Underwriting income in 2005 has been reduced by net costs of $462.2 million ($300.4 million after-tax or $1.47 per share) related to Hurricane Katrina.
Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding expectations as to the impact of future catastrophes on our financial condition and results of operations; the cost and availability of reinsurance in 2006; our loss reserve estimates and reinsurance recoverables, including our estimated gross and net losses from Hurricane Katrina; the impact of the 2005 hurricanes on the commercial insurance marketplace; competition and growth estimates; the impact of regulatory investigations and developments on our business; the number and severity of surety-related claims; our plans for exiting the reinsurance assumed business; our expected income stream from the transaction with Harbor Point Limited; the impact of asbestos liability developments; estimates with respect to our CFS credit derivatives exposure; and the possible recognition of additional impairment losses if real estate is not sold or does not perform as contemplated and the effect thereof on our results of operations. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with:
the effects of disclosures by, and investigations of, public companies relating to possible accounting irregularities, practices in the financial services industry and other corporate governance issues, including:
the effects of investigations into market practices, in particular contingent commissions and loss mitigation and finite reinsurance arrangements, in the U.S. property and casualty insurance industry and related settlements, industry reform and any legal or regulatory proceedings arising therefrom;
The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables, the fair value of future obligations under financial products contracts and the recoverability of the carrying value of real estate properties. These estimates and judgments, which are discussed within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.
Underwriting results in 2005 were adversely affected by pre-tax costs of $462 million related to Hurricane Katrina, including estimated net losses of $403 million and net reinsurance reinstatement premium costs of $59 million. We also incurred a charge of about $45 million, included in our corporate segment, representing our share of the losses from Hurricane Katrina estimated by an insurer in which we have a minority interest.
Property and casualty investment income after taxes increased by 11% in 2005 and 13% in 2004.
The profitability of the property and casualty insurance business depends on the results of both underwriting operations and investments. We view these as two distinct operations. The underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.
Valuable articles results, which had been included in other personal, are now included in homeowners.
Accident results, which had been included in other specialty, are now included in other personal.
Commercial insurance results from our financial institutions business, which had been included in financial institutions results in specialty insurance, are now included in the appropriate commercial insurance lines.
Executive protection results are now combined with the professional liability and financial fidelity results from our financial institutions business into a new professional liability line. Financial institutions results are no longer reported separately.
Surety results, which had been included in other specialty, are now reported separately within specialty insurance.
Net premiums written amounted to $12.3 billion in 2005, an increase of 2% over 2004. An increase in premiums from our insurance business was partially offset by a decline in premiums from our reinsurance business. Net premiums written increased 9% in 2004 compared with 2003, reflecting increases in premiums from both our insurance and reinsurance businesses.
Premiums from our insurance business grew 4% in 2005 and 8% in 2004. Premiums in 2005 reflected reinsurance reinstatement premium costs of $102 million related to Hurricane Katrina. Approximately 80% of our insurance premiums in 2005 were written in the United States. Insurance premiums in the U.S. grew by 3% in 2005 and 7% in 2004. Insurance premiums outside the U.S. grew 8% in 2005 and 12% in 2004. In local currencies, such growth was 6% and 4% in 2005 and 2004, respectively, reflecting the weakness of the U.S. dollar.
Our overall reinsurance costs in 2004 were similar to those in 2003. We discontinued a casualty per risk treaty that responded primarily to excess liability exposures over $25 million. Underwriting actions we have taken in recent years resulted in a reduction in the number of such exposures, which we believe made this treaty no longer economical. Our professional liability per risk treaty was renewed with coverage similar to the prior year. On our property per risk treaty, our retention remained at $15 million. Our property catastrophe treaty for events in the United States was modified to increase our initial retention and to increase the reinsurance coverage at the top.
Our overall reinsurance costs in 2005 were lower than those in 2004. We discontinued our professional liability per risk treaty. Underwriting actions we have taken in recent years have resulted in lower average limits on those large risks we write, which we believe made this treaty no longer economical. On our casualty clash treaty, which operates like a catastrophe treaty, we increased our retention from $50 million to $75 million. This treaty now provides $125 million of coverage in excess of $75 million per insured event. We did not renew a high excess surety per risk treaty as we believe the cost was not justified. On our commercial property per risk treaty, our retention remained at
$15 million. This treaty provides $435 million of coverage per risk in excess of our retention. Our property catastrophe treaty for events in the United States was modified to increase the coverage in the northeastern part of the country by $100 million. The program now provides coverage of approximately 85% of losses (net of recoveries from other available reinsurance) between $250 million and $1.25 billion, with additional coverage of 80% of losses between $1.25 billion and $1.6 billion in the northeastern part of the country. Our property catastrophe treaty for events outside the United States was modified to increase our retention from $25 million to $50 million. This treaty now provides coverage of 90% of losses between $50 million and $250 million. Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated by foreign terrorists. Since September 2001, we have changed our underwriting protocols to address terrorism and the limited availability of terrorism reinsurance.
Our 2006 reinsurance program has not been finalized. Our casualty clash treaty was extended through March 31, 2006 under its current terms. Our property reinsurance program renews on April 1. As a result of the substantial losses suffered by reinsurers from the catastrophes in the latter half of 2005, we are anticipating significant price increases on our property catastrophe treaties and our commercial property per risk treaty. The final structure and amount of coverage purchased will be determinants of our cost for these treaties. In addition, the availability of reinsurance for certain coverages, such as terrorism, will continue to be limited and expensive in 2006.
The loss ratio was modestly higher in 2005 than in 2004 due to higher catastrophe losses, primarily from Hurricane Katrina. The loss ratio improved in 2004 compared with the prior year, reflecting the favorable experience resulting from our disciplined underwriting in recent years as well as substantially lower incurred losses related to asbestos claims.
Our total net catastrophe losses in 2005 were $630 million and related net reinsurance reinstatement premium costs were $59 million. The aggregate impact accounted for 5.5 percentage points of the
loss ratio. Losses from catastrophes were $270 million in 2004, which represented 2.3 percentage points of the loss ratio, and $294 million or 2.9 percentage points in 2003. The 2004 catastrophe loss amount reflects an $80 million reduction in loss reserves related to the September 11, 2001 attack, which reduced the impact of catastrophes on the loss ratio for the year by 0.7 of a percentage point. Other than the reinsurance recoverable related to Hurricane Katrina, we did not have any recoveries from our catastrophe reinsurance program during the three year period because there were no other individual catastrophes for which our losses exceeded our initial retention under the program.
Incurred losses related to asbestos claims were $35 million in 2005, $75 million in 2004 and $250 million in 2003, which represented 0.3, 0.6 and 2.5 percentage points, respectively, of the loss ratio.
Our expense ratio improved in 2004 and again in 2005. The lower expense ratio in 2004 was due to premiums written growing at a higher rate than overhead expenses, as we made progress in reducing our expense structure, and to lower contingent commission expenses.
In both 2005 and 2004, premium growth was driven by our homeowners business. The growth in our homeowners business in both years was due to increased insurance-to-value and, to a lesser extent, higher rates. The in-force policy count for this class had minimal growth in both years. Homeowners premiums in 2005 were reduced by reinsurance reinstatement premium costs of $17 million related to Hurricane Katrina. The low growth in our personal automobile business in 2005 was due to our maintaining underwriting discipline in a more competitive marketplace. Growth in our other personal business, which includes insurance for excess liability, yacht and accident coverages, was lower in 2005 than in the prior year. This was attributable to lower premiums in our U.S. accident business due to increased competition and the culling of our health care business.
Our personal insurance business produced profitable underwriting results in each of the last three years. Overall results have shown substantial improvement in each succeeding year, driven largely by our homeowners results. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
Homeowners results were profitable in each of the last three years and showed significant improvement in 2004 and again in 2005. The improvement was largely the result of better pricing and a reduction in water damage losses primarily through contract wording changes related to mold damage and loss remediation measures that we have implemented over the past few years. Results in 2005 also benefited from lower catastrophe losses. The impact of catastrophes accounted for 9.8 percentage points of the combined loss and expense ratio for this class in 2005 compared with 12.6 percentage points in 2004 and 11.2 percentage points in 2003.
Other personal business produced profitable results in each of the past three years. Results in 2005 and 2004 were less profitable than those in 2003 due to higher losses in the excess liability and yacht components in both years. The yacht losses in 2005 were primarily related to catastrophes. Our accident business was profitable in all three years.
Net premiums from commercial insurance, which represented 41% of our total writings in 2005, increased by 2% in 2005 compared with an 11% increase in 2004. Net premiums written for the classes of business within the commercial insurance segment were as follows:
Property and marine results were marginally profitable in 2005 compared with highly profitable results in the previous two years, particularly in 2004. Results in each year benefited from improved pricing, higher deductibles and better terms and conditions. Results in 2005 and 2004 also benefited from unusually low non-catastrophe losses. Results in 2005 deteriorated, however, due to substantially higher catastrophe losses, primarily from Hurricane Katrina. The impact of catastrophes accounted for 27.2 percentage points of the combined loss and expense ratio for this class in 2005 compared with 1.8 percentage points in 2004 and 7.1 percentage points in 2003. The impact of catastrophes in 2004 reflects a $20 million reduction in net loss reserves related to the September 11, 2001 attack.
Overall, rates increased slightly in 2004 and were down slightly in 2005. The most significant rate declines occurred in the for-profit directors and officers liability component. Retention levels were significantly higher in 2004 compared with 2003, while new business volume was similar to 2003 levels. Retention levels in 2005 were comparable to the 2004 levels, while new business volume was lower due in part to our exiting the hospital medical malpractice and managed care errors and omissions business. Overall, we continued to get adequate rates and favorable terms and conditions on both new business and renewals. While large public companies remain a significant component of our book of business, that component has decreased in recent years in line with our strategy to focus on small and middle market publicly traded and privately held companies.
We continue to have substantial commercial and construction surety exposure for current and prior customers. In that regard, we have exposures related to surety bonds issued on behalf of companies that have experienced deterioration in creditworthiness since we issued bonds to them. We therefore may experience an increase in filed claims and may incur high severity losses. Such losses would be recognized if and when claims are filed and determined to be valid, and could have a material adverse effect on the Corporation’s results of operations and liquidity.
Our reinsurance assumed business was profitable in 2005, 2004 and 2003. The combined loss and expense ratio for this business was 96.1%, 94.3% and 93.6% in 2005, 2004 and 2003, respectively. The impact of catastrophes accounted for 5.2 percentage points of the combined loss and expense ratio in 2005 and 2.2 percentage points in 2004. Catastrophe losses were not significant in 2003.
In December 2005, we completed a transaction involving a new Bermuda-based reinsurance company, Harbor Point Limited. As part of the transaction, we transferred our continuing reinsurance assumed business and certain related assets, including renewal rights, to Harbor Point. In exchange, we received from Harbor Point $200 million of 6% convertible notes and warrants to purchase common stock of Harbor Point. The notes and warrants represent in the aggregate on a fully diluted basis approximately 16% of the new company.
Harbor Point generally did not assume our reinsurance liabilities relating to reinsurance contracts incepting prior to December 31, 2005. We retained those liabilities and the related assets.
The New York Attorney General and other regulators have commenced investigations with respect to potential conflicts of interest and anti-competitive behavior arising from the payment of contingent commissions to brokers and agents. In connection with these investigations, we have received subpoenas and requests for information from the Attorneys General of several states, as well as from various states’ insurance regulators. We are cooperating, and intend to continue to cooperate, fully with these investigations.
As a result of these investigations, in certain instances, brokers and agents and, in at least one case, a major insurance carrier have entered into settlement agreements with such regulators. Among other things, these agreements prohibit the acceptance or payment, as applicable, of contingent commissions for some or all lines of business. Several other brokers and some agents have voluntarily eliminated the practice of receiving contingent compensation from insurers. Other industry participants may make similar or different determinations in the future. In addition, a number of states have announced that they are 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 from disclosure requirements to prohibition of certain forms of compensation to imposition of new duties on insurance agents, brokers or carriers in dealing with customers. These or other developments may require changes to market practices relative to contingent commissions. Changes to the manner in which we interact with and compensate insurance brokers and agents could have a material adverse impact on our ability to renew business or write new business, which, in turn, could have a material adverse impact on our results of operations.
Our property and casualty subsidiaries have exposure to losses caused by natural perils such as hurricanes and other windstorms, earthquakes, winter storms and brush fires and from man-made catastrophic events such as terrorism. The frequency and severity of catastrophes are unpredictable.
The Terrorism Risk Insurance Act of 2002 (TRIA) established a temporary program under which the federal government will share the risk of loss from certain acts of international terrorism with the insurance industry. The program, which was applicable to most lines of commercial business, was scheduled to terminate on December 31, 2005. In December 2005, the federal government extended TRIA through December 31, 2007. Under the terms of the amended law, certain lines of business previously subject to the provisions of TRIA, including commercial automobile, surety and professional liability insurance, other than directors and officers liability, are excluded from the program. As a precondition to recovery under TRIA, insurance companies with direct commercial insurance exposure in the United States for TRIA lines of business are required to make insurance for covered acts of terrorism available under their policies. Each insurer has a separate deductible that it must meet in the event of an act of terrorism before federal assistance becomes available. The deductible is based on a percentage of direct U.S. earned premiums for the covered lines of business in the previous calendar year. For 2006, that deductible is 17.5% of direct premiums earned in 2005 for these lines of business. For losses above the deductible, the federal government will pay for 90% of covered losses, while the insurer retains 10%. In 2007, the deductible will increase to 20% of direct premiums earned in 2006 and the insurer share for losses above the deductible will increase to 15%. There is a combined
While the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $925 million in 2006. For certain classes of business, such as workers’ compensation, terrorism insurance is mandatory under TRIA. For those classes of business where it is not mandatory, insureds may choose not to accept terrorism insurance, which would, subject to other statutory or regulatory restrictions, reduce our exposure.
We will continue to manage this type of catastrophic risk by monitoring terrorism risk aggregations. Nevertheless, given the unpredictability of the targets, frequency and severity of potential terrorist events as well as the limited terrorism coverage in our reinsurance program, the occurrence of any such events could have a material adverse effect on the Corporation’s results of operations, financial condition or liquidity.
Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability of our property and casualty subsidiaries.
Loss reserves, net of reinsurance recoverable, increased by $1.9 billion or 11% in 2005 compared with an increase of $2.3 billion or 16% in 2004. The loss reserves related to asbestos and toxic waste claims, Hurricane Katrina and the September 11 attack are significant components of our total loss reserves, but they distort the growth trend in the loss reserves. Excluding such loss reserves, our loss reserves, net of reinsurance recoverable, increased by $1.8 billion or 12% in 2005 compared with an increase of $2.5 billion or 20% in 2004.
Based on all information currently available, we believe that the aggregate loss reserves of our property and casualty subsidiaries at December 31, 2005 were adequate to cover claims for losses that had occurred, including both those known to us and those yet to be reported. In establishing such reserves, we consider facts currently known and the present state of the law and coverage litigation. However, given the judicial decisions and legislative actions that have broadened the scope of
Most of our loss reserves relate to long tail liability classes of business. Long tail classes include directors and officers liability, errors and omissions liability and other professional liability coverages, commercial excess liability, and other liability coverages. For many liability claims significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long tail liability classes has limited statistical credibility because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for these classes is more complex and subject to a higher degree of variability.
changes in the judicial interpretation of policy provisions relating to the determination of coverage;
changes in the general attitude of juries in the determination of liability and damages;
changes in our estimates of the number and/or severity of claims that have been incurred but not reported as of the date of the financial statements;
The future impact of the various factors described above that contribute to the uncertainty in the loss reserving process and of emerging or potential claims and coverage issues is extremely hard to predict and cannot be quantified.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional actuarial loss reserving techniques that rely on historical accident year loss development factors. Instead, we rely on an exposure-based analysis that involves a detailed review of individual policy terms and exposures. Because each policyholder presents different liability and coverage issues, we generally evaluate our exposure on a policyholder-by-policyholder basis, considering a variety of factors that are unique to each policyholder. Quantitative techniques have to be supplemented by subjective considerations including management’s judgment. It is therefore not possible to determine the future development of asbestos and toxic waste claims with the same degree of reliability as is the case for other types of claims. Such development will be affected by future court decisions and interpretations as well as changes in applicable legislation.
theory, insurance coverage is deemed to be triggered from the time a claimant is first exposed to asbestos until the manifestation of any disease. This interpretation of a policy trigger can involve insurance companies over many years and increases their exposure to liability.
Asbestos claims against the major manufacturers, distributors or installers of asbestos products were presented under the products liability section of primary general liability policies as well as under excess liability policies, both of which typically had aggregate limits that capped an insurer’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 or operators
In establishing our toxic waste reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider a variety of factors including: the probable liability, available insurance coverage, judicial interpretations, past settlement values of similar exposures as well as facts that are unique to each insured.
Ceded reinsurance contracts do not relieve our primary obligation to our policyholders. Consequently, an exposure exists with respect to reinsurance recoverable to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. We are selective in regard to our reinsurers, placing reinsurance with only those reinsurers with strong
The net unfavorable development of $163 million in 2005 was due to various factors. The most significant were:
We experienced net adverse development of about $200 million in the professional liability classes other than fidelity. Adverse development related to accident years 1998 through 2002, due largely to errors and omissions liability claims related to corporate failures and allegations of management misconduct and accounting irregularities, was offset in part by favorable development related to accident years 2003 and 2004.
We experienced adverse development of about $175 million related to accident years prior to 1996, including $35 million related to asbestos claims. The adverse development was due largely to our strengthening loss reserves for commercial excess/umbrella and other commercial liability classes. There was significant reported loss activity during 2005 related to these older accident years, which caused us to extend the expected loss emergence period for these classes.
We experienced favorable development of about $160 million due to fewer than expected late reported homeowners and commercial property losses.
The net unfavorable development of $327 million in 2004 was also the result of various factors. The most significant factors were:
We experienced adverse development of about $185 million related to accident years prior to 1995, including $75 million related to asbestos claims. We strengthened loss reserves for certain commercial liability classes.
The unfavorable development in 2003 was due primarily to two factors. First, we strengthened asbestos loss reserves by $250 million in the fourth quarter. Second, we experienced unfavorable development of about $140 million in our professional liability classes, principally directors and officers liability and errors and omissions liability, as adverse loss trends in the 2000 through 2002 accident years more than offset favorable loss experience in older accident years.
Our U.S. property and casualty subsidiaries are required to file annual statements with insurance regulatory 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 presents accident year loss development information by line of business for the nine years prior to 2005. It is our intention to post the Schedule P for our combined U.S. property and casualty subsidiaries on our website as soon as it becomes available.
Property and casualty investment income before taxes increased by 11% in 2005 compared with 2004 and by 12% in 2004 compared with 2003. Growth in both years was due to an increase in invested assets, which reflected substantial cash flow from operations over the period. Growth in 2004 also benefited from an $800 million capital contribution to the property and casualty subsidiaries by the Corporation in the second quarter of 2003. Growth in investment income in both years was dampened by lower available reinvestment rates on fixed maturities that matured.
The effective tax rate on our investment income was 19.7% in 2005 compared with 19.8% in 2004 and 20.3% in 2003. The effective tax rate fluctuated as the result of our holding a different proportion of our investment portfolio in tax-exempt securities during each year.
Other charges include miscellaneous income and expenses of the property and casualty subsidiaries.
Portfolio credit default swaps are derivatives and are carried in the financial statements at estimated 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 valuation models that are similar to external valuation models.
The fair value of our credit default swaps is subject to fluctuations arising from, among other factors, changes in credit spreads, the financial ratings of referenced asset-backed securities, actual credit events reducing subordination, credit correlation within a portfolio, anticipated recovery rates related to potential defaults and changes in interest rates. Changes in fair value are included in income in the period of the change. Thus, CFS’s results have been subject to volatility.
The non-insurance business of CFS produced a loss before taxes of $6 million in 2005 compared with losses of $17 million in 2004 and $127 million in 2003.
The substantial loss in 2003 was due to downgrades in the financial ratings of certain referenced securities underlying two of our asset-backed portfolio credit default swaps. In the first nine months of
the year, the fair value of our obligations related to these two swaps increased by $70 million. Then, in the fourth quarter, CFS paid $50 million to terminate the two asset-backed portfolio credit default swaps and simultaneously entered into a new contract under which CFS guaranteed principal and interest obligations on a notional amount of referenced securities. CFS established a liability of $186 million related to the new principal and interest contract, which represented the estimated fair value of the guarantee at its inception. At the same time, CFS eliminated the carried liability of $140 million on the two swaps that were terminated. The aggregate loss in the fourth quarter related to the termination of the two swaps was $96 million. The losses during 2003 related to these two asset-backed swaps were partially offset by mark-to-market gains on our corporate credit default swaps.
The loss in 2005 was due to the termination of the principal and interest guarantee contract. CFS paid the counterparty $198 million to terminate the contract, at which time the $186 million liability was eliminated. The loss related to the termination of this contract was partially offset by gains on the termination during the period of CFS’s obligations under certain portfolio credit default swaps.
During each of the past three years, CFS terminated certain portfolio credit default swaps with the original counterparties at negotiated settlement amounts. CFS also entered into credit default swaps with third parties that effectively offset existing credit default swaps. As of December 31, 2005, the notional amount of such offsetting credit default swaps was approximately $1.5 billion.
The notional amount of CFS’s credit default swaps was $1.0 billion at December 31, 2005. Our realistic loss exposure is a very small portion of the $1.0 billion notional amount as our position is senior to subordinated interests of $537 million in the aggregate. In addition, using our internal ratings models, we estimate that the credit ratings of the individual portfolio credit default swaps at December 31, 2005 were AAA.
In addition to portfolio credit default swaps, CFS entered into a derivative contract linked to an equity market index that terminates in 2012 and a few other insignificant non-insurance transactions.
Corporate and other includes investment income earned on corporate invested assets, interest expense and other expenses not allocated to the operating subsidiaries, and the results of our real estate and other non-insurance subsidiaries. It also includes income from our investment in Allied World Assurance Company, Ltd.
In 2004 and 2003, corporate and other results included a loss at The Chubb Institute, Inc., the post secondary educational subsidiary that we sold in September 2004. In both years, the effect of this loss was substantially offset by income from our investment in Allied World. Income from our investment in Allied World was significantly lower in 2005 than in the prior two years due to losses from Hurricane Katrina, our share of which was approximately $45 million.
During 2005, we committed to a plan to sell a parcel of land in New Jersey that we had previously intended to hold and develop. The decision to sell the property was based on our assessment of the current real estate market and our concern about zoning issues. As a result of our decision to sell this property, we reassessed the recoverability of its carrying value. Based on our reassessment, we recognized an impairment loss of $48 million during the year to reduce the carrying value of the property to its estimated fair value. The higher loss in 2004 compared with 2003 was due primarily to the recognition of impairment losses in 2004 on two commercial properties.
Real estate revenues were $115 million in 2005, $70 million in 2004 and $72 million in 2003. In each year, we sold selected commercial properties as well as residential properties.
Of the net realized gains on sales of equity securities, $162 million, $155 million and $35 million in 2005, 2004 and 2003, respectively, related to our share of gains recognized by limited partnerships in which we have an interest.
A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality where market opportunities have existed to do so. In the fourth quarter of 2005, to reduce our income tax liability, we engaged in a program to sell taxable and tax-exempt fixed maturities to generate realized losses to offset a portion of the gain related to the Harbor Point transaction.
We regularly review those invested assets whose fair value is less than cost to determine if an other-than-temporary decline in value has occurred. In evaluating whether a decline in value of any investment is temporary or other-than-temporary, we consider various quantitative criteria and qualitative factors including the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, our intent and ability to hold the investment for a period of time sufficient to allow us to recover our cost, general market conditions and industry or sector specific factors. If a decline in the fair value of an individual security is deemed to be other-than-temporary, the difference between cost and estimated fair value is charged to income as a realized investment loss. The fair value of the investment becomes its new cost basis.
In June 2003, Chubb issued $460 million of unsecured 2.25% senior notes due in 2008 and 18.4 million purchase contracts to purchase its common stock. The notes and purchase contracts
Credit ratings assess a company’s ability to repay its debts. The following table summarizes the Corporation’s credit ratings from the major independent rating organizations as of March 10, 2006.
It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future. If our ratings were downgraded, we may incur higher borrowing costs and may have more limited means to access capital. In addition, a downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.
In addition to cash from operations, the property and casualty subsidiaries received a capital contribution of $800 million from Chubb in the second quarter of 2003.
Our property and casualty subsidiaries maintain investments in highly liquid, short-term and other marketable securities to provide for immediate cash needs.
Chubb’s liquidity requirements in the past have been met by dividends from its property and casualty subsidiaries and the issuance of commercial paper and debt and equity securities. It is expected that our liquidity requirements in the future will be met by these sources of funds or borrowings from our credit facility.
The declaration and payment of future dividends to Chubb’s shareholders will be at the discretion of Chubb’s Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.
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 is dependent in large part on the dividend paying ability of its property and casualty subsidiaries. Various state insurance laws restrict our property and casualty subsidiaries as to the amount of dividends they may pay without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders’ surplus as determined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered “extraordinary” and require prior regulatory approval. During 2005, these subsidiaries paid to Chubb dividends totaling $617 million, including $520 million in cash and $97 million in other assets. The maximum dividend distribution that may be made by the property and casualty subsidiaries to Chubb during 2006 without prior approval is approximately $1.4 billion.
In June 2005, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $500 million. The revolving credit facility terminates on June 22, 2010. On the termination date of the agreement, any loans then outstanding become payable. There have been no borrowings under this agreement. Various interest rate options are available to the Corporation, all of which are based on market interest rates. The agreement contains customary restrictive covenants including a covenant to maintain a minimum consolidated shareholders’ equity, as adjusted. The facility is available for general corporate purposes and to support our commercial paper borrowing arrangement. This facility replaced a $250 million short term revolving credit facility that expired and a $250 million medium term revolving credit facility that was terminated.
The following table provides our future payments due by period under contractual obligations as of December 31, 2005, aggregated by type of obligation.
The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors.
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 as foreign bonds that support our international operations. In addition, the portfolio includes equity securities, primarily publicly traded common stocks and private equity limited partnerships, held with the objective of capital appreciation.
Fixed maturity securities that we have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classified as available-for-sale. Fixed maturities classified as held-to-maturity are carried at amortized cost while fixed maturities classified as available-for-sale are carried at market value. At December 31, 2005 and 2004, 1% of the fixed maturity portfolio was classified as held-to-maturity compared with 2% at December 31, 2003.
Changes in the general interest rate environment affect the returns available on new fixed maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new investments but
Consolidated financial statements of the Corporation at December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 and the report thereon of our independent registered public accounting firm, and the Corporation’s unaudited quarterly financial data for the two-year period ended December 31, 2005 are listed in Item 15(a) of this report.