Case Study – Mari Alania, Sofia Dakhundaridze
The Chubb Corporation
Reformulated Balance Sheet
2010 2009
Operating assets:
Cash 70 51
Premiums receivable 2,098 2,101
Reinsurance recoverable on unpaid claims 1,817 2,053
Prepaid reinsurance premiums 325 308
Deferred policy acquisition costs 1,562 1,533
Deferred income tax 98 272
Goodwill 467 467
Other assets 1,152 1,200
Total operating assets 7,589 7,985
Operating liabilities:
Unpaid losses and loss expenses 22,718 22,839
Unearned premiums 6,189 6,153
Accrued expenses and other liabilities 1,725 1,730
30,632 30,722
Net operating assets (23,043) (22,737)
Investment operations:
Short-term investments 1,905 1,918
Fixed maturity investment-held to maturity 19,774 19,587
Fixed maturity investment-available for sale 16,745 16,991
Equity investments 1,550 1,433
Other invested assets 2,239 2,075
Accrued investment income 447 460
42,660 42,464
Total net operating assets 19,617 19,727
Long-term debt 3,975 3,975
Common shareholders' equity 15,642 15,752
Shareholders’ reported equity 15,530 15,634
Dividends payable 112 118
15,642 15,752
Chubb Corporation is a property and casualty insurance holding company and as other similar
institutions it takes on financial risk for a fee (this process is known as underwriting).
We have reformulated balance sheet to better distinguish assets and liabilities that are used in
business operations -where the firm makes its money, from assets and liabilities that are used
in financing- to raise cash for operations and temporarily store excess cash for operations. So
firm is reformulated into operating and financial items.
Now we will go into details:
We have reported dividends payable as shareholders’ equity not as a liability.
NOA in our statements is negative (Net operating liabilities). Which means company has more
financing debt than debt assets held. This is typical insurance company and its NOA is negative
because there is a gap in timing which means that they can have more liabilities to clients that
should be paid from insurance premiums (from which company pays out cash for losses).
Common size Balance Sheet
2010 2009
Invested assets
Short term investments 1,905 4% 1,918 4%
Fixed maturities
Tax exempt (cost $19,072 and $18,720) 19,774 39% 19,587 39%
Taxable (cost $15,989 and$ 16,470) 16,745 33% 16,991 34%
Equity securities (cost $1,285 and $1,215) 1,550 3% 1,433 3%
Other invested assets 2,239 4% 2,075 4%
Total invested assets 42,213 84% 42,004 83%
Cash 70 0% 51 0%
Accrued investment income 447 1% 460 1%
Premiums receivable 2,098 4% 2,101 4%
Reinsurance recoverable on unpaid losses and loss expenses 1,817 4% 2,053 4%
Prepaid reinsurance premiums 325 1% 308 1%
Deferred policy acquisition costs 1,562 3% 1,533 3%
Deferred income tax 98 0% 272 1%
Goodwill 467 1% 467 1%
Other assets 1,152 2% 1,200 2%
Total assets 50,249 100% 50,449 100%
Unpaid losses and loss expenses 22,718 45% 22,839 45%
Unearned premiums 6,189 12% 6,153 12%
Long term debt 3,975 8% 3,975 8%
Dividend payable to shareholders 112 0% 118 0%
Accrued expenses and other liabilities 1,725 3% 1,730 3%
Total liabilities 34,719 69% 34,815 69%
Commitments and contingent liabilities (Note 6 and 13)
Shareholders' equity
Preferred stock-authorized 8,000,000 shares;
$1 par value; issued-none
Common stock-authorized 1,200,000,000 shares;
$1 par value; issued 371,980,460 shares 372 1% 372 1%
Paid-in surplus 208 0% 224 0%
Retained earnings 17,943 36% 16,235 32%
Accumulated other comprehensive income 790 2% 720 1%
Treasury stock, at cost-74,707,547 and 39,972,796 shares -3,783 -8% (1,917) -4%
Total shareholders' equity 15,530 31% 15,634 31%
Total liabilities and shareholders' equity 50,249 100% 50,449 100%
A common size balance sheet allows for the relative percentage of each asset, liability, and
equity account to be quickly analyzed. The common figure for a common size balance sheet
analysis is total assets. The information presented is useful to financial institutions and other
lenders, they also provide useful information to external parties, including independent
auditors.
We can see that total liabilities account for 69% of total assets in both years steadily, from
which we can conclude that a company is risky in managing its debts; retained earnings account
for 36%, which means that excess cash is being retained; assets comprise mostly of invested
assets (84%).
Reformulated Income Statement
Underwriting operations:
Premiums earned 11,215
Losses and loss expenses:
Losses and loss expenses 6,499
Amortization of deferred policy acquisition costs 3,067
Other operating costs 425 9,991
Operating income before tax 1,224
Corporate and other expenses 290
Operating income before tax 934
Income tax 814
Tax on investment income 638 (176)
Core operating income after tax - underwriting 754
Currency translation gain (after tax) (18)
Postretirement benefit cost change 12 (6)
Operating income after tax, underwriting and other 752
Investment operations:
Before tax revenues:
Investment income (taxable) 1,424
Realized investment gains 437
Other revenue 13
Operating income from
investment activities 1,874
Investment expenses 50
Ebit 1,824
Tax 638
Income after tax 1,186
Investment income-tax exempt 241
Unrealized investment gain after tax 69
Other-than-temporary impairments (5) 1,492
Comprehensive income 2,244
The reformulated statement separates the two types of operations. It divides profit from
investing from income from insurance operations. With this reformulation we can get a better
understanding of the business. The tax rate of 35% is applied only to taxable investment
income.
