 2005 in Essex County, Massachusetts. Bothinvolved in the ongoing investigations of certain market cases were removed to federal court and then transferredpractices in the property and casualty insurance industry by the Judicial Panel on Multidistrict Litigation to theby various Attorneys General and other regulatory au- U.S. District Court for the District of New Jersey forthorities of several states, the U.S. Securities and Ex- consolidation with the In re Insurance Brokerage Anti-change Commission, the U.S. Attorney for the Southern trust Litigation.District of New York and certain non-U.S. regulatoryauthorities with respect to, among other things, (1) po- In December 2005, Chubb and certain of its subsidiar-tential conÖicts of interest and anti-competitive behavior ies were named in an action similar to the In re Insurancearising from the payment of contingent commissions to Brokerage Antitrust Litigation. The action is pending inbrokers and agents and (2) loss mitigation and Ñnite the same court and has been assigned to the judge who isreinsurance arrangements. In connection with these in- presiding over the In re Insurance Brokerage Antitrustvestigations, Chubb and certain of its subsidiaries have Litigation. The complaint has not yet been served in thisreceived subpoenas and other requests for information matter. Separately, in April 2006, Chubb and one of itsfrom various regulators. The Corporation has been coop- subsidiaries were named in an action similar to the In reerating fully with these investigations. Although no regu- Insurance Brokerage Antitrust Litigation. This action waslatory action has been initiated against the Corporation, Ñled in the U.S. District Court for the Northern Districtit is possible that one or more regulatory authorities will of Georgia and subsequently was transferred by thebring an action against the Corporation with respect to Judicial Panel on Multidistrict Litigation to the U.S.some or all of the issues that are the focus of these District for the District of New Jersey for consolidationongoing investigations. with the In re Insurance Brokerage Antitrust Litigation.

On December 21, 2006, Chubb entered into an Assur- In these actions, the plaintiÅs generally allege that theance of Discontinuance with the Attorneys General of defendants unlawfully used contingent commissionNew York, Connecticut and Illinois, resolving all issues agreements. The actions seek treble damages, injunctivearising out of those oÇcials' investigations of the market and declaratory relief, and attorneys' fees. The Corpora-practices described above. As part of this agreement, the tion believes it has substantial defenses to all of theCorporation agreed to contribute $15 million to a settle- aforementioned legal proceedings and intends to defendment fund established for the beneÑt of certain custom- the actions vigorously.ers. The Corporation also agreed to pay $2 million to

The Corporation cannot at this time predict the ulti-help defray the costs of the investigations by the Attor-mate outcome of the aforementioned ongoing investiga-neys General. In addition, the Corporation agreed totions and legal proceedings, including any potentialimplement certain business reforms, including discontin-amounts that the Corporation may be required to pay inuing the payment of contingent commissions in theconnection with them.United States on all insurance lines, beginning in 2007.

(b) Chubb Financial Solutions (CFS) participated inPurported class actions arising out of the investigationsderivative Ñnancial instruments, principally as ainto the payment of contingent commissions to brokerscounterparty in portfolio credit default swaps. CFS'sand agents have been Ñled in a number of federal andparticipation in a typical portfolio credit default swap wasstate courts. On August 1, 2005, Chubb and certain ofdesigned to replicate the performance of a portfolio ofits subsidiaries were named in a putative class actioncorporate securities or a portfolio of asset-backed securi-entitled In re Insurance Brokerage Antitrust Litigation inties. Chubb has issued unconditional guarantees withthe U.S. District Court for the District of New Jersey.respect to all obligations of CFS arising from theseThis action, brought against several brokers and insurerstransactions. CFS has been in run-oÅ since April 2003.on behalf of a class of persons who purchased insurance

through the broker defendants, asserts claims under theCFS's aggregate exposure, or retained risk, from its in-Sherman Act and state law and the Racketeer InÖuenced

force portfolio credit default swaps and other derivativeand Corrupt Organizations Act (""RICO'') arising fromÑnancial instruments is referred to as notional amount.the alleged unlawful use of contingent commissionNotional amounts are used to express the extent ofagreements.involvement in derivative transactions. The notional

Chubb and certain of its subsidiaries have also been amounts are used to calculate the exchange of contrac-named as defendants in two purported class actions tual cash Öows and are not necessarily representative ofrelating to allegations of unlawful use of contingent the potential for gain or loss. Notional amounts are notcommission arrangements that were originally Ñled in recorded on the balance sheet.

F-25


Future obligations with respect to derivative Ñnancial (15) Segments Informationinstruments are carried at estimated fair value at the

The principal business of the Corporation is the sale ofbalance sheet date and are included in other liabilities.property and casualty insurance. The proÑtability of theThe notional amount and fair value of future obligationsproperty and casualty insurance business depends on theunder CFS's derivative contracts were as follows:results of both underwriting operations and investments,

December 31 which are viewed as two distinct operations. The under-Notional writing operations are managed and evaluated separatelyAmount Fair Value

from the investment function.2006 2005 2006 2005

(in billions) (in millions) The P&C Group underwrites most lines of propertyCredit default swaps ÏÏÏÏÏÏÏÏÏÏÏ $1.1 $1.0 $2 $2 and casualty insurance. Underwriting operations consistOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .3 .3 6 7 of four separate business units: personal insurance, com-

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.4 $1.3 $8 $9 mercial insurance, specialty insurance and reinsuranceassumed. The personal segment targets the personalinsurance market. The personal classes include automo-(c) A property and casualty insurance subsidiary is-bile, homeowners and other personal coverages. Thesued a reinsurance contract to an insurer that providescommercial segment includes those classes of businessfinancial guarantees on debt obligations. At December 31,that are generally available in broad markets and are of a2006, the aggregate principal commitments related to thismore commodity nature. Commercial classes includecontract for which the subsidiary was contingently liablemultiple peril, casualty, workers' compensation andamounted to approximately $350 million, net of reinsur-property and marine. The specialty segment includesance. These commitments expire by 2023.those classes of business that are available in more limitedmarkets since they require specialized underwriting and(d) The Corporation occupies oÇce facilities underclaim settlement. Specialty classes include professionallease agreements that expire at various dates throughliability coverages and surety. The reinsurance assumed2019; such leases are generally renewed or replaced bybusiness is eÅectively in runoÅ following the sale, inother leases. Most facility leases contain renewal optionsDecember 2005, of the ongoing business to Harbor Pointfor increments ranging from two to ten years. The(see Note (3)).Corporation also leases data processing, oÇce and trans-

portation equipment. All leases are operating leases.Corporate and other includes investment income

earned on corporate invested assets, corporate expensesRent expense was as follows:and the Corporation's real estate and other non-insur-

Years Ended ance subsidiaries. The results of CFS, which were previ-December 31ously reported separately, are now included in corporate2006 2005 2004and other.(in millions)

OÇce facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $89 $ 87 $ 90 Performance of the property and casualty underwrit-EquipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 14 15 ing segments is measured based on statutory underwrit-

$98 $101 $105 ing results. Statutory underwriting proÑt is arrived at byreducing premiums earned by losses and loss expensesincurred and statutory underwriting expenses incurred.At December 31, 2006, future minimum rental pay-Under statutory accounting principles applicable toments required under non-cancellable operating leasesproperty and casualty insurance companies, policy acqui-were as follows:sition and other underwriting expenses are recognized

Years Endingimmediately, not at the time premiums are earned.December 31 (in millions)

Management uses underwriting results determined in2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 872008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80 accordance with generally accepted accounting principles2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69 (GAAP) to assess the overall performance of the under-2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 writing operations. Underwriting income determined in2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57

accordance with GAAP is deÑned as premiums earnedAfter 2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 219less losses and loss expenses incurred and GAAP under-$571writing expenses incurred. To convert statutory under-writing results to a GAAP basis, policy acquisition

(e) The Corporation had certain commitments total- expenses are deferred and amortized over the period ining $1.5 billion at December 31, 2006 to fund limited which the related premiums are earned.partnership investments. These capital commitments canbe called by the partnerships during the commitment Investment income performance is measured based onperiod (on average, 1 to 5 years) to fund working capital investment income net of investment expenses, exclud-needs or the purchase of new investments. ing realized investment gains and losses.

F-26


Distinct investment portfolios are not maintained for each underwriting segment. Property and casualty investedassets are available for payment of losses and expenses for all classes of business. Therefore, such assets and the relatedinvestment income are not allocated to underwriting segments.

Revenues, income before income tax and assets of each operating segment were as follows:


2006 2005 2004

(in millions)Revenues

Property and casualty insurancePremiums earned

Personal insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,409 $ 3,217 $ 2,997Commercial insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,079 5,020 4,766Specialty insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,953 2,981 2,762

Total insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,441 11,218 10,525Reinsurance assumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 517 958 1,111

11,958 12,176 11,636Investment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,485 1,342 1,207

Total property and casualty insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,443 13,518 12,843Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 181 116Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245 384 218

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,003 $14,083 $13,177

Income (loss) before income taxProperty and casualty insurance

UnderwritingPersonal insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 590 $ 405 $ 187Commercial insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 840 376 777Specialty insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371 67 (249)

Total insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,801 848 715Reinsurance assumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 56 55

1,886 904 770Increase in deferred policy acquisition costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 17 76

Underwriting incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,905 921 846Investment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,454 1,315 1,184Other income (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 (1) (4)

Total property and casualty insuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,369 2,235 2,026Corporate and other lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (89) (172) (176)Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 245 384 218

Total income before income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,525 $ 2,447 $ 2,068

December 31

2006 2005 2004

(in millions)Assets

Property and casualty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $47,671 $45,110 $42,049Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,811 3,054 2,226Adjustments and eliminationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (205) (103) (15)

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50,277 $48,061 $44,260

The international business of the property and casualty insurance segment is conducted primarily through subsidiariesthat operate solely outside of the United States. Their assets and liabilities are located principally in the countries wherethe insurance risks are written. International business is also written by branch oÇces of certain domestic subsidiaries.

Revenues of the P&C Group by geographic area were as follows:


2006 2005 2004

(in millions)Revenues

United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,807 $11,013 $10,567International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,636 2,505 2,276

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,443 $13,518 $12,843

F-27


(16) Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of commonshares outstanding during the year. The computation of diluted earnings per share reÖects the potential dilutive eÅect,using the treasury stock method, of outstanding awards under stock-based employee compensation plans and ofoutstanding purchase contracts and mandatorily exercisable warrants to purchase Chubb's common stock.

The following table sets forth the computation of basic and diluted earnings per share:


2006 2005 2004

(in millions except for pershare amounts)

Basic earnings per share:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,528 $1,826 $1,548

Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412.5 396.4 379.7

Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.13 $ 4.61 $ 4.08

Diluted earnings per share:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,528 $1,826 $1,548

Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412.5 396.4 379.7Additional shares from assumed exercise of stock-based compensation awardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.7 7.3 6.3Additional shares from assumed issuance of common stock upon settlement of purchase contracts and

mandatorily exercisable warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.2 4.7 .4

Weighted average number of common shares and potential common shares assumed outstanding forcomputing diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 422.4 408.4 386.4

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.98 $ 4.47 $ 4.01

In 2006, 2005 and 2004, options to purchase 0.1 million shares, 1.6 million shares and 15.2 million shares of commonstock with weighted average exercise prices of $51.55 per share, $42.02 per share and $37.51 per share, respectively,were excluded from the computation of diluted earnings per share because the exercise price of these options was greaterthan the average market price of Chubb's common stock. For additional disclosure regarding the stock-basedcompensation awards, see Note (12).

(17) Comprehensive Income

Comprehensive income is deÑned as all changes in shareholders' equity, except those arising from transactions withshareholders. Comprehensive income includes net income and other comprehensive income, which for the Corporationconsisted of changes in unrealized appreciation or depreciation of investments carried at market value and changes inforeign currency translation gains or losses.

The components of other comprehensive income or loss were as follows:


2006 2005 2004

Before Income Before Income Before IncomeTax Tax Net Tax Tax Net Tax Tax Net

(in millions)Unrealized holding gains (losses) arising

during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $161 $ 55 $106 $(447) $(157) $(290) $ 19 $ 3 $ 16ReclassiÑcation adjustment for

realized gains included in net income ÏÏÏÏÏÏÏÏÏÏÏÏ 36 11 25 35 12 23 94 29 65

Net unrealized gains (losses) recognizedin other comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 44 81 (482) (169) (313) (75) (26) (49)

Foreign currency translation gains (losses) ÏÏÏÏÏÏÏÏÏ 52 18 34 (35) (13) (22) 103 36 67

Total other comprehensiveincome (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $177 $ 62 $115 $(517) $(182) $(335) $ 28 $ 10 $ 18

F-28


(18) Fair Values of Financial Instruments values of Ñxed maturities are principally a function ofcurrent interest rates. Care should be used in evaluat-

Fair values of Ñnancial instruments are based on ing the signiÑcance of these estimated market valuesquoted market prices where available. Fair values of which can Öuctuate based on such factors as interestÑnancial instruments for which quoted market prices are rates, inÖation, monetary policy and general economicnot available are based on estimates using present value conditions.or other valuation techniques. Those techniques are

(iii) Fair values of equity securities are based onsigniÑcantly aÅected by the assumptions used, includingquoted market prices.the discount rates and the estimated amounts and timing

of future cash Öows. In such instances, the derived fair (iv) Fair values of limited partnerships representvalue estimates cannot be substantiated by comparison to the Corporations's equity in the net assets of theindependent markets and are not necessarily indicative of partnerships based on valuations provided by the man-the amounts that would be realized in a current market ager of each partnership.exchange. Certain Ñnancial instruments, particularly in-

(v) Fair values of real estate mortgages receivablesurance contracts, are excluded from fair value disclosureare estimated individually as the value of the dis-requirements.counted future cash Öows of the loan, subject to the

The methods and assumptions used to estimate the fair estimated fair value of the underlying collateral.value of Ñnancial instruments are as follows:

(vi) The fair value of the interest rate swap isbased on a price quoted by a dealer.(i) The carrying value of short term investments

approximates fair value due to the short maturities of (vii) Fair values of long term debt is based onthese investments. prices quoted by dealers.

(ii) Fair values of Ñxed maturities with active mar- (viii) Fair values of credit derivatives, principallykets are based on quoted market prices. For Ñxed portfolio credit default swaps, are determined usingmaturities that trade in less active markets, fair values internal valuation models that are similar to externalare obtained from independent pricing services. Fair valuation models.

The carrying values and fair values of Ñnancial instruments were as follows:

December 31

2006 2005

Carrying Fair Carrying FairValue Value Value Value

(in millions)Assets

Invested assetsShort term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,254 $ 2,254 $ 1,899 $ 1,899Fixed maturities (Note 4)

Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135 142 205 216Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,831 31,831 30,318 30,318

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,957 1,957 1,169 1,169Other invested assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,516 1,516 1,043 1,043

Real estate mortgages receivable (Note 6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 19 19Interest rate swap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 6 7 7

LiabilitiesLong term debt (Note 8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,460 2,504 2,460 2,714Credit derivatives (Note 14)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 8 9 9

F-29


(19) Shareholders' Equity

(a) In connection with the stock split approved by the Board of Directors on March 3, 2006, the Board of Directorsapproved a proportionate increase in the number of authorized shares of Chubb's common stock from 600 millionshares to 1.2 billion shares and an increase in the authorized shares of Chubb's preferred stock from 4 million shares to8 million shares.

(b) The authorized but unissued preferred shares may be issued in one or more series and the shares of each seriesshall have such rights as Ñxed by the Board of Directors.

(c) On February 8, 2006, the Board of Directors authorized the cancellation of all treasury shares, which werethereupon restored to the status of authorized but unissued common shares. The change had no eÅect on totalshareholders' equity.

The activity of Chubb's common stock was as follows:Years Ended December 31

2006 2005 2004

(number of shares)Common stock issued

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 420,864,596 391,607,648 391,607,648Treasury shares cancelledÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,887,800) Ì ÌRepurchase of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20,266,262) Ì ÌShares issued upon settlement of equity unit purchase contracts and warrantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,883,527 17,366,234 ÌShare activity under stock-based employee compensation plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,682,879 11,890,714 Ì

Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 411,276,940 420,864,596 391,607,648

Treasury stockBalance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,787,800 6,254,564 15,680,896Repurchase of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,100,000 2,787,800 ÌCancellation of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,887,800) Ì ÌShare activity under stock-based employee compensation plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (6,254,564) (9,426,332)

Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,787,800 6,254,564

Common stock outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 411,276,940 418,076,796 385,353,084

In November 2002, Chubb issued 24 million mandatorily exercisable warrants to purchase its common stock and$600 million of senior notes due in 2007. The warrants and notes were issued together in the form of equity units. Eachwarrant obligated the holder to purchase, and obligated Chubb to sell, on or before the settlement date of November 16,2005, for a settlement price of $25, a variable number of newly issued shares of Chubb's common stock. The number ofshares of Chubb's common stock purchased was determined based on a formula that considered the market price of thecommon stock immediately prior to the time of settlement in relation to the $28.32 per share sale price of the commonstock at the time the equity units were oÅered. Upon settlement of the warrants, Chubb issued 17,366,234 shares ofcommon stock and received proceeds of $600 million.

In June 2003, Chubb issued 18.4 million purchase contracts to purchase its common stock and $460 million of seniornotes due in 2008. The purchase contracts and notes were issued together in the form of equity units. Each purchasecontract obligated the holder to purchase, and obligated Chubb to sell, on or before the settlement date of August 16,2006, for a settlement price of $25, a variable number of newly issued shares of Chubb's common stock. The number ofshares of Chubb's common stock purchased was determined based on a formula that considered the market price of thecommon stock immediately prior to the time of settlement in relation to the $29.75 per share sale price of the commonstock at the time the equity units were oÅered. Upon settlement of the purchase contracts, Chubb issued12,883,527 shares of common stock and received proceeds of $460 million.

(d) As of December 31, 2006, 19,845,938 shares remained under the current share repurchase authorization thatwas approved by the Board of Directors in December 2006. The authorization has no expiration date.

F-30


(e) Chubb has a shareholders rights plan under which each shareholder has one-half of a right for each share ofChubb's common stock held. Each right entitles the holder to purchase from Chubb one one-thousandth of a share ofSeries B Participating Cumulative Preferred Stock at an exercise price of $240. The rights are attached to all outstandingshares of common stock and trade with the common stock until the rights become exercisable. The rights are subject toadjustment to prevent dilution of the interests represented by each right.

The rights will become exercisable and will detach from the common stock ten days after a person or group eitheracquires 20% or more of the outstanding shares of Chubb's common stock or announces a tender or exchange oÅerwhich, if consummated, would result in that person or group owning 20% or more of the outstanding shares of Chubb'scommon stock.

In the event that any person or group acquires 20% or more of the outstanding shares of Chubb's common stock,each right will entitle the holder, other than such person or group, to purchase that number of shares of Chubb'scommon stock having a market value of two times the exercise price of the right. In the event that, following theacquisition of 20% or more of Chubb's outstanding common stock by a person or group, the Corporation is acquired ina merger or other business combination transaction or 50% or more of the Corporation's assets or earning power is sold,each right will entitle the holder to purchase common stock of the acquiring company having a value equal to two timesthe exercise price of the right. At any time after any person or group acquires 20% or more of Chubb's common stock,but before such person or group acquires 50% or more of such stock, Chubb may exchange all or part of the rights,other than the rights owned by such person or group, for shares of Chubb's common stock at an exchange ratio of oneshare of common stock per one-half of a right.

The rights do not have the right to vote or to receive dividends. The rights may be redeemed in whole, but not inpart, at a price of $0.01 per right by Chubb at any time until the tenth day after the acquisition of 20% or more ofChubb's outstanding common stock by a person or group. The rights will expire at the close of business onMarch 12, 2009, unless previously exchanged or redeemed by Chubb.

(f) The property and casualty insurance subsidiaries are required to Ñle annual statements with insurance regulatoryauthorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). For suchsubsidiaries, statutory accounting practices diÅer in certain respects from GAAP.

A comparison of shareholders' equity on a GAAP basis and policyholders' surplus on a statutory basis is as follows:December 31

2006 2005

GAAP Statutory GAAP Statutory

(in millions)P&C GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,868 $11,357 $12,147 $8,910

Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) 260

$13,863 $12,407

A comparison of GAAP and statutory net income (loss) is as follows:Years Ended December 31

2006 2005 2004

GAAP Statutory GAAP Statutory GAAP Statutory

(in millions)P&C GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,637 $2,575 $1,963 $1,897 $1,799 $1,664

Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (109) (137) (251)

$2,528 $1,826 $1,548

(g) As a holding company, Chubb's ability to continue to pay dividends to shareholders and to satisfy its obligations,including the payment of interest and principal on debt obligations, relies on the availability of liquid assets, which isdependent in large part on the dividend paying ability of its property and casualty insurance subsidiaries. TheCorporation's property and casualty insurance subsidiaries are subject to laws and regulations in the jurisdictions inwhich they operate that restrict the amount of dividends they may pay without the prior approval of regulatoryauthorities. The restrictions are generally based on net income and on certain levels of policyholders' surplus asdetermined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered""extraordinary'' and require prior regulatory approval. During 2006, these subsidiaries paid dividends to Chubb totaling$650 million.

The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to Chubbduring 2007 without prior regulatory approval is approximately $1.6 billion.

F-31


QUARTERLY FINANCIAL DATA

Summarized unaudited quarterly Ñnancial data for 2006 and 2005 are shown below. In management's opinion, theinterim Ñnancial data contain all adjustments, consisting of normal recurring items, necessary to present fairly the resultsof operations for the interim periods.

Three Months Ended

March 31 June 30 September 30 December 31

2006 2005 2006 2005 2006 2005(a) 2006 2005

(in millions except for per share amounts)

Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,506 $3,449 $3,445 $3,452 $3,451 $3,479 $3,601 $3,703Losses and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,554 2,837 2,611 2,768 2,620 3,175 2,693 2,856Federal and foreign income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 280 142 236 189 227 58 254 232

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 672 $ 470 $ 598 $ 495 $ 604 $ 246 $ 654 $ 615

Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.62 $ 1.22 $ 1.45 $ 1.26 $ 1.47 $ 0.62 $ 1.59 $ 1.50

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.58 $ 1.18 $ 1.41 $ 1.23 $ 1.43 $ 0.60 $ 1.56 $ 1.46

Underwriting ratiosLosses to premiums earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53.8% 60.6% 56.7% 60.3% 56.9% 74.4% 53.2% 61.8%Expenses to premiums written ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.1 28.8 28.5 28.0 28.6 27.8 29.9 27.5

Combined ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82.9% 89.4% 85.2% 88.3% 85.5% 102.2% 83.1% 89.3%

(a) In the third quarter of 2005, revenues were reduced by net reinsurance reinstatement premium costs of $51 million and losses and expensesincluded net losses of $415 million related to Hurricane Katrina. Net income for the quarter was reduced by $303 million or $0.74 per dilutedshare ($0.76 per basic share) for the after-tax eÅect of the net costs. Excluding the impact of Hurricane Katrina, the losses to premiums earnedratio was 59.8%, the expenses to premiums written ratio was 27.3% and the combined ratio was 87.1%.

Per share amounts have been retroactively adjusted to reÖect the two-for-one stock split eÅective March 31, 2006.

F-32



Schedule I

CONSOLIDATED SUMMARY OF INVESTMENTS Ì OTHER THAN INVESTMENTS IN RELATED PARTIES

(in millions)

December 31, 2006

Amountat Which

Cost or Shown inAmortized Market the

Type of Investment Cost Value Balance Sheet

Short term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,254 $ 2,254 $ 2,254

Fixed maturities

United States Government and government agenciesand authorities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,699 4,604 4,604

States, municipalities and political subdivisions ÏÏÏÏÏÏÏÏÏ 17,482 17,785 17,778

ForeignÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,589 5,571 5,571

Public utilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 449 453 453

All other corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,540 3,560 3,560

Total Ñxed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,759 31,973 31,966

Equity securities

Common stocks

Public utilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173 218 218

Banks, trusts and insurance companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 382 535 535

Industrial, miscellaneous and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 964 1,160 1,160

Total common stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,519 1,913 1,913

Non-redeemable preferred stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 44 44

Total equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,561 1,957 1,957

Other invested assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,516 1,516 1,516

Total invested assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $37,090 $37,700 $37,693

S-1



Schedule II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS Ì PARENT COMPANY ONLY

(in millions)

December 31

2006 2005

Assets

Invested Assets

Short Term Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 748 $ 916

Taxable Fixed Maturities Ì Available-for-Sale (cost $1,134 and $1,295) 1,113 1,278

Equity Securities (cost $289 and $5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 416 8

TOTAL INVESTED ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,277 2,202

Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì

Investment in Consolidated SubsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,848 12,156

Investment in Partially Owned CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 260

Net Receivable from Consolidated Subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 141

Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243 149

TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 16,388 $14,908

Liabilities

Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,266 $ 2,267

Dividend Payable to Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104 90

Accrued Expenses and Other Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155 144

TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,525 2,501

Shareholders' Equity

Preferred Stock Ì Authorized 8,000,000 Shares;

$1 Par Value; Issued Ì NoneÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì

Common Stock Ì Authorized 1,200,000,000 Shares;

$1 Par Value; Issued 411,276,940 and 420,864,596 SharesÏÏÏÏÏÏÏÏÏÏÏÏÏ 411 210

Paid-In Surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,539 2,364

Retained Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,711 9,600

Accumulated Other Comprehensive Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202 368

Treasury Stock, at Cost Ì 2,787,800 Shares in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (135)

TOTAL SHAREHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,863 12,407

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITYÏÏÏÏÏÏÏÏ $ 16,388 $14,908

The condensed Ñnancial statements should be read in conjunction with the consolidated Ñnancialstatements and notes thereto.

S-2



Schedule II(continued)

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME Ì PARENT COMPANY ONLY

(in millions)


2006 2005 2004

Revenues

Investment IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 111 $ 82 $ 65

Other RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 3 Ì

Realized Investment Gains (Losses)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 16 (41)

TOTAL REVENUESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128 101 24

Expenses

Investment Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 2 2

Real Estate Impairment Loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 48 Ì

Corporate Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 192 188 176

TOTAL EXPENSES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 195 238 178

Loss before Federal and Foreign Income Tax and Equity in NetIncome of Consolidated Subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (67) (137) (154)

Federal and Foreign Income Tax (Credit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 (48) 53

Loss before Equity in Net Income of Consolidated Subsidiaries ÏÏ (83) (89) (207)

Equity in Net Income of Consolidated Subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,611 1,915 1,755

NET INCOMEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,528 $1,826 $1,548

Chubb and its domestic subsidiaries Ñle a consolidated federal income tax return. The federalincome tax provision represents an allocation under the Corporation's tax allocation agreements.


S-3



Schedule II(continued)

CONDENSED FINANCIAL INFORMATION OF REGISTRANTSTATEMENTS OF CASH FLOWS Ì PARENT COMPANY ONLY

(in millions)


2006 2005 2004

Cash Flows from Operating ActivitiesNet IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,528 $ 1,826 $ 1,548Adjustments to Reconcile Net Income to Net CashProvided by Operating ActivitiesEquity in Net Income of Consolidated Subsidiaries ÏÏÏÏÏÏÏÏÏÏ (2,611) (1,915) (1,755)Realized Investment Losses (Gains)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (16) 41Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 102 Ì

NET CASH USED IN OPERATING ACTIVITIESÏÏÏÏÏÏÏÏÏÏ (42) (3) (166)

Cash Flows from Investing ActivitiesProceeds from Fixed Maturities

Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 121 548 190Maturities, Calls and Redemptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 113 102 69

Proceeds from Sales of Equity SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 7Purchases of Fixed Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (75) (703) (973)Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1) ÌDecrease (Increase) in Short Term Investments, Net ÏÏÏÏÏÏÏÏÏÏ 168 (730) 517Capital Contributions to Consolidated SubsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) (200) (20)Dividends Received from Consolidated Insurance Subsidiaries ÏÏ 650 520 380Distributions Received from Consolidated Non-Insurance

SubsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 Ì 11Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 100 Ì

NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 985 (363) 181

Cash Flows from Financing ActivitiesRepayment of Long Term DebtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (300) ÌProceeds from Common Stock Issued Upon Settlement of

Equity Unit Purchase Contracts and WarrantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 460 600 ÌProceeds from Issuance of Common Stock Under

Stock-Based Employee Compensation Plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229 531 258Repurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,228) (135) ÌDividends Paid to ShareholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (403) (330) (291)Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 18

NET CASH PROVIDED BY (USED IN)FINANCING ACTIVITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (942) 366 (15)

Net Increase in Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì ÌCash at Beginning of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

CASH AT END OF YEAR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1 $ Ì $ Ì


In 2005, consolidated subsidiaries paid noncash dividends in the amount of $196 million to Chubb.These transactions have been excluded from the statement of cash Öows.

S-4


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EXHIBITS INDEX

(Item 15(a))ExhibitNumber Description

Ì Articles of incorporation and by-laws

3.1 Restated CertiÑcate of Incorporation incorporated by reference to Exhibit (3) ofthe registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,1996.

3.2 CertiÑcate of Amendment to the Restated CertiÑcate of Incorporation incorporatedby reference to Exhibit (3) of the registrant's Annual Report on Form 10-K for theyear ended December 31, 1998.

3.3 Certificate of Correction of Certificate of Amendment to the Restated Certificate ofIncorporation incorporated by reference to Exhibit (3) of the registrant's AnnualReport on Form 10-K for the year ended December 31, 1998.

3.4 Certificate of Amendment to the Restated Certificate of Incorporation incorporatedby reference to Exhibit (3.1) of the registrant's Current Report on Form 8-K filedon April 18, 2006.

3.5 By-Laws incorporated by reference to Exhibit (3.1) of the registrant's CurrentReport on Form 8-K Ñled on December 9, 2003.

Ì Instruments deÑning the rights of security holders, including indentures

The registrant is not Ñling any instruments evidencing any indebtedness since thetotal amount of securities authorized under any single instrument does not exceed10% of the total assets of the registrant and its subsidiaries on a consolidated basis.Copies of such instruments will be furnished to the Securities and ExchangeCommission upon request.

4.1 Rights Agreement dated as of March 12, 1999 between The Chubb Corporation andFirst Chicago Trust Company of New York, as Rights Agent incorporated byreference to Exhibit (99.1) of the registrant's Current Report on Form 8-K Ñledon March 30, 1999.

Ì Material contracts

10.1 Five Year Revolving Credit Agreement, dated as of June 22, 2005, among The ChubbCorporation, the banks listed on the signature pages thereof, Deutsche BankSecurities Inc. and Citigroup Global Markets Inc., as Arrangers, Deutsche BankAG New York Branch and Citicorp USA, Inc., as Swingline Lenders, Citicorp USA,Inc., as Syndication Agent, the Bank of New York and Wachovia Bank, NationalAssociation, as Documentation Agents, and Deutsche Bank AG New York Branch,as Administrative Agent, incorporated by reference to Exhibit (10.1) of theregistrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.

10.2 The Chubb Corporation 2003 Producer Stock Incentive Plan incorporated byreference to Annex B of the registrant's deÑnitive proxy statement for the AnnualMeeting of Shareholders held on April 29, 2003.

10.3 The Chubb Corporation Producer Stock Incentive Program incorporated by refer-ence to Exhibit (4.3) of Amendment No. 2 to the registrant's RegistrationStatement on Form S-3 (No. 333-67445) dated January 25, 1999.

10.4 The Chubb Corporation Asset Managers Incentive Compensation Plan (2005)incorporated by reference to Exhibit (10) of the registrant's Annual Report onForm 10-K for the year ended December 31, 2004.

E-1


ExhibitNumber Description

10.5 Corporate Aircraft Policy incorporated by reference to Exhibit (10.12) of theregistrant's Current Report on Form 8-K Ñled on March 9, 2005.

10.6 The Chubb Corporation Annual Incentive Plan (2006) incorporated by reference toAnnex A of the registrant's deÑnitive proxy statement for the Annual Meeting ofShareholders held on April 25, 2006.

10.7 The Chubb Corporation Long-Term Stock Incentive Plan (2004) incorporated byreference to Annex B of the registrant's deÑnitive proxy statement for the AnnualMeeting of Shareholders held on April 27, 2004.

10.8 The Chubb Corporation Long-Term Stock Incentive Plan (2000) incorporated byreference to Exhibit A of the registrant's deÑnitive proxy statement for the AnnualMeeting of Shareholders held on April 25, 2000.

10.9 The Chubb Corporation Long-Term Stock Incentive Plan (1996), as amended,incorporated by reference to Exhibit (10) of the registrant's Annual Report onForm 10-K for the year ended December 31, 1998.

10.10 The Chubb Corporation Long-Term Stock Incentive Plan (1992), as amended,incorporated by reference to Exhibit (10) of the registrant's Annual Report onForm 10-K for the year ended December 31, 1998.

10.11 The Chubb Corporation Long-Term Stock Incentive Plan for Non-Employee Direc-tors (2004) incorporated by reference to Annex C of the registrant's deÑnitiveproxy statement for the Annual Meeting of Shareholders held on April 27, 2004.

10.12 The Chubb Corporation Stock Option Plan for Non-Employee Directors (2001)incorporated by reference to Exhibit C of the registrant's deÑnitive proxystatement for the Annual Meeting of Shareholders held on April 24, 2001.

10.13 The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996), asamended, incorporated by reference to Exhibit (10) of the registrant's AnnualReport on Form 10-K for the year ended December 31, 1998.

10.14 The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992), asamended, incorporated by reference to Exhibit (10) of the registrant's AnnualReport on Form 10-K for the year ended December 31, 1998.

10.15 Non-Employee Director Special Stock Option Agreement, dated as of December 5,2002, between The Chubb Corporation and Joel J. Cohen, incorporated byreference to Exhibit (10.1) of the registrant's Current Report on Form 8-K Ñledon December 9, 2002.

10.16 Non-Employee Director Special Stock Option Agreement, dated as of December 5,2002, between The Chubb Corporation and Lawrence M. Small, incorporated byreference to Exhibit (10.3) of the registrant's Current Report on Form 8-K Ñledon December 9, 2002.

10.17 The Chubb Corporation Key Employee Deferred Compensation Plan (2005) incor-porated by reference to Exhibit (10.9) of the registrant's Current Report onForm 8-K Ñled on March 9, 2005.

10.18 Amendment to the registrant's Key Employee Deferred Compensation Plan (2005)incorporated by reference to Exhibit (10.1) of the registrant's Current Report onForm 8-K Ñled on September 12, 2005.

10.19 The Chubb Corporation Executive Deferred Compensation Plan incorporated byreference to Exhibit (10) of the registrant's Annual Report on Form 10-K for theyear ended December 31, 1998.

E-2



10.20 The Chubb Corporation Deferred Compensation Plan for Directors, as amended,incorporated by reference to Exhibit (10.1) of the registrant's Current Report onForm 8-K Ñled on December 11, 2006.

10.21 The Chubb Corporation Estate Enhancement Program incorporated by reference toExhibit (10) of the registrant's Quarterly Report on Form 10-Q for the quarterended March 31, 1999.

10.22 The Chubb Corporation Estate Enhancement Program for Non-Employee Directorsincorporated by reference to Exhibit (10) of the registrant's Quarterly Report onForm 10-Q for the quarter ended March 31, 1999.

10.23 Change in Control Employment Agreement, dated as of December 1, 2002, betweenThe Chubb Corporation and John D. Finnegan, incorporated by reference toExhibit (10) of the registrant's Current Report on Form 8-K Ñled on January 21,2003.

10.24 Amendment, dated as of December 1, 2003, to Change in Control EmploymentAgreement, dated as of December 1, 2002, between The Chubb Corporation andJohn D. Finnegan, incorporated by reference to Exhibit (10.2) of the registrant'sCurrent Report on Form 8-K Ñled on December 2, 2003.

10.25 Employment Agreement, dated as of December 1, 2002, between The ChubbCorporation and John D. Finnegan, incorporated by reference to Exhibit (10) ofthe registrant's Current Report on Form 8-K Ñled on January 21, 2003.

10.26 Amendment, dated as of December 1, 2003, to Employment Agreement, dated as ofDecember 1, 2002, between The Chubb Corporation and John D. Finnegan,incorporated by reference to Exhibit (10.1) of the registrant's Current Report onForm 8-K Ñled on December 2, 2003.

10.27 Executive Severance Agreement, dated as of November 16, 1998, between TheChubb Corporation and Thomas F. Motamed, incorporated by reference toExhibit (10) of the registrant's Annual Report on Form 10-K for the year endedDecember 31, 1998.

10.28 Executive Severance Agreement, dated as of June 30, 1997, between The ChubbCorporation and Michael O'Reilly, incorporated by reference to Exhibit (10) ofthe registrant's Annual Report on Form 10-K for the year ended December 31,1997.

10.29 Executive Severance Agreement, dated as of December 8, 1995, between The ChubbCorporation and John J. Degnan, incorporated by reference to Exhibit (10) of theregistrant's Annual Report on Form 10-K for the year ended December 31, 1995.

10.30 Schedule of 2006 Base Salary Increases for Named Executive OÇcers incorporatedby reference to Exhibit (10.1) of the registrant's Current Report on Form 8-K Ñledon March 8, 2006.

10.31 Form of 2006 Performance Share Award Agreement under The Chubb CorporationLong-Term Stock Incentive Plan (2004) (for Chief Executive OÇcer and ViceChairmen) incorporated by reference to Exhibit (10.2) of the registrant's Quar-terly Report on Form 10-Q for the quarter ended March 31, 2006.

10.32 Form of 2006 Performance Share Award Agreement under The Chubb CorporationLong-Term Stock Incentive Plan (2004) (for Executive Vice Presidents andcertain Senior Vice Presidents) incorporated by reference to Exhibit (10.3) of theregistrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

E-3



10.33 Form of 2006 Restricted Stock Unit Agreement under The Chubb CorporationLong-Term Stock Incentive Plan (2004) (for Chief Executive OÇcer, ViceChairmen, Executive Vice Presidents and certain Senior Vice Presidents) incorpo-rated by reference to Exhibit (10.4) of the registrant's Quarterly Report onForm 10-Q for the quarter ended March 31, 2006.

10.34 Form of 2006 Performance Share Award Agreement under The Chubb CorporationLong-Term Stock Incentive Plan for Non-Employee Directors (2004) incorpo-rated by reference to Exhibit (10.5) of the registrant's Current Report onForm 8-K Ñled on March 8, 2006.

10.35 Form of 2006 Stock Unit Agreement under The Chubb Corporation Long-TermStock Incentive Plan for Non-Employee Directors (2004) incorporated by refer-ence to Exhibit (10.6) of the registrant's Current Report on Form 8-K Ñled onMarch 8, 2006.

10.36 Form of Performance Share Award Agreement under The Chubb Corporation Long-Term Stock Incentive Plan (2004) (for Chief Executive OÇcer and Vice Chair-men) incorporated by reference to Exhibit (10.3) of the registrant's CurrentReport on Form 8-K Ñled on March 9, 2005.

10.37 Form of Performance Share Award Agreement under The Chubb Corporation Long-Term Stock Incentive Plan (2004) (for Executive Vice Presidents and certainSenior Vice Presidents) incorporated by reference to Exhibit (10.4) of theregistrant's Current Report on Form 8-K Ñled on March 9, 2005.

10.38 Form of Performance Share Award Agreement under The Chubb Corporation Long-Term Stock Incentive Plan (2004) (for recipients other than Chief ExecutiveOÇcer, Vice Chairmen, Executive Vice Presidents and certain Senior Vice Presi-dents) incorporated by reference to Exhibit (10.5) of the registrant's CurrentReport on Form 8-K Ñled on March 9, 2005.

10.39 Form of Restricted Stock Unit Agreement under The Chubb Corporation Long-Term Stock Incentive Plan (2004) incorporated by reference to Exhibit (10.6) ofthe registrant's Current Report on Form 8-K Ñled on March 9, 2005.

10.40 Amendment to the form of restricted stock unit award agreement for all eligibleparticipants in The Chubb Corporation Long-Term Stock Incentive Plan (2004)incorporated by reference to Exhibit (10.2) of the registrant's Current Report onForm 8-K Ñled on September 12, 2005.

10.41 Form of Non-Statutory Stock Option Award Agreement under The Chubb Corpora-tion Long-Term Stock Incentive Plan (2004) (three year vesting schedule)incorporated by reference to Exhibit (10.7) of the registrant's Current Report onForm 8-K Ñled on March 9, 2005.

10.42 Form of Non-Statutory Stock Option Award Agreement under The Chubb Corpora-tion Long-Term Stock Incentive Plan (2004) (four year vesting schedule) incor-porated by reference to Exhibit (10.8) of the registrant's Current Report onForm 8-K Ñled on March 9, 2005.

10.43 Form of Performance Share Award Agreement under The Chubb Corporation Long-Term Stock Incentive Plan for Non-Employee Directors (2004) incorporated byreference to Exhibit (10.10) of the registrant's Current Report on Form 8-K Ñledon March 9, 2005.

10.44 Form of Stock Unit Agreement under The Chubb Corporation Long-Term StockIncentive Plan for Non-Employee Directors (2004) incorporated by reference toExhibit (10.11) of the registrant's Current Report on Form 8-K Ñled on March 9,2005.

E-4



11.1 Computation of earnings per share included in Note (16) of the Notes to Consoli-dated Financial Statements.

21.1 Subsidiaries of the registrant Ñled herewith.

23.1 Consent of Independent Registered Public Accounting Firm Ñled herewith.

Ì Rule 13a-14(a)/15d-14(a) CertiÑcations.31.1 CertiÑcation by John D. Finnegan Ñled herewith.31.2 CertiÑcation by Michael O'Reilly Ñled herewith.

Ì Section 1350 CertiÑcations.32.1 CertiÑcation by John D. Finnegan Ñled herewith.32.2 CertiÑcation by Michael O'Reilly Ñled herewith.

E-5


Exhibit 21.1


SUBSIDIARIES OF THE REGISTRANT

SigniÑcant subsidiaries at December 31, 2006 of The Chubb Corporation, a New Jersey corpora-tion, and their subsidiaries (indented), together with the percentages of ownership, are set forthbelow.

PercentagePlace of of Securities

Company Incorporation Owned

Federal Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Indiana 100%

Vigilant Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New York 100

PaciÑc Indemnity CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wisconsin 100

Northwestern PaciÑc Indemnity CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Oregon 100

Texas PaciÑc Indemnity Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Texas 100

Great Northern Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minnesota 100

Chubb Insurance Company of New Jersey ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New Jersey 100

Chubb Custom Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Chubb National Insurance CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Indiana 100

Chubb Indemnity Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New York 100

Executive Risk Indemnity Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Executive Risk Specialty Insurance Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Connecticut 100

CC Canada Holdings Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canada 100

Chubb Insurance Company of Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canada 100

Chubb Insurance Company of Europe, S.A. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Belgium 100

Chubb Insurance Company of Australia Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Australia 100

Chubb Argentina de Seguros, S.A. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Argentina 100

Chubb Atlantic Indemnity Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bermuda 100

DHC Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Chubb do Brasil Companhia de SegurosÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Brazil 99

Bellemead Development Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Chubb Capital Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New Jersey 100

Chubb Financial Solutions, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Chubb Financial Solutions LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Delaware 100

Certain other subsidiaries of Chubb and its consolidated subsidiaries have been omitted since, inthe aggregate, they would not constitute a signiÑcant subsidiary.


Exhibit 23.1


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-3: No. 333-67445, No. 333-104310; Form S-8: No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273,No. 333-09275, No. 333-58157, No. 333-67347, No. 333-73073, No. 333-36530, No. 333-85462, No. 333-90140, No. 333-117120, No. 333-135011) of The Chubb Corporation and in the related Prospectuses ofour reports dated February 26, 2007, with respect to the consolidated Ñnancial statements andschedules of The Chubb Corporation, The Chubb Corporation's management's assessment of theeÅectiveness of internal control over Ñnancial reporting, and the eÅectiveness of internal control overÑnancial reporting of The Chubb Corporation, included in this Annual Report (Form 10-K) for theyear ended December 31, 2006.

/S/ ERNST & YOUNG LLPNew York, New YorkFebruary 26, 2007


Exhibit 31.1


CERTIFICATION

I, John D. Finnegan, certify that:

1. I have reviewed this annual report on Form 10-K of The Chubb Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in thisreport, fairly present in all material respects the Ñnancial condition, results of operations and cashÖows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying oÇcer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controlsand procedures to be designed under our supervision, to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is beingprepared;

(b) Designed such internal control over Ñnancial reporting, or caused such internal controlover Ñnancial reporting to be designed under our supervision, to provide reasonableassurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancialstatements for external purposes in accordance with generally accepted accountingprinciples;

(c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures andpresented in this report our conclusions about the eÅectiveness of the disclosure controlsand procedures, as of the end of the period covered by this report based on suchevaluation; and

(d) Disclosed in this report any change in the registrant's internal control over Ñnancialreporting that occurred during the registrant's most recent Ñscal quarter (the registrant'sfourth Ñscal quarter in the case of an annual report) that has materially aÅected, or isreasonably likely to materially aÅect, the registrant's internal control over Ñnancialreporting; and

5. The registrant's other certifying oÇcer(s) and I have disclosed, based on our most recentevaluation of internal control over Ñnancial reporting, to the registrant's auditors and the auditcommittee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internalcontrol over Ñnancial reporting which are reasonably likely to adversely aÅect theregistrant's ability to record, process, summarize and report Ñnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees whohave a signiÑcant role in the registrant's internal control over Ñnancial reporting.

Date: February 26, 2007

/s/ John D. Finnegan

John D. FinneganChairman, President and Chief Executive OÇcer


Exhibit 31.2


CERTIFICATION

I, Michael O'Reilly, certify that:

1. I have reviewed this annual report on Form 10-K of The Chubb Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in thisreport, fairly present in all material respects the Ñnancial condition, results of operations and cashÖows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying oÇcer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controlsand procedures to be designed under our supervision, to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is beingprepared;

(b) Designed such internal control over Ñnancial reporting, or caused such internal controlover Ñnancial reporting to be designed under our supervision, to provide reasonableassurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancialstatements for external purposes in accordance with generally accepted accountingprinciples;

(c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures andpresented in this report our conclusions about the eÅectiveness of the disclosure controlsand procedures, as of the end of the period covered by this report based on suchevaluation; and

(d) Disclosed in this report any change in the registrant's internal control over Ñnancialreporting that occurred during the registrant's most recent Ñscal quarter (the registrant'sfourth Ñscal quarter in the case of an annual report) that has materially aÅected, or isreasonably likely to materially aÅect, the registrant's internal control over Ñnancialreporting; and

5. The registrant's other certifying oÇcer(s) and I have disclosed, based on our most recentevaluation of internal control over Ñnancial reporting, to the registrant's auditors and the auditcommittee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internalcontrol over Ñnancial reporting which are reasonably likely to adversely aÅect theregistrant's ability to record, process, summarize and report Ñnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees whohave a signiÑcant role in the registrant's internal control over Ñnancial reporting.

Date: February 26, 2007

/s/ Michael O'Reilly

Michael O'ReillyVice Chairman and Chief Financial OÇcer


Exhibit 32.1


CERTIFICATION OF PERIODIC REPORT

I, John D. Finnegan, Chairman, President and Chief Executive OÇcer of The Chubb Corporation (the""Corporation''), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that:

(1) the Annual Report on Form 10-K of the Corporation for the annual period ended December 31,2006 (the ""Report'') fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the Ñnancialcondition and results of operations of the Corporation.

Dated: February 26, 2007

/s/ John D. Finnegan

John D. FinneganChairman, President and Chief Executive OÇcer


Exhibit 32.2


CERTIFICATION OF PERIODIC REPORT

I, Michael O'Reilly, Vice Chairman and Chief Financial OÇcer of The Chubb Corporation (the""Corporation''), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that:

(1) the Annual Report on Form 10-K of the Corporation for the annual period ended December 31,2006 (the ""Report'') fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the Ñnancialcondition and results of operations of the Corporation.

Dated: February 26, 2007

/s/ Michael O'Reilly

Michael O'ReillyVice Chairman and Chief Financial OÇcer


Stock ListingThe common stock of the Corporation

is traded on the New York Stock

Exchange under the symbol CB.

Dividend Agent, TransferAgent and RegistrarComputershare Trust Company, N.A.

P.O. Box 43069

Providence, RI 02940-3069

Telephone (800) 317-4445

Company Code 1816

www.computershare.com

SEC and NYSE CertificationsChubb has included as exhibits to its

Annual Report on Form 10-k for the

year ended December 31, 2006 filed

with the Securities and Exchange

Commission certificates of its Chief

Executive Officer and Chief Financial

Officer certifying the quality of

Chubb’s internal controls over

financial reporting and disclosure

controls. Chubb has submitted to

the New York Stock Exchange (NYSE)

a certificate of its Chief Executive

Officer certifying that he is not

aware of any violation by Chubb of

the NYSE’s corporate governance

listing standards.

The Chubb Corporation15 Mountain View Road, P.O. Box 1615

Warren, New Jersey 07061-1615

Telephone (908) 903-2000

www.chubb.com

Photography Randy Duchaine, Peter Vidor, Greg Leshé, Joseph Lynch and David Levenson. Permission to photograph Fallingwater for publication courtesy of Western Pennsylvania Conservancy.

Subsidiaries


Federal Insurance Company

Vigilant Insurance Company

Great Northern Insurance Company

Pacific Indemnity Company

Northwestern Pacific Indemnity Company

Texas Pacific Indemnity Company

Executive Risk Indemnity Inc.

Executive Risk Specialty Insurance Company

Chubb Custom Insurance Company

Chubb Indemnity Insurance Company

Chubb Insurance Company of New Jersey

Chubb National Insurance Company

Chubb Atlantic Indemnity, Ltd.

Chubb Insurance Company of Australia, Limited

Chubb Insurance Company of Canada

Chubb Insurance Company of Europe, S.A.

Chubb Argentina de Seguros, S.A.

Chubb do Brasil Companhia de Seguros

Chubb de Colombia Compañía de Seguros S.A.

Chubb de Chile Compañía de Seguros Generales S.A.

Chubb de Mexico, Compania Afianzadora, S.A. de C.V.

Chubb de Mexico, Compania de Seguros, S.A. de C.V.

Property and Casualty Insurance Underwriting Managers

Chubb Custom Market, Inc.

Chubb Multinational Managers Inc.

Reinsurance

Harbor Island Indemnity Ltd.

Consulting — Claims Administration — Services

Chubb Services Corporation

Insurance Agency

Chubb Insurance Solutions Agency, Inc.

Licensing Services

Chubb Licensing Services LLC


Annual Report 2006


Annual Report 2006

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THE CHUBB CORPORATION15 Mountain View Road, P.O. Box 1615Warren, New Jersey 07061-1615Telephone (908) 903-2000www.chubb.com

chubb Annual Report 2006

Economy & Finance

Transcript of chubb Annual Report 2006