(a) Amounts in years prior to 2012 have been adjusted to reflect the adoption of new guidance issued by the Financial Accounting Standards Board related to the accounting for costs associated with acquiring or renewing insurance contracts. The adoption of this guidance decreased deferred policy acquisition costs by $420 million, decreased deferred income tax liabilities by $147 million and decreased shareholders’ equity by $273 million as of January 1, 2008. The effect of the adoption of the new guidance on net income was not material. The amounts of the retrospective reductions to previously reported deferred acquisition costs, related deferred income tax liabilities and shareholders’ equity as of December 31, 2011, 2010, 2009 and 2008 were the same as the amounts of the reductions as of January 1, 2008.
the impact from the bankruptcy protection sought by various asbestos producers and other related businesses;
Chubb assumes no obligation to update any forward-looking information set forth in this document, which speak as of the date hereof.
Net income was $1.5 billion in 2012, $1.7 billion in 2011 and $2.2 billion in 2010. The decrease in net income in 2012 compared with 2011 was due to both lower operating income and lower net realized investment gains. The decrease in net income in 2011 compared with 2010 was due primarily to lower operating income and, to a lesser extent, lower net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.
Underwriting results in 2012 were adversely affected by costs of $882 million before tax related to Storm Sandy, including estimated net losses of $829 million and reinsurance reinstatement premium costs of $53 million. The total costs of catastrophes before tax were $1,140 million in 2012, $1,030 million in 2011 and $634 million in 2010.
During 2012, 2011 and 2010, we experienced overall favorable development of $614 million, $767 million and $746 million, respectively, on loss reserves established as of the previous year end. The favorable development in each year was due primarily to favorable loss experience in certain commercial liability, professional liability and personal insurance classes.
Property and casualty investment income after tax decreased by 5% in 2012 and was flat in 2011 in what continued to be a low yield investment environment. Management uses property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment results because it reflects the impact of any change in the proportion of tax exempt investment income to total investment income and is therefore more meaningful for analysis purposes than investment income before income tax.
Net realized investment gains before tax were $193 million ($125 million after tax) in 2012 compared with $288 million ($187 million after tax) in 2011 and $426 million ($277 million after tax) in 2010. The net realized gains in 2012 were primarily related to fixed maturities and investments in limited partnerships. The net realized gains in 2011 and 2010 were primarily related to investments in limited partnerships.
Property and casualty income before tax was modestly lower in 2012 than in 2011, which in turn was significantly lower than in 2010. The modestly lower income in 2012 compared with 2011 was due primarily to a decrease in investment income. Underwriting income was similar in both years. The lower level of property and casualty income before tax in 2011 compared with 2010 was due to a substantial decrease in underwriting income that was primarily the result of a higher impact of catastrophes during 2011 and a decrease in current accident year underwriting profitability excluding the impact of catastrophes. Investment income was flat in 2011 compared with that in 2010.
Net premiums written were $11.9 billion in 2012, $11.8 billion in 2011 and $11.2 billion in 2010. Net premiums written by business unit were as follows:
* The change in net premiums written is not presented since this business is in runoff.
Net premiums written increased by 1% in 2012 compared with 2011 and 5% in 2011 compared with 2010. Net premiums written in the United States, which in 2012 represented 74% of our total net premiums, increased by 2% in both 2012 and 2011 compared with the respective prior year. Net premiums written outside the United States, expressed in U.S. dollars, decreased by 3% in 2012 and increased by 11% in 2011. In 2012, foreign currency translation had a negative impact on growth of net premiums written outside the United States, reflecting the impact of the stronger U.S. dollar relative to several currencies in which we wrote business in 2012 compared to 2011. Conversely, in 2011, foreign currency translation had a positive impact on growth of net premiums written outside the United States reflecting the impact of the weaker U.S. dollar relative to several currencies in which we wrote business in 2011 compared to 2010. Measured in local currencies, net premiums written outside the United States grew slightly in 2012 and grew significantly in 2011. The countries outside the United States which were significant contributors to net premiums written in recent years were the United Kingdom, Canada, Brazil, Australia and Germany.
We classify business as written in the United States or outside the United States based on the location of the risk associated with the underlying policies. The method of determining location of risk varies by class of business. Location of risk for property classes is typically based on the physical location of the covered property, while location of risk for liability classes may be based on the main location of the insured, or in the case of the workers’ compensation class, the primary work location of the covered employee.
In 2011, overall growth in net premiums written in the United States was due to growth in our commercial insurance segment, which reflected general improvement in the rate environment for this business. Net premiums written in the United States for our personal insurance segment were flat in 2011 compared to 2010. Net premiums written in the United States for our specialty insurance segment decreased modestly in 2011, due to overall slightly lower renewal rates and a decrease in new business compared to 2010.
Overall, average renewal rates outside the United States were up slightly in 2012 in both the commercial and professional liability components of our business in comparison to expiring rates. Rates were down slightly in 2011 in both components. The amounts of coverage purchased or the insured exposures remained flat in our commercial business in 2012 and were up slightly in 2011 compared to the respective prior year. For our professional liability business, the amounts of coverage purchased were down slightly in both years. We continued to retain a high percentage of our existing commercial and professional liability business in both years, but renewal retention levels in 2012 were lower than those in 2011. The overall level of new business was down in 2012 compared to 2011 for both our commercial and professional liability business. In 2011, the overall level of new business was up in our commercial insurance business and flat in the professional liability business compared to 2010.
Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies we write that are subject to reinsurance. Most of our ceded reinsurance arrangements consist of excess of loss and catastrophe contracts that protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. Therefore, unless we incur losses that exceed our initial retention under these contracts, we do not receive any loss recoveries. As a result, in some years, we cede premiums to reinsurance companies and receive few, if any, loss recoveries. However, in a year in which there is a significant catastrophic event, such as Storm Sandy in 2012, or a series of large individual losses, we may receive substantial loss recoveries. The impact of ceded reinsurance on net premiums written and net premiums earned and on net losses and loss expenses incurred for the three years ended December 31, 2012 is presented in Note (9) of the Notes to Consolidated Financial Statements.
For property risks in the United States and Canada, we purchase traditional catastrophe reinsurance, including our primary treaty which we refer to as our North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our exposures in the northeastern United States. For certain exposures in the United States, we have also arranged for the purchase of multi-year, collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds. For events outside the United States, we also purchase traditional catastrophe reinsurance.
The North American catastrophe treaty has an initial retention of $500 million and provides coverage for exposures in the United States and Canada of approximately 34% of losses (net of recoveries from other available reinsurance) between $500 million and $900 million and approximately 72% of losses (net of recoveries) between $900 million and $1.65 billion. For certain catastrophic events in the northeastern part of the United States or along the southern U.S. coastline, the combination of the North American catastrophe treaty, supplemental catastrophe reinsurance and/or the catastrophe bond arrangements provide additional coverages as discussed below.
For hurricane and severe thunderstorm events along the southern U.S. coastline, the $150 million catastrophe bond arrangement provides additional coverage of approximately 50% of homeowners-related hurricane and severe thunderstorm losses (net of recoveries from other available reinsurance) between $850 million and $1.15 billion.
For hurricane events in Florida, in addition to the coverage provided by the North American catastrophe treaty and the $150 million catastrophe bond arrangement discussed above, we have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this mandatory program limits our initial retention in Florida for homeowners-related losses to approximately $165 million and provides coverage of 90% of covered losses between approximately $165 million and $595 million.
In addition to catastrophe treaties, we also have a commercial property per risk treaty. This treaty provides coverage per risk of approximately $600 million to $800 million (depending upon the currency in which the insurance policy was issued) in excess of our initial retention. Our initial retention is generally between $25 million and $35 million.
In addition to our major property catastrophe and property per risk treaties, we purchase several smaller property treaties that only cover specific classes of business or locations having concentrations of risk.
Our major, traditional property reinsurance treaties expire on April 1, 2013. Although the industry incurred significant catastrophe losses in 2012, particularly in the United States, we expect that reinsurance rates for property risks will vary somewhat in 2013 depending on individual insurers’ and reinsurers’ exposure to Storm Sandy related losses. The final structure of our reinsurance program and amount of coverage purchased, including the mixture of traditional catastrophe reinsurance and collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, is still being determined and will affect our total reinsurance costs in 2013.
The only reinsurance recoverable we had from our primary catastrophe reinsurance treaties during the three year period ended December 31, 2012 was that related to Storm Sandy because there was no other individual catastrophe event for which our losses exceeded our initial retention under the treaties. Under a region-specific property catastrophe reinsurance treaty, we had recoveries of about $60 million of our gross losses related to the earthquake in Chile in 2010.
2012, growth occurred in our excess liability business, which is predominantly written in the United States, and in our accident and health business, both inside and outside the United States. Growth in 2011 was attributable primarily to an increase in premiums in our excess liability business. Premiums for our accident and health business were flat in 2011 as growth outside the United States, attributable to new business initiatives and, to a lesser extent, the positive effect of foreign currency translation was offset by a significant decrease in premiums written inside the United States, due to our decision to exit and run off the employer health care stop loss component of this business.
Our personal insurance business produced profitable underwriting results in 2012 and 2011 and highly profitable results in 2010. Results were more profitable in 2010 due in part to a lower impact of catastrophe losses. The impact of catastrophes accounted for 13.7 percentage points of the combined loss and expense ratio for our personal business in 2012, compared with 13.1 percentage points in 2011 and 10.2 percentage points in 2010. Most of the catastrophe losses in 2012 related to storms in the United States, particularly Storm Sandy. A significant portion of the catastrophe losses in 2011 and 2010 also related to storms in the United States, including Hurricane Irene in 2011. Results were more profitable in 2012 compared with 2011 due to better results in our homeowners business, driven mainly by improvement in the current accident year loss ratio excluding catastrophes. In addition to the higher impact of catastrophes, results were less profitable in 2011 compared to 2010 due to a higher expense ratio, a higher current accident year loss ratio excluding catastrophes and a lower amount of favorable prior year loss development. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
Our personal automobile results were profitable in 2012 and 2011 and highly profitable in 2010. Results in all three years benefited from moderate claim frequency and favorable prior year loss development.
Net premiums written from commercial insurance, which represented 43% of our premiums written in 2012, increased by 2% in 2012 and 8% in 2011 compared with the respective prior year. Net premiums written for the classes of business within the commercial insurance segment were as follows:
In 2011, premium growth occurred in all classes of our commercial insurance business. Growth occurred both inside and outside the United States. Premium growth outside the United States benefited modestly from the impact of foreign currency translation. Overall premium growth reflected higher rates, new business opportunities and slightly higher amounts of audit and endorsement premiums in a market that was highly competitive. In 2011, there was improvement in the overall rate environment, particularly in the United States, throughout the year. Average renewal rates in the United States increased over those in 2010 for all major classes of our commercial business. In 2011, the average renewal exposure change was flat in the United States and up slightly outside the United States. Retention levels of our existing policyholders remained strong and new business volume was up modestly in 2011 compared with 2010, driven by activity outside the United States.
Our commercial insurance business produced near breakeven underwriting results in 2012 and 2011 compared to profitable results in 2010. Results in all three years benefited from favorable loss experience, disciplined risk selection and appropriate terms and conditions in recent years. The 2012 results benefited from a lower current accident year loss ratio excluding catastrophes compared with 2011, but this was largely offset by a reduced amount of favorable prior year reserve development. The less profitable results in 2012 and 2011 compared to 2010 were mainly due to a higher impact of catastrophes. The impact of catastrophes accounted for 11.4 percentage points of the combined loss and expense ratio for our commercial insurance business in 2012, compared with 10.5 percentage points in 2011 and 5.4 percentage points in 2010. The less profitable results in 2011 compared with 2010 were also due to a higher current accident year loss ratio excluding catastrophes.
Multiple peril results were profitable in 2012 and 2010 compared with slightly unprofitable results in 2011. The profitable results in 2012 compared with the unprofitable results in 2011 were due primarily to a lower impact of catastrophes and a lower current accident year loss ratio excluding catastrophes in the property component of this business, offset in part by less profitable results in the liability component. The unprofitable results in 2011 compared with the profitable results in 2010 were mainly due to a higher impact of catastrophes in the property component, offset in part by more profitable results in the liability component due to a higher amount of favorable prior year loss development. The impact of catastrophes accounted for 10.9 percentage points of the combined loss and expense ratio for the multiple peril class in 2012 compared with 15.1 percentage points in 2011 and 10.3 percentage points in 2010. The property component reflected moderate non-catastrophe losses in all three years, particularly outside the United States in 2010.
Property and marine results were highly unprofitable in 2012 and 2011 compared with highly profitable results in 2010. The unprofitable results in 2012 and 2011 were primarily due to a higher impact of catastrophes. The impact of catastrophes accounted for 31.6 percentage points of the combined loss and expense ratio in 2012 compared with 24.9 percentage points in 2011 and 8.9 percentage points in 2010. Excluding the impact of catastrophes, the combined ratio was 83.4%, 89.8% and 81.6% in 2012, 2011 and 2010, respectively. On this basis, the improved results in 2012 compared to 2011 primarily reflected a lower current accident year loss ratio excluding catastrophes, partly due to a lower frequency of losses. The less profitable results in 2011 compared to 2010, excluding the impact of catastrophes, primarily reflected a higher current accident year loss ratio excluding catastrophes, partly due to a higher frequency of large losses.
Net premiums written from specialty insurance, which represented 22% of our premiums written in 2012, decreased by 6% in 2012 and were flat in 2011 compared with the respective prior year. Net premiums written for the classes of business within the specialty insurance segment were as follows:
Net premiums written in our professional liability business decreased by 5% in 2012 and were flat in 2011 compared with the respective prior year. Net premiums written in the United States decreased modestly in both years. Net premiums written outside the United States also decreased in 2012 but increased in 2011. Premium growth in our professional liability business remained constrained in both years by the continuing effects of the economic downturn in recent years and our focus on profitability rather than premium volume in what remains a highly competitive marketplace. Nevertheless, there was improvement in the overall rate environment, particularly in the United States, that began in late 2011 and continued throughout 2012. During this period, we pursued rate increases on our professional liability business to address margin compression experienced in these classes of business in recent years. Retention levels for this business remained strong, but declined modestly in 2012 compared to those in recent years as a result of our rate increase initiative, particularly in the United States. New business declined in both years in the United States. New business also declined outside the United States in 2012 but was flat in 2011. The decline in retention levels and new business volume in 2012 is consistent with our desire to selectively reduce our exposure in some customer segments where current rate levels are not attractive, as well as our commitment to maintaining underwriting discipline in this environment.
Average renewal rates for our professional liability business were up significantly in the United States in 2012, after declining slightly in 2011. The average rate of increase grew throughout 2012. The most significant increases in 2012 occurred in the directors and officers liability and employment practices liability lines of business. Average renewal rates outside the United States were up slightly in 2012 after a modest decline in 2011.
Collectively, the results for the professional liability classes benefited from favorable prior year loss development in the past three years, but less so in each successive year, driven mainly by positive loss experience related to accident years 2008 and prior. The current accident year combined ratio in our professional liability business was slightly above breakeven in 2012 and near breakeven in 2011 and 2010. The higher current accident year combined ratio in 2012 was attributable to adverse loss trends in certain classes within this component of our business.
The majority of our surety obligations are intended to be performance-based guarantees. We manage our exposure by individual account and by specific bond type. We have substantial commercial and construction surety exposure for current and prior customers, including 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, especially in light of ongoing economic conditions. 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.
In 2005, we transferred our ongoing reinsurance assumed business and certain related assets, including renewal rights, to a reinsurance company. The reinsurer 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. For a transition period of about two years, the same reinsurer underwrote specific reinsurance business on our behalf. We retained a portion of this business and ceded the balance to the reinsurer.
Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe natural catastrophic events could have a material effect on the Corporation’s results of operations, financial condition or liquidity.
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 very limited terrorism reinsurance coverage available in the market and the limitations of existing government programs and uncertainty regarding their availability in the future, the occurrence of a terrorist event could have a material adverse effect on the Corporation’s results of operations, financial condition or liquidity.
Incurred but not reported (IBNR) reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which are not yet known to the insured, as well as a provision for future development on reported claims. A relatively large proportion of our net loss reserves, particularly for long tail liability classes, are reserves for IBNR losses. In fact, about 70% of our aggregate net loss reserves at December 31, 2012 were for IBNR losses.
Loss reserves, net of reinsurance recoverable, increased by $693 million or 3% in 2012. The effect of catastrophes increased loss reserves by $366 million. Loss reserves related to our insurance business increased by $802 million. Loss reserves related to our reinsurance assumed business, which is in runoff, decreased by $109 million.
Total gross loss reserves related to our insurance business increased by $1.1 billion in 2012, almost all of which was an increase in IBNR reserves. The largest increases in gross IBNR reserves were in the homeowners and property and marine classes driven primarily by higher catastrophe-related loss reserves attributable to Storm Sandy. Gross IBNR reserves also increased in the casualty and workers’ compensation classes, where case reserves increased as well, partly due to increased exposures. Reinsurance recoverable related to our insurance business increased by $261 million in 2012, driven by significant increases in expected recoveries in the homeowners and property and marine classes related to gross losses from Storm Sandy.
An accident year is the calendar year in which a loss 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 significantly affected by changing contract interpretations and the legal and economic environment. Consequently, the estimation of loss reserves for these classes is more complex and typically subject to a higher degree of variability than for short tail classes. As a result, the role of judgment is much greater for these reserve estimates.
Most of our reinsurance assumed business is long tail casualty reinsurance. Reserve estimates for 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 the claim is reported to the ceding insurer and when it is reported by the ceding insurer to us and by our dependence on the quality and consistency of the loss reporting by the ceding company.
In completing their loss reserve analysis, our actuaries are required to determine the most appropriate actuarial methods to employ for each class of business. Within each class, the business is further segregated by accident year and, where appropriate, by jurisdiction. Each estimation method has its own pattern, parameter and/or judgmental dependencies, with no estimation method being better than the others in all situations. The relative strengths and weaknesses of the various estimation methods when applied to a particular class of business can also change over time, depending on the underlying circumstances. In many cases, multiple estimation methods will be valid for the particular facts and circumstances of the relevant class of business. The manner of application and the degree of reliance on a given method will vary by class of business, by accident year and by jurisdiction based on our actuaries’ evaluation of the above dependencies and the potential volatility of the loss frequency and severity patterns. The estimation methods selected or given weight by our actuaries at a particular
valuation date are those that are believed to produce the most reliable indication for the loss reserves being evaluated. These selections incorporate input from claims personnel, pricing actuaries and underwriting management on loss cost trends and other factors that could affect the reserve estimates.
any disease. This interpretation of a policy trigger can involve insurance policies over many years and increases insurance companies’ exposure to liability. Until recently, judicial interpretations and legislative actions attempted to maximize insurance availability from both a coverage and liability standpoint.
New asbestos claims and new exposures on existing claims have continued despite the fact that usage of asbestos has declined since the mid-1970s. Many claimants were exposed to multiple asbestos products over an extended period of time. As a result, claim filings typically name dozens of defendants. The plaintiffs’ bar has solicited new claimants through extensive advertising and through asbestos medical screenings. A vast majority of asbestos bodily injury claims have been filed by claimants who do not show any signs of asbestos related disease. New asbestos cases are often filed in those jurisdictions with a reputation for judges and juries that are extremely sympathetic to plaintiffs.
Approximately 95 manufacturers and distributors of asbestos products have filed for bankruptcy protection as a result of asbestos related liabilities. A bankruptcy sometimes involves an agreement to a plan between the debtor and its creditors, including the creation of a trust to pay current and future asbestos claimants for their injuries. Although the debtor is negotiating in part with its insurers’ money, insurers are generally given only limited opportunity to be heard. In addition to contributing to the overall number of claims, bankruptcy proceedings not only result in increased settlement demands against remaining solvent defendants, but also create the potential for recoveries from multiple trusts by the same claimant for the same alleged injuries.
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 contain asbestos 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
Our actuaries and claim personnel perform periodic analyses of our asbestos related exposures. The analyses during 2012 and 2011 noted modest adverse developments related to a small number of accounts. Based on these developments, we increased our net asbestos loss reserves by $28 million in 2012 and $22 million in 2011. The analyses during 2010 noted no significant developments that required a change in our estimate of ultimate liabilities related to asbestos claims.
At December 31, 2012, $331 million of the net asbestos loss reserves were IBNR reserves.
Significant uncertainty remains as to our ultimate liability related to asbestos related claims. This uncertainty is due to several factors including:
the volume of claims by severely impaired plaintiffs, such as those with mesothelioma, and the size of settlements and judgments received by those plaintiffs;
the number of insureds seeking bankruptcy protection as a result of asbestos related liabilities;
In each of the past three years, the analysis of our toxic waste exposures indicated that some of our insureds had become responsible for the remediation of additional polluted sites and that, as clean up standards continue to evolve as a result of technology advances, the estimated cost of remediation of certain sites had increased. Defense costs associated with some of these cases have also increased. Based on these developments, we increased our net toxic waste loss reserves by $55 million in 2012, $50 million in 2011 and $61 million in 2010.
We are selective in regard to our reinsurers, placing reinsurance with only those reinsurers that we believe have strong balance sheets and superior underwriting ability. We monitor the financial strength of our reinsurers and our concentration of risk with reinsurers on an ongoing basis. We obtain collateral from certain of our reinsurers in the form of letters of credit, trust agreements and cash advances, in order to mitigate potential collectibility exposure. The total amount of collateral held at December 31, 2012 related to reinsurance recoverable on paid and unpaid losses and loss expenses was $634 million. As of December 31, 2012, the largest amount of reinsurance recoverable on paid and unpaid losses and loss expenses from any individual reinsurer represented less than 1.5% of shareholders’ equity. Nevertheless, in recent years, certain of our reinsurers have experienced financial difficulties or exited the reinsurance business. In addition, we may become involved in coverage disputes with our reinsurers. A provision for estimated uncollectible reinsurance is recorded based on periodic evaluations of balances due from reinsurers, the financial condition of the reinsurers, coverage disputes and other relevant factors, including collateral held.
The following table presents the overall prior year loss development for the three years ended December 31, 2012 by accident year.
We experienced favorable development of about $25 million in the surety business due to lower than expected loss emergence in recent accident years. Loss reserve estimates at the end of 2011 included an expectation of more late reported losses than actually occurred in 2012. However, since the experience in this business is volatile and we would still expect such losses to occur over time, the favorable development in 2012 was given only modest weight in our determination of carried surety loss reserves at December 31, 2012.
We experienced favorable development of about $80 million in the aggregate in the personal and commercial property classes, primarily related to the 2009 and 2010 accident years. The severity and frequency of late developing property claims that emerged during 2011 were lower than expected.
We experienced favorable development of about $30 million in the runoff of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
We experienced favorable development of about $40 million in the personal automobile business due primarily to lower than expected frequency of prior year claims.
Property and casualty investment income before taxes decreased by 5% in 2012 compared with 2011 and was flat in 2011 compared with 2010. In 2012, the decrease was primarily due to a modest decline in average yields on our investment portfolio. In 2011, the slightly positive impact of currency fluctuation
on income from our investments denominated in currencies other than the U.S. dollar was offset by the impact of lower average yields on our investment portfolio. In 2012 and 2011, the decrease in the average yield of our investment portfolio primarily resulted from lower reinvestment yields on fixed maturity securities that matured, were redeemed by the issuer or were sold during the year. Growth in property and casualty investment income before taxes was limited as a result of our property and casualty subsidiaries holding a similar amount of average invested assets in 2012, 2011 and 2010. Despite the substantial operating cash generated during each of the past three years, average invested assets were similar in the three years as a result of substantial dividends distributed by the property and casualty subsidiaries to Chubb during the period.
On an after-tax basis, property and casualty investment income decreased by 5% compared to 2011 and was flat in 2011 compared to 2010. The after-tax annualized yield on the investment portfolio that supports our property and casualty insurance business was 3.12% in 2012 compared with 3.25% in 2011 and 3.29% in 2010.
Other income and charges, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was income of $10 million in 2012 compared with income of $21 million and $2 million in 2011 and 2010, respectively. The income in 2012 and 2011 primarily included income from several small property and casualty insurance companies in which we have an interest.
Chubb Financial Solutions (CFS), a wholly owned subsidiary of Chubb, participated in derivative financial instruments and has been in runoff since 2003. Since that date, CFS has terminated early or run off nearly all of its contractual obligations under its derivative contracts. At December 31, 2012, CFS’s remaining derivative contracts were insignificant. A derivative contract linked to an equity market index terminated in 2012, as expected.
The notional amount under the remaining contracts was about $90 million and we estimate the fair value of our future obligations was about $2 million at December 31, 2012.
The net realized gains and losses of other invested assets represent primarily the aggregate of realized gain distributions to us from the limited partnerships in which we have an interest and changes in our equity in the net assets of those partnerships based on valuations provided to us by the manager of each partnership. Due to the timing of our receipt of valuation data from the investment managers, the value of these investments and any related realized gains and losses are generally reported on a one quarter lag. The net realized gains of the limited partnerships reported in 2012 primarily reflected the strong performance of the U.S. equity and high yield investment markets in the first and third quarters of 2012, partially offset by the negative performance of several non-U.S. equity markets, particularly in Asia, in the fourth quarter of 2011 and the global equity markets in the second quarter of 2012. The net realized gains of the limited partnerships reported in 2011 reflected the strong performance of the equity and high yield investment markets in the fourth quarter of 2010 and in the first quarter of 2011.
During each of the last three years, the fair value of some of our investments were at a level below our cost. Some of these investments were deemed to be other than temporarily impaired. In 2012, about 65% of the other-than-temporary impairment losses recognized for equity securities related to issuers in the financial services industry. The remainder of the other-than-temporary impairment losses in 2012 and the other-than-temporary impairment losses in 2011 and 2010 related to issuers that were not concentrated within any individual industry or sector.
Capital resources and liquidity represent a company’s overall financial strength and its ability to generate cash flows, borrow funds at competitive rates and raise new capital to meet operating and growth needs.
In 2010, we repurchased 37,667,829 shares of Chubb’s common stock in open market transactions at a cost of $2,008 million. In 2011, we repurchased 27,582,889 shares of Chubb’s common stock in open market transactions at a cost of $1,718 million. In 2012, we repurchased 13,094,640 shares of Chubb’s common stock in open market transactions at a cost of $935 million. As of December 31, 2012, $329 million remained under the January 2012 share repurchase authorization. In January 2013, we repurchased 1,365,500 shares under the January 2012 authorization at a cost of $108 million.
As a holding company, Chubb’s ability to continue to pay dividends to shareholders and to satisfy its 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. The timing and amount of dividends paid by the property and casualty subsidiaries to Chubb may vary from year to year. Our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount and timing of dividends they may pay within twelve consecutive months 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.
In September 2012, Chubb entered into a revolving credit agreement with a syndicate of banks that provides for up to $500 million of unsecured borrowings. The revolving credit facility is available for general corporate purposes. The agreement has a maturity date of September 24, 2017. Various interest rate options are available to Chubb, all of which are based on market interest rates. The agreement contains customary restrictive covenants, including a covenant to maintain a minimum adjusted consolidated shareholders’ equity. At December 31, 2012, Chubb was in compliance with all such covenants. Chubb is permitted to request an increase in the credit available under the agreement, no more than two times per year, up to a maximum facility amount of $750 million. Chubb is permitted to request on two occasions, at any time during the term of the agreement, an extension of the maturity date for an additional one year period. There have been no borrowings under this agreement. On the maturity date of the agreement, any borrowings then outstanding become payable. A previous five-year $500 million revolving credit agreement that would have expired in October 2012 was terminated in September 2012 in connection with the new revolving credit agreement.
The following table provides our future payments due by period under contractual obligations as of December 31, 2012, aggregated by type of obligation.
(a) Junior subordinated capital securities of $1 billion bear interest at a fixed rate of 6.375% through April 14, 2017 and at a rate equal to the three-month LIBOR rate plus 2.25% thereafter. For purposes of the above table, interest after April 14, 2017 was calculated using the three-month LIBOR rate as of December 31, 2012. The table includes future interest payments through the scheduled maturity date, April 15, 2037. Interest payments for the period from the scheduled maturity date through the final maturity date, March 29, 2067, would increase the contractual obligation by $766 million. It is our expectation that the capital securities will be redeemed at the end of the fixed interest rate period.
The above table excludes certain commitments totaling approximately $580 million at December 31, 2012 to fund limited partnership investments. These commitments can be called by the partnerships (generally over a period of five years or less), if and when needed by the partnerships to fund certain partnership expenses or the purchase of investments. It is uncertain whether and, if so, when we will be required to fund these commitments. There is no predetermined payment schedule.
Limited partnership investments by their nature are less liquid and may involve more risk than other investments. We actively manage our risk through type of asset class and domestic and international diversification. At December 31, 2012, we had investments in about 90 separate partnerships. We review the performance of these investments on a quarterly basis and we obtain audited financial statements annually.
During 2012, we increased our holdings of corporate bonds and we reduced our holdings of tax exempt fixed maturities and mortgage-backed securities. During 2011, cash used for financing activities exceeded cash provided by operating activities. As a result, our holdings of tax exempt fixed maturities and mortgage-backed securities both decreased slightly during the year, partly offset by a slight increase in our holdings of corporate bonds. In 2010, we increased our holdings of tax exempt fixed maturities and we reduced our holdings of mortgage-backed securities. Our objective is to achieve the appropriate mix of taxable and tax exempt securities in our portfolio to balance both investment and tax strategies. At December 31, 2012, 65% of our U.S. fixed maturity portfolio was invested in tax exempt securities compared with 68% and 67% at December 31, 2011 and December 31, 2010, respectively.
In 2012 and 2011, market yields on fixed maturity investments declined, resulting in an increase in the fair value of many of our fixed maturity investments.
Level 1 - Unadjusted quoted prices in active markets for identical financial instruments.
A pricing service provides fair value amounts for approximately 99% of our fixed maturities. The prices we obtain from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments. At December 31, 2012 and December 31, 2011, we held an insignificant amount of financial instruments in our investment portfolio for which a lack of market liquidity impacted our determination of fair value.
The methods and assumptions used to estimate the fair value of the Corporation’s pension plan and other postretirement benefit plan assets, other than assets invested in pooled funds, are similar to the methods and assumptions used for our other financial instruments. The fair value of pooled funds is based on the net asset value of the funds. At December 31, 2012 and December 31, 2011, approximately 99% of the pension plan and other postretirement benefit plan assets are categorized as Level 1 or Level 2 in the fair value hierarchy.
Effective January 1, 2012, the Corporation adopted new guidance issued by the Financial Accounting Standards Board related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies those costs relating to the successful acquisition of new or renewal insurance contracts that should be capitalized. The Corporation elected retrospective application of this guidance under which deferred policy acquisition costs and related deferred income tax liabilities were reduced as of the beginning of the earliest period presented in the financial statements, offset by a cumulative effect adjustment that reduced retained earnings. The adoption of this guidance decreased deferred policy acquisition costs by $420 million, decreased deferred income tax liabilities by $147 million and decreased shareholders’ equity by $273 million as of January 1, 2010. The effect of the adoption of the new guidance on net income for the years ended December 31, 2012, 2011 and 2010 was not material. The change in accounting is discussed further in Note (2) of the Notes to Consolidated Financial Statements.