Understanding the Business Through Reformulated Financial Statements: Chubb Corporation Chubb Corporation is a property and casualty insurance holding company providing insur- ance through its subsidiaries in the United States, Canada, Europe, and parts of Latin America and Asia, Its subsidiaries include Federal, Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity, and Texas Pacific Indemnity insurance companies. The insurance operations are divided into three business units. Chubb Commercial Insurance offers a full range of commercial customer insurance products, including cover- age for multiple peril, casualty, workers' compensation, and property and marine. Chubb Commercial Insurance writes policies for niche business through agents and brokers. Chubb Specialty Insurance offers a wide variety of specialized executive protection and professional liability products for privately and publicly owned companies, financial insti tutions, professional firms, and health care organizations. Chubb Specialty Insurance also includes surety and accident businesses, as well as reinsurance through Chubb Re. Chubb Personal Insurance offers products for individuals with fine homes and possessions who require more coverage choices and higher limits than standard insurance policies. Chubb's balance sheets for 2006 and 2007 are in Exhibit 9.16. Its 2007 comparative income statement is also given, along with a statement of comprehensive income that Chubb reports outside both the equity statement and the income statement. You are asked to refor- mulate these statements in a way that captures how Chubb carries out its business operations and that reveals the profitability of those operations. The statutory tax rate is 35 percent, but note that $232 million of investment income is interest on tax-exempt bonds. First you should understand how insurers "make money" Insurance companies run un- derwriting operations where they write insurance policies and processes and pay claims co these policies. They are also involved in investment operations where they manage invest- ments in which the considerable "float" from insurance operations is invested. Accordingly, you see both investment assets and liabilities on the balance sheet as well as assets and lia- bilities associated with insurance. You also see revenues and expenses associated with both activities in the income statement. Your reformulation should separate the items identified with the two activities.

Afteryouhavecarried out the reformulations, answer the following questions:
A.Why are someinvestments listedat market valueon the balance sheetwhile othersare listedat cost?
B, Why are net operating assetsin theinsurance operations negative? Whatis the business interpretation?
C.Whyis it desirable to distinguish thetwotypesof income?
D. W'rrj is it desirable to have income from an insurerreported on a comprehensive basis?
Think: cherrypicking.
E. What, approximately, is the valueof the investment operation?
F. Summarize what the reformulated statements are tellingyou about Chubb's business.
Real World Connection Minicase M13.1 on Chubb extends thiscase to valuation.