We experienced modest premium growth in our insurance business in 2005. In a more competitive market environment, we maintained underwriting discipline by continuing to get acceptable rates and appropriate terms and conditions on business written. Rates were generally stable, but were under competitive pressure in some classes of business. We continued to retain a high percentage of our existing customers and to renew these accounts at adequate prices. In addition, while we continued to be selective, we found opportunities to write new business at acceptable rates. The premium growth in 2004 was largely the result of our retaining a higher percentage of our existing customers compared with the prior year and attracting new customers. We did get rate increases in 2004 on a significant portion of the business we wrote, although the size of such increases decelerated throughout the year.
Reinsurance assumed premiums generated by Chubb Re decreased by 21% in 2005 after increasing by 16% in 2004. Premiums in 2005 included net reinstatement premium revenue of $43 million related to Hurricane Katrina. The premium decline in 2005 was in line with our expectations. As discussed below, we sold our ongoing reinsurance assumed business to Harbor Point Limited in December 2005.
Our estimated net losses from Hurricane Katrina were $403 million and we incurred $59 million of net reinsurance reinstatement premium costs related to the hurricane. In our insurance business, we incurred net losses of $335 million as well as reinstatement premium costs of $102 million, for an aggregate cost of $437 million. In our reinsurance assumed business, we incurred net losses of $68 million and recognized net reinstatement premium revenue of $43 million, for a net cost of $25 million.
Results for our casualty business were profitable in 2005 compared with highly profitable results in 2004 and unprofitable results in 2003. Casualty results in each year were adversely affected by asbestos losses, particularly in 2003. Asbestos losses represented 1.2, 2.8 and 18.6 percentage points of the combined loss and expense ratio for casualty business in 2005, 2004 and 2003, respectively. The automobile component of our casualty business was highly profitable in each of the past three years. Excluding the effects of asbestos losses, results in the primary liability component were also highly profitable in each of the past three years while results in the excess liability component were unprofitable in 2005, profitable in 2004 and near breakeven in 2003. Excess liability results in 2005 were adversely affected by unfavorable loss development related to accident years prior to 1998 due to significant reported loss activity that caused us to extend the expected loss emergence period. Results in 2004 for this component benefited from a $30 million reduction in net loss reserves related to the September 11, 2001 attack.
Our reinsurance assumed business is treaty reinsurance, primarily casualty reinsurance. Premiums from our reinsurance assumed business, which represented 7% of our net premiums written in 2005, decreased by 21% in 2005 compared with a 16% increase in 2004. Premiums in 2005 included net reinsurance reinstatement premium revenue of $43 million related to Hurricane Katrina. The significant decrease in premiums in 2005 was in line with our expectations as we had anticipated fewer attractive opportunities in the reinsurance market.
Other than pursuant to certain arrangements entered into with Harbor Point, we generally will no longer engage directly in the reinsurance assumed business. However, Harbor Point will have the right for a transition period of up to two years to underwrite specific reinsurance business on our behalf. We will retain a portion of any such business and will cede the balance to Harbor Point in return for a fronting commission.
Certain regulators also have commenced investigations into certain loss mitigation and finite reinsurance arrangements in the property and casualty insurance industry. In connection with these investigations, we have received subpoenas and requests for information from various regulators including the U.S. Securities and Exchange Commission and the U.S. Attorney for the Southern
District of New York. We are cooperating, and intend to continue to cooperate, fully with these investigations.
legislative actions including the impact of the Class Action Fairness Act of 2005;
Asbestos Reserves. Asbestos remains the most significant and difficult mass tort for the insurance industry in terms of claims volume and dollar exposure. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Early court cases established the “continuous trigger” theory with respect to insurance coverage. Under this
During 2004 and 2005, our actuaries and claim personnel performed analyses of our asbestos related exposures. The 2004 analysis noted that both the number of peripheral asbestos defendants for whom we established reserves and the average severity of these claims were again somewhat higher than expected. In addition, there was an increase in our estimate of the ultimate liabilities for one of our traditional asbestos defendants. The 2005 analysis noted an increase in our estimate of the ultimate liabilities for two of our asbestos defendants. Based on these analyses, which were confirmed by our outside actuarial consultants, we increased our net asbestos loss reserves by $75 million in 2004 and $35 million in 2005.
During 2005, we experienced overall unfavorable prior year development of $163 million, which represented 1.0% of the net loss reserves as of December 31, 2004. This compares with unfavorable prior year development of $327 million during 2004, which represented 2.3% of the net loss reserves at December 31, 2003, and $397 million during 2003, which represented 3.1% of the net loss reserves at December 31, 2002. Such adverse development was reflected in operating results in these respective years.
In a typical portfolio credit default swap, CFS participated in the senior layer of a structure designed to replicate the performance of a portfolio of corporate or asset-backed securities. The structure of these portfolio credit default swaps generally requires CFS to make payment to counterparties to the extent cumulative losses, related to numerous credit events, exceed a specified threshold. The risk below that threshold, referred to as subordination, is assumed by other parties with the primary risk layer sometimes retained by the buyer. Credit events generally arise when one of the referenced entities within a portfolio becomes bankrupt, undergoes a debt restructuring or fails to make timely interest or principal payments.
The recoverability of the carrying value of our real estate assets, other than the parcel of land that we plan to sell, is assessed based on our ability to fully recover costs through a future revenue stream. The assumptions used reflect future improvement in demand for office space, an increase in rental rates and the ability and intent to obtain financing in order to hold and develop such remaining properties and protect our interests over the long term. Management believes that it has made adequate provisions for impairment of real estate assets. However, if the assets are not sold or developed or if leased properties do not perform as presently contemplated, it is possible that additional impairment losses may be recognized that would have a material adverse effect on the Corporation’s results of operations.
Our strong underwriting results continued to generate substantial new cash in 2005. New cash from operations available for investment by the property and casualty subsidiaries was approximately $3.4 billion in 2005 compared with $3.8 billion in 2004 and $3.1 billion in 2003. New cash available in 2005 was lower than in 2004 due to a 17% increase in paid losses in 2005 whereas premium receipts were only modestly higher compared with 2004. The increase in paid losses in 2005 was due primarily to directors and officers liability payments related to accident years 2002 and prior, payments related to Hurricane Katrina and payments related to two surety claims. New cash available in 2004 was higher than in 2003 due to growth in premium receipts in 2004 whereas paid losses were nearly flat compared with 2003.
The Corporation does not have any material off-balance sheet arrangements, except as disclosed in Note (13) of the Notes to Consolidated Financial Statements.