Underwriting income in 2001 has been reduced by net costs of $635.0 million ($412.8 million after-tax or $2.35 per share) related to the September 11 attack. Underwriting income in 2004 has been increased by a reduction in net losses of $80.0 million ($52.0 million after-tax or $0.27 per share) related to the September 11 attack.
Management’s discussion and analysis of financial condition and results of operations address the financial condition of the Corporation as of December 31, 2005 compared with December 31, 2004 and the results of operations for each of the three years in the period ended December 31, 2005. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
developments in judicial decisions or regulatory or legislative actions relating to coverage and liability for asbestos, toxic waste and mold claims;
the impact of legislative and regulatory developments on our business, including those relating to terrorism and large-scale catastrophes;
Net income was $1,826 million in 2005 compared with $1,548 million in 2004 and $809 million in 2003. The increase in net income in 2005 was driven by increases in both underwriting and investment income in our property and casualty insurance business.
Despite the impact of Hurricane Katrina, underwriting results were highly profitable in 2005 as they were in 2004, compared with modestly profitable results in 2003. Our combined loss and expense ratio was 92.3% in both 2005 and 2004 compared with 98.0% in 2003.
Premium growth was 2% in 2005 and 9% in 2004. Premiums in our insurance business grew 4% in 2005 and 8% in 2004. The lower growth in 2005 reflects our maintaining underwriting discipline in a more competitive market environment. Rates were generally stable, but were under competitive pressure in some classes of business. In our reinsurance assumed business, premiums decreased 21% in 2005 after increasing 16% in 2004. The decrease in 2005 was in line with our expectations as we had anticipated fewer attractive opportunities in the reinsurance market.
During 2005, we experienced overall unfavorable development of $163 million on loss reserves established as of the previous year end, due primarily to unfavorable development in the professional liability classes of business, principally errors and omissions liability, and in excess liability and certain other commercial liability classes, offset in part by favorable development in the property classes and in fidelity and surety.
In December 2005, we completed a transaction involving a new 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. The transaction resulted in the recognition of a pre-tax realized investment gain of $171 million in 2005.
Property and casualty income before tax in 2005 was higher than in 2004 which, in turn, was substantially higher than in 2003. Income in 2005 and 2004 benefited from highly profitable underwriting results. Underwriting income increased modestly in 2005 despite significantly higher catastrophe losses, primarily from Hurricane Katrina. Results in 2005 and 2004 also benefited from a significant increase in investment income.
The reporting format for property and casualty underwriting results by business unit was changed in 2005 to more closely reflect the way the business is now managed. Prior year amounts have been reclassified to conform with the new presentation.
Reinsurance assumed results, which had been included in other specialty, are now reported as a separate business unit.
Underwriting results in 2005 and 2004 were highly profitable compared with modestly profitable results in 2003. The combined loss and expense ratio for our overall property and casualty business was as follows:
We estimate that our gross losses from Hurricane Katrina were about $1.2 billion. Almost all of the losses were from property exposure and business interruption claims. Our net losses of $403 million were significantly lower than the gross amount due to a property per risk treaty that limited our net loss per risk and our property catastrophe treaty. We still have about $400 million of reinsurance available for this event under our catastrophe treaty if our gross losses were higher than our current estimate. Therefore, while it is possible that our estimate of ultimate losses related to Hurricane Katrina may change in the future, we do not expect that any such change would have a material effect on the Corporation’s consolidated financial condition or liquidity.
The decrease in contingent commissions in 2004 was due to two factors that reduced producer compensation. First, we did not pay contingent commissions in the fourth quarter to those large brokers who elected to terminate such arrangements before year end. Second, the slowdown of premium growth in the second half of the year resulted in lower compensation to other producers whose commissions, in part, were contingent on the volume of business placed with us.
The decrease in the expense ratio in 2005 was due to lower contingent commission expenses and, to a lesser extent, flat overhead expenses compared with 2004, as we continued to make progress in reducing our cost structure through outsourcing and other initiatives, and the discontinuation of a professional liability per risk reinsurance treaty, which resulted in an increase in net premiums written without a commensurate increase in expenses.
Net premiums from personal insurance, which represented 27% of the premiums written by our property and casualty subsidiaries in 2005, increased by 6% in 2005 compared with a 9% increase in 2004. Net premiums written for the classes of business within the personal insurance segment were as follows:
Growth in 2004 occurred in all segments of this business but was particularly strong in the workers’ compensation and casualty classes. The premium growth was due in large part to higher rates as well as an increase in our in-force policy count. However, as expected, the level of rate increases declined throughout 2004 as we experienced more competition in the marketplace, particularly in the property classes. The low growth in 2005 was the result of increased competition in the marketplace. Rates decreased slightly in 2005 compared with 2004. Multiple peril and property and marine premiums in 2005 were reduced by reinsurance reinstatement premium costs of $19 million and $66 million, respectively, related to Hurricane Katrina. Excluding the reinsurance reinstatement
premiums, multiple peril premiums were flat in 2005 compared with 2004 and property and marine premiums grew 5%.
Retention levels of our existing customers were somewhat higher in 2004 compared with 2003 and remained steady in 2005. New business volume has steadily declined since 2003 due to decreased submission activity, the result of our competitors working to retain their better accounts. We have maintained our discipline in the competitive market by continuing to get acceptable rates and appropriate terms and conditions on business written.
It is uncertain how the hurricanes in 2005 will affect the commercial insurance marketplace. We have seen significant price increases and tighter terms and conditions on property business in catastrophe exposed areas. We expect this trend to continue in 2006. However, we expect that property business in non-catastrophe exposed areas and casualty business will remain competitive.
Our commercial insurance business produced profitable underwriting results in each of the past three years, particularly in 2004. These profitable results were due in large part to the cumulative effect of price increases, better terms and conditions and more stringent risk selection in recent years. Results in 2005 and 2004 also benefited from unusually low non-catastrophe property losses. Results in 2005 were less profitable than in 2004 largely due to higher catastrophe losses, primarily from Hurricane Katrina. Results in 2003 were adversely affected by incurred losses related to asbestos claims. Incurred losses related to asbestos claims were $35 million in 2005, $75 million in 2004 and $250 million in 2003.
Multiple peril results were highly profitable in each of the past three years, but more so in 2004. Results in 2005 were less profitable than in 2004 largely due to higher catastrophe losses. The property component of this business benefited from unusually low non-catastrophe losses in both years. Both the property and liability components of this business contributed to the substantial improvement in 2004 compared with 2003. The impact of catastrophes accounted for 9.1 percentage points of the combined loss and expense ratio for this class in 2005 and 3.4 percentage points in 2003. Catastrophe losses were negligible for this class in 2004 due to a $30 million reduction in net loss reserves related to the September 11, 2001 attack.
Workers’ compensation results were highly profitable in each of the past three years. Results were more profitable in each succeeding year. Results in all three years benefited from our disciplined risk selection during the past several years.
Net premiums from specialty insurance, which represented 25% of our total writings in 2005, increased by 6% in 2005 compared with a 4% increase in 2004. Net premiums written for the classes of business within the specialty insurance segment were as follows:
Growth in net premiums written for the professional liability classes of business was constrained in both 2005 and 2004 by the competitive pressure on rates that began in the latter half of 2003 and by our commitment to maintain underwriting discipline. Growth in 2005 was also dampened by the sale of renewal rights, effective July 1, 2005, on our hospital medical malpractice and managed care errors and omissions business. The net premium growth in 2005 in the professional liability classes was due solely to the non-renewal of a per risk reinsurance treaty.
The growth in net premiums written for our surety business was substantial in both 2005 and 2004. The growth in 2005 was due in part to the non-renewal of a high excess reinsurance treaty.
Our specialty insurance business produced modestly profitable underwriting results in 2005 compared with unprofitable results in 2004 and 2003. The combined loss and expense ratios for the classes of business within specialty insurance were as follows:
Our professional liability business improved substantially in 2005, producing near breakeven results compared with the highly unprofitable results in 2004 and 2003. Results have begun to benefit from the cumulative effect of price increases, lower policy limits and better terms and conditions in recent years. Results in all three years, but more so in 2004 and 2003, were adversely affected by unfavorable loss development related to accident years 2002 and prior, particularly in the errors and omissions class. The adverse development was predominantly from claims that have arisen due to corporate failures and allegations of management misconduct and accounting irregularities. Results were particularly unprofitable in 2004 due to an increase of about $160 million in errors and omissions liability loss reserves in the second quarter related to investment banks. The fidelity component of our professional liability business was highly profitable in each of the past three years due to favorable loss experience.
Our surety business tends to be characterized by infrequent but potentially high severity losses. We continue to manage our exposure on an absolute basis and by specific bond type. The majority of our obligations are intended to be performance-based guarantees. When losses occur, they are mitigated, at times, by the customer’s balance sheet, contract proceeds, collateral and bankruptcy recovery.
The transaction resulted in a pre-tax gain of $204 million, of which $171 million was recognized as a realized investment gain in 2005. The remaining gain of $33 million was deferred and will be recognized based on the timing of the ultimate disposition of our economic interest in Harbor Point.
We will receive additional payments over the next two years based on the amount of business renewed by Harbor Point, which will be recognized as realized investment gains when earned.
We cannot predict at this time the outcome of these investigations or any impact on our business or results of operations.
The extent of losses from a natural catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We regularly assess our concentration of risk exposures in catastrophe exposed areas globally and have strategies and underwriting standards to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. We have invested in modeling technologies and a concentration management tool that allow us to monitor and control our accumulations of potential losses in catastrophe exposed areas in the United States, such as California and the gulf and east coasts, as well as in such areas in other countries. Actual results may differ materially from those suggested by the model. We also continue to actively explore and analyze credible scientific evidence, including the impact of global climate change, that may affect our ability to manage exposure under the insurance policies we issue.
The September 11, 2001 attack changed the way the property and casualty insurance industry views catastrophic risk. That tragic event demonstrated that numerous classes of business we write are subject to terrorism-related catastrophic risks in addition to the catastrophic risks related to natural occurrences. This has required us to change how we identify and evaluate risk accumulations. We have licensed a terrorism model that provides estimates of loss events. We also have a concentration management tool that enables us to identify locations and geographic areas that are exposed to risk accumulations. The information provided by the model and the tracking tool has resulted in our non-renewing some accounts and has restricted us from writing others. Actual results may differ materially from those suggested by the model.
annual aggregate limit for the federal government and all insurers of $100 billion. If acts of terrorism result in covered losses exceeding the $100 billion annual limit, insurers are not liable for additional losses.
Our loss reserves include the accumulation of individual case estimates for claims that have been reported and estimates of claims that have been incurred but not reported as well as estimates of the expenses associated with processing and settling all reported and unreported claims. Estimates are based upon past loss experience modified for current trends as well as prevailing economic, legal and social conditions. Our loss reserves are not discounted to present value.
We regularly review our loss reserves using a variety of actuarial techniques. We update the reserve estimates as historical loss experience develops, additional claims are reported or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed.
Our loss reserves include significant amounts related to asbestos and toxic waste claims, Hurricane Katrina and the September 11 attack. The components of our loss reserves were as follows:
Loss reserves for each of our business units increased significantly in 2004 and again in 2005. The most significant increases occurred in the long tail liability classes of business within commercial and specialty insurance and reinsurance assumed.
coverage and expanded theories of liability in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos claims and, to a lesser extent, toxic waste claims, it is possible that management’s estimate of the ultimate liability for losses that had occurred as of December 31, 2005 may increase in future periods. Such increases in estimates could have a material adverse effect on the Corporation’s future operating results. However, management does not expect that any such increases would have a material adverse effect on the Corporation’s consolidated financial condition or liquidity.
Due to the inherent complexity of the loss reserving process and the potential variability of the assumptions used, the actual emergence of losses could vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly when settlements may not occur until well into the future. A relatively small percentage change in the estimate of net loss reserves would have a material effect on the Corporation’s operating results. For example, a hypothetical 1% increase in net loss reserves at December 31, 2005 would have resulted in a pre-tax charge of approximately $190 million.
Our loss reserves include amounts related to short tail and long tail classes of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary.
Short tail classes consist principally of homeowners, commercial property and marine business. For these classes, the estimation of loss reserves is less complex because claims are generally reported and settled shortly after the loss occurs and the claims relate to tangible property. Typically, there is less variability in reserve estimates for these classes of business.
Most of our reinsurance assumed business is long tailed 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.
We regularly review the loss reserves for each of the numerous classes of business we write as part of our overall analysis of loss reserves, taking into consideration the variety of trends that impact the ultimate settlement of claims in each particular class of business.
To estimate loss reserves, our actuaries use a variety of actuarial methods that analyze experience, trends and other relevant factors. These methods generally utilize analyses of historical patterns of the development of paid and reported losses by accident year by class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes.
Using all available data, our actuaries select an indicated loss reserve amount for each class of business based on the various assumptions, projections and methods. The total indicated reserve amount determined by our actuaries is an aggregate of the indicated reserve amount for the individual classes of business. The ultimate liability is likely to fall within a range of potential outcomes around this indicated liability, but the indicated amount is not expected to be precisely the ultimate liability.
Actuarial ranges of reasonable estimates are not a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. This is due, among other reasons, to the fact that actuarial ranges are developed based on known events as of the valuation date whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that were unknown as of the valuation date.
After carefully reviewing our actuaries’ loss reserve analyses, management determines the carried reserve for each class of business. In making the determination, management considers numerous factors, such as changes in actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular class of business. Such an assessment requires considerable judgment. It is often not possible to determine whether a change in the data is an anomaly. Even if a change is determined to be permanent, it is not always possible to determine the extent of the change until sometime later. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the carried loss reserves. In general, changes are made more quickly to more mature accident years and less volatile classes of business.
changes in the inflation rate for goods and services related to covered damages such as medical care and home repair costs;
In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions change. These issues can have a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Recent examples of emerging or potential claims and coverage issues include increases in the number and size of directors and officers liability and errors and omissions liability claims arising out of investment banking practices and accounting and other corporate malfeasance, exposure to claims asserted for bodily injury as a result of long-term exposure to harmful products or substances and increases in the number and size of water damage claims related to remediation of mold conditions. As a result of issues such as these, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have grown, further complicating the already complex loss reserving process.
We establish case reserves and expense reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves are established to cover additional exposures on both known and unasserted claims.
New asbestos claims and new exposures on existing claims have continued unabated despite the fact that usage of asbestos has declined since the mid-1970’s. Each claim filing typically names dozens of defendants to ensure that there is a solvent company left in the group to eventually pay claims. The plaintiffs’ bar continues to solicit new claimants through extensive advertising and through asbestos medical screenings. New asbestos cases are often filed in those jurisdictions with a reputation for judges and juries that are extremely sympathetic to plaintiffs. A vast majority of asbestos bodily injury claims are filed by claimants who do not show any signs of asbestos related disease.
Various challenges to mass screening claimants have been mounted, including a June 2005 U.S. District Court decision in Texas that accused plaintiffs’ lawyers of filing claims for people who had not been properly diagnosed with silicosis. Among the repercussions of that ruling, several asbestos injury settlement trusts have refused new claims that were based on the diagnosis of physicians or screening companies named in the case. Further investigations of the medical screening process for asbestos claims are underway.
Since 2004, several states have enacted laws that set medical criteria that must be met for plaintiffs to proceed with their claims. Other states have medical criteria bills pending. While this legislation is being challenged in certain of these states, it appears that these laws are already impacting the filing of claims by unimpaired plaintiffs. A related positive development has been the implementation by several states of inactive dockets, which preserve the rights of unimpaired claimants but do not provide for payments to these claimants unless they meet medical criteria.
To date, approximately 75 manufacturers and distributors of asbestos products have filed for bankruptcy protection as a result of asbestos related liabilities. Certain of these manufacturers and distributors have utilized a practice referred to as a prepackaged bankruptcy, which involves an agreement to a plan between the debtor and its creditors, including current and future asbestos claimants. Although the debtor is negotiating in part with its insurers’ money, insurers are generally given only limited opportunity to be heard. In recognition that many aspects of prepackaged bankruptcy plans are unfair to certain classes of claimants and to the insurance industry, these plans are beginning to be closely scrutinized by the courts and rejected when appropriate.
Our most significant individual asbestos exposures involve products liability on the part of “traditional” defendants who were engaged in the manufacture, distribution or installation of asbestos products. We wrote excess liability and/or general liability coverages for these insureds. While these insureds are relatively few in number, their exposure has increased in recent years due to the increased volume of claims, the erosion of much of the underlying limits and the bankruptcies of target defendants.
who allegedly had asbestos on their property, under the premises or operations section of primary general liability policies. Unlike products exposures, these non-products exposures typically had no aggregate limits on coverage, creating potentially greater exposure. Further, in an effort to seek additional insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits. It is difficult to predict whether insureds will be successful in asserting claims under non-products coverage or whether insurers will be successful in asserting additional defenses. Therefore, the future impact of such efforts on insurers is uncertain.
In establishing our asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider a variety of factors including: the available insurance coverage; limits and deductibles; the jurisdictions involved; past settlement values of similar claims; the potential role of other insurance, particularly underlying coverage below our excess liability policies; potential bankruptcy impact; and applicable coverage defenses, including asbestos exclusions. We have assumed a continuing unfavorable legal environment with no benefit from any federal asbestos reform legislation. Proposed legislation currently being considered by the Senate would create a $140 billion asbestos trust fund. We are among those who oppose this bill because it provides neither certainty nor finality.
In the fourth quarter of 2003, our actuaries and claim personnel, together with our outside actuarial consultants, performed a rigorous update of a 2002 ground-up analysis of our asbestos related exposures. The review noted certain adverse trends, particularly an increase in estimates of the ultimate liabilities for several of our traditional asbestos defendants. In addition, the number of peripheral asbestos defendants for whom we established reserves and the average severity of these claims were both higher than anticipated. Upon completion of the update, we increased our net asbestos loss reserves by $250 million.
The following table presents the number of policyholders for whom we have open asbestos case reserves and the related net loss reserves at December 31, 2005 as well as the net losses paid during 2005 by component.
the increase in the volume of claims by unimpaired plaintiffs and the extent to which they can be precluded from making claims;
the number of insureds seeking bankruptcy protection as a result of asbestos related liabilities and the impact of prepackaged bankruptcies;
These significant uncertainties are not likely to be resolved definitively in the near future. While there have been some positive legislative and judicial developments in the asbestos arena over the past two years, it is too early to call it a trend.
There is substantial uncertainty involved in estimating our liabilities related to these claims. First, the liabilities of the claimants are extremely difficult to estimate. At any given waste site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly depending on a
variety of factors. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved definitively in the near future.
Without federal movement on Superfund reform, the enforcement of Superfund liability is shifting to the states. States are being forced to reconsider state-level cleanup statutes and regulations. As individual states move forward, the potential for conflicting state regulation becomes greater. In a few states, we are seeing cases brought against insureds or directly against insurance companies for environmental pollution and natural resources damages. To date, only a few natural resource claims have been filed and they are being vigorously defended. Significant uncertainty remains as to the cost of remediating the state sites. Because of the large number of state sites, such sites could prove even more costly in the aggregate than Superfund sites.
Of the net toxic waste loss reserves at December 31, 2005 $64 million was for IBNR losses.
Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable from reinsurers related to the losses we have incurred. At December 31, 2005, reinsurance recoverable included $396 million recoverable with respect to paid losses and loss expenses, which is included in other assets, and $3.8 billion recoverable on unpaid losses and loss expenses.
balance sheets and superior underwriting ability, and we monitor the financial strength of our reinsurers on an ongoing basis. 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 an evaluation of balances due from reinsurers, changes in the credit standing of the reinsurers, coverage disputes and other relevant factors.
A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years ended December 31, 2005 is as follows:
We experienced adverse development of about $415 million in the professional liability classes, principally directors and officers liability and errors and omissions liability, resulting from adverse loss trends in accident years 1998 through 2002 due in large part to claims related to corporate failures and allegations of management misconduct and accounting irregularities, especially those involving investment banks and other financial institutions.
In Item 1 of this report, we present an analysis of our consolidated loss reserve development on a calendar year basis for each of the ten years prior to 2005.
Other charges in 2003 included expenses of $18 million related to the restructuring of our operations in Continental Europe. The restructuring costs consisted primarily of severance costs related to branch closings and work force reductions.
In April 2003, the Corporation announced its intention to exit CFS’s non-insurance business and to run-off the existing financial products portfolio. Since that date, our objective has been to exit this business as quickly as possible while minimizing the potential of a large payment due to an unexpected credit event.
The loss in 2004 was primarily related to the termination during the year of CFS’s obligations under several portfolio credit default swaps.
The notional amount and fair value of our future obligations under derivative contracts by type of risk were as follows:
Real estate operations resulted in a loss before taxes of $41 million in 2005 compared with losses of $25 million in 2004 and $14 million in 2003. These amounts are included in the corporate and other results.
In addition to the aforementioned parcel of land that we plan to sell, we own approximately $160 million of land that we expect will be developed in the future. Our real estate assets also include approximately $145 million of commercial properties and land parcels under lease.
In December 2005, we transferred our ongoing reinsurance business and certain related assets to Harbor Point Limited. We recognized a gain of $171 million on this transaction, which is further discussed under “Transfer of Ongoing Reinsurance Assumed Business”.
In September 2005, we completed the sale of Personal Lines Insurance Brokerage, Inc. Based on the terms of the sale, we recognized a gain of $16 million.
Information related to investment securities in an unrealized loss position at December 31, 2005 and 2004 is included in Note (3)(b) of the Notes to Consolidated Financial Statements.
During the years 2000 through 2002, Chubb Insurance Company of Europe (Chubb Europe) incurred substantial losses. During 2002, we established a valuation allowance of $40 million for the portion of deferred income tax assets related to the expected future U.S. tax benefit of the losses and foreign taxes incurred by Chubb Europe that we could not recognize for accounting purposes due to the requirement to evaluate realization over a near term horizon. Due to profitable results in Chubb Europe during 2003, we concluded that it was more likely than not that the deferred tax assets would be realized over a near term horizon and we eliminated the valuation allowance.
In connection with the sale of a subsidiary a number of years ago, we agreed to indemnify the buyer for certain pre-closing tax liabilities. During the first quarter of 2005, we settled this obligation with the purchaser. As a result, we reduced our income tax liability, which resulted in the recognition of a benefit of $22 million.
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At December 31, 2005, the Corporation had shareholders’ equity of $12.4 billion and total debt of $2.5 billion.
In 2002, Chubb issued $600 million of unsecured 4% senior notes due in 2007 and 24 million mandatorily exercisable warrants to purchase its common stock. The notes and warrants were issued together in the form of 7% equity units, each of which initially represented $25 principal amount of notes and one warrant. In August 2005, the notes were successfully remarketed as required by their terms. The interest rate on the notes was reset to 4.934%, effective August 16, 2005. The remarketed notes mature on November 16, 2007. Each warrant obligated the holder to purchase, on or before November 16, 2005, for a settlement price of $25, a variable number of shares of Chubb’s common stock. The number of shares purchased was determined based on a formula that considered the market price of Chubb’s common stock immediately prior to the time of settlement in relation to the $56.64 per share sale price of the common stock at the time the equity units were offered. Upon settlement of the warrants, Chubb issued 8,683,117 shares of common stock and received proceeds of $600 million.
were issued together in the form of 7% equity units, each of which initially represents $25 principal amount of notes and one purchase contract. The notes will be remarketed in May 2006. Each purchase contract obligates the holder to purchase, for a settlement price of $25, a variable number of shares of Chubb’s common stock on or before August 16, 2006. The number of shares to be purchased will be determined based on a formula that considers the market price of Chubb’s common stock immediately prior to the time of settlement in relation to the $59.50 per share sale price of the common stock at the time the equity units were offered. Upon settlement of the purchase contracts, Chubb will receive proceeds of approximately $460 million and will issue between approximately 6,500,000 and 7,700,000 shares of common stock.
The equity units are further described in Notes (8) and (18) of the Notes to Consolidated Financial Statements.
Chubb also has outstanding $225 million of unsecured 3.95% notes due in 2008, $400 million of unsecured 6% notes due in 2011, $275 million of unsecured 5.2% notes due in 2013, $100 million of unsecured 6.6% debentures due in 2018 and $200 million of unsecured 6.8% debentures due in 2031. In August 2005, $300 million of 6.15% notes were paid when due.
Chubb Executive Risk Inc., a wholly owned subsidiary, has outstanding $75 million of unsecured 7 1/8% notes due in 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has outstanding $125 million of 8.675% capital securities. The sole assets of the Trust are debentures issued by Chubb Executive Risk. The capital securities are subject to mandatory redemption in 2027 upon repayment of the debentures. The capital securities are also subject to mandatory redemption under certain circumstances beginning in 2007. Chubb has guaranteed the unsecured notes and the capital securities.
Management continuously monitors the amount of capital resources that Chubb maintains both for itself and its operating subsidiaries. In connection with our long-term capital strategy, Chubb from time to time contributes capital to its property and casualty subsidiaries. In addition, in order to satisfy its capital needs as a result of any rating agency capital adequacy or other future rating issues, or in the event we were to need additional capital to make strategic investments in light of market opportunities, we may take a variety of actions, which could include the issuance of additional debt and/or equity securities.
In June 2003, a shelf registration statement that Chubb filed in March 2003 was declared effective by the Securities and Exchange Commission. Under the registration statement, up to $2.5 billion of various types of securities may be issued. At December 31, 2005, approximately $650 million remained under the shelf registration statement.
In December 2005, the Board of Directors authorized the repurchase of up to 14,000,000 shares of Chubb’s common stock. The authorization has no expiration date. The authorization replaced an existing program authorized by the Board in July 1998 to purchase up to 12,500,000 shares, of which 3,287,100 shares had remained available. We made no share repurchases during 2003 and 2004. We repurchased 1,393,900 shares in open market transactions in 2005 at a cost of $135 million. As of December 31, 2005, 12,606,100 shares remained under the current share repurchase authorization. Based on our outlook for 2006, we expect to repurchase all of the shares remaining under this authorization by the end of 2006.
On January 3, 2006, we repurchased 2,550,000 shares under an accelerated stock buyback program at an initial price of $97.80 per share, for a total cost of approximately $250 million. At the end of the program, we may receive, or be required to pay, a price adjustment based on the volume weighted average price of Chubb’s common stock during the agreed upon program period, which will not exceed four months. The price adjustment may be settled, at our election, in Chubb’s common stock or cash.
Financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders. The following table summarizes our property and casualty subsidiaries’ financial strength ratings from the major independent rating organizations as of March 10, 2006.
The above table excludes certain commitments totaling $1.0 billion at December 31, 2005 to fund limited partnership investments. These capital commitments can be called by the partnerships during the commitment period (on average, 1 to 4 years) to fund working capital needs or the purchase of new investments.
Our gross liability for unpaid losses and loss expenses was $22.5 billion at December 31, 2005. Of this $22.5 billion liability, we estimate that approximately $6.3 billion will be paid in 2006, an aggregate $6.8 billion will be paid in 2007 and 2008, and an aggregate $3.4 billion will be paid in 2009 and 2010. The estimate is based on our historical loss payment patterns. The ultimate amount and timing of loss payments will likely vary materially from our estimate. We expect that these loss payments will be funded, in large part, by future cash receipts from operations.
In 2005, 2004 and 2003, we invested new cash in tax-exempt bonds and taxable bonds and, to a lesser extent, equity securities. In 2005, the taxable bonds we invested in were primarily mortgage-backed securities and corporate bonds. In 2004, the taxable bonds were primarily U.S. Treasury securities, foreign government bonds and corporate bonds. In 2003, the taxable bonds were primarily U.S. Treasury securities, mortgage-backed securities and foreign government bonds. 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, 2005, 52% of our fixed maturity portfolio was invested in tax-exempt bonds compared with 51% at December 31, 2004 and 2003.
increases the market value of existing investments, creating the opportunity for realized investment gains on disposition.
The unrealized appreciation before tax of investments carried at market value, which includes fixed maturities classified as available-for-sale and equity securities, was $478 million, $961 million and $1,036 million at December 31, 2005, 2004 and 2003, respectively. Such unrealized appreciation is reflected in a separate component of other comprehensive income, net of applicable deferred income tax.
The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $11 million, $21 million and $35 million at December 31, 2005, 2004 and 2003, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements.