Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of December 31, 2010 compared with December 31, 2009 and the results of operations for each of the three years in the period ended December 31, 2010. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
the impact from the bankruptcy protection sought by various asbestos producers and other related businesses; and
the effects of proposed asbestos liability legislation, including the impact of claims patterns arising from the possibility of legislation and those that may arise if legislation is not passed;
the occurrence of significant weather-related or other natural or human-made disasters, particularly in locations where we have concentrations of risk;
the impact of legislative and regulatory developments on our business, including those relating to terrorism, catastrophes and the financial markets;
Operating income was $1.9 billion in 2010, $2.2 billion in 2009 and $2.0 billion in 2008. The lower operating income in 2010 compared with that in 2009 was due to lower underwriting income in our property and casualty insurance business, attributable in large part to a higher impact of catastrophes. Higher operating income in 2009 compared with that in 2008 was due to higher underwriting income in our property and casualty insurance business offset in part by lower investment income. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.
Underwriting results were highly profitable in 2010, 2009 and 2008. Our combined loss and expense ratio was 89.3% in 2010 compared with 86.0% in 2009 and 88.7% in 2008. The less profitable results in 2010 compared to 2009 were due to a substantially higher impact of catastrophes. The more profitable results in 2009 compared to 2008 were due to a substantially lower impact of catastrophe losses offset in part by a lower amount of favorable prior year loss development. The impact of catastrophes accounted for 5.7 percentage points of the combined ratio in 2010 compared with 0.8 of a percentage point in 2009 and 5.1 percentage points in 2008.
During 2010, we experienced overall favorable development of $746 million on loss reserves established as of the previous year end, due primarily to favorable loss experience in certain professional liability, commercial liability and personal insurance classes. During 2009 and 2008, we experienced overall favorable development of $762 million and $873 million, respectively, due primarily to favorable loss experience in certain professional liability and commercial liability classes as well as lower than expected emergence of losses in the homeowners and commercial property classes.
Total net premiums written increased by 1% in 2010 and decreased by 6% in 2009. Growth in net premiums written in both years was limited by the general economic downturn and our continued emphasis on underwriting discipline in a market environment that remained competitive. Premium growth in 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States. The decrease in 2009 compared with 2008 was attributable to the general downturn in the economy and, to a lesser extent, to the impact of currency fluctuation on business written outside the United States due to the strength of the U.S. dollar in 2009 compared to 2008. Net premiums written in the United States decreased by 1% in 2010 and 6% in 2009. Net premiums written outside the United States increased by 9% in 2010 and decreased by 6% in 2009. Measured in local currencies, premiums outside the United States grew modestly in both years.
Net realized investment gains before tax were $426 million ($277 million after tax) in 2010 compared with net realized gains before tax of $23 million ($15 million after tax) in 2009 and net realized losses before tax of $371 million ($241 million after tax) in 2008. The net realized gains in 2010 were primarily related to investments in limited partnerships, which generally are reported on a quarter lag. The net realized losses in 2008 were primarily attributable to other-than-temporary impairment losses on equity securities.
coverage purchased or insured exposures were generally down in most classes of business compared to 2008. Also, in both 2010 and 2009, our ability to grow premiums was constrained by our emphasis on underwriting discipline in the highly competitive market environment. In 2010, the competitive environment placed pressure on renewal rates - overall renewal rates in the commercial and professional liability businesses were down slightly. In 2009, the competitive pressures were significant but renewal rates in the commercial and professional liability businesses increased slightly overall.
The most significant component of our ceded reinsurance program is property reinsurance. We purchase two types of property reinsurance: catastrophe and property per risk.
For property risks in the United States and Canada, we purchase catastrophe reinsurance in two forms. 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 northeast United States exposures. We have also arranged for the purchase of multi-year, collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, known as catastrophe bonds.
Our North American catastrophe treaty has an initial retention of $500 million.
The combination of the North American catastrophe treaty and a portion of the catastrophe bond coverages generally provide coverage for United States and Canadian exposures of approximately 69% of losses (net of recoveries from other available reinsurance) between $500 million and $1.37 billion and 60% of losses between $1.37 billion and $1.65 billion. For catastrophe events in the northeastern part of the United States and in Florida, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the catastrophe bond coverages provide additional coverages as discussed below.
For catastrophic events in the northeastern part of the United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and certain catastrophe bond coverages provide additional coverage of approximately 40% of losses (net of recoveries from other available reinsurance) between $1.37 billion and $2.17 billion, approximately 90% of losses between $2.50 billion and $2.85 billion, and approximately 30% of homeowners-related hurricane losses between $1.47 billion and $2.30 billion.
Our primary property catastrophe treaty for events outside the United States provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million.
In addition to catastrophe treaties, we also have a commercial property per risk treaty. This treaty provides up to approximately $800 million (depending upon the currency in which the insurance policy was issued) of coverage per risk in excess of our initial retention, which is generally between $25 million and $35 million.
After increasing somewhat in 2009, due to capacity restrictions for certain coverages in the market, reinsurance rates for property risks generally decreased in 2010. Consequently, the overall cost of our property reinsurance program was modestly lower in 2010 than in 2009. We do not expect the changes we made to our reinsurance program during 2010 to have a material effect on the Corporation’s results of operations, financial condition or liquidity.
Our major, traditional property reinsurance treaties expire on April 1, 2011 and we are in the process of evaluating our 2011 property reinsurance program. Despite significant natural disaster losses to the industry in early 2010, lower than average hurricane-related catastrophe losses to the industry in 2010 lead us to expect that reinsurance rates for property risks will decrease somewhat in 2011. 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, will be the determinants of our total reinsurance costs in 2011.
Statutory accounting principles applicable to property and casualty insurance companies differ in certain respects from generally accepted accounting principles (GAAP). Under statutory accounting principles, policy acquisition and other underwriting expenses are recognized immediately, not at the time premiums are earned. Management uses underwriting results determined in accordance with GAAP, among other measures, to assess the overall performance of our underwriting operations. To convert statutory underwriting results to a GAAP basis, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. Underwriting income determined in accordance with GAAP is defined as premiums earned less losses and loss expenses incurred and GAAP underwriting expenses incurred.
In 2010, the impact of catastrophes was $634 million, which represented 5.7 percentage points of the combined ratio. A significant portion of the catastrophe losses in 2010 related to numerous storms in the United States and, to a lesser extent, the earthquake in Chile. The impact of catastrophes was $91 million in 2009 and $607 million in 2008, which represented 0.8 percentage points and 5.1 percentage points, respectively, of the combined ratio. About $310 million of the catastrophe losses in 2008 related to Hurricane Ike, including our estimated share of an assessment from the Texas Windstorm Insurance Association.
Our expense ratio was higher in 2010 compared with 2009, which in turn was higher compared with 2008. The increase in 2010 was due to an increase in commissions and, to a lesser extent, overhead expenses increasing at a rate that exceeded the rate of growth of premiums written. Commissions were higher primarily outside the United States due, in part, to premium growth in classes of business with higher commission rates. The increase in 2009 was due primarily to an increase in commission rates in certain classes of business in the United States and, to a lesser extent, a decline in premiums written at a rate that exceeded the rate of reduction in our overhead expenses.
Our personal insurance business produced highly profitable underwriting results in each of the last three years, but less so in 2010 due to the impact of significantly higher homeowners catastrophe losses. A significant portion of the catastrophe losses in 2010 related to numerous storms in the United States in the first half of the year. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
Other personal business produced profitable results in each of the past three years. Results for our excess liability business were highly profitable in 2010 and 2009 compared with near breakeven results in 2008. Prior year loss development for our personal excess liability business was favorable in 2010 and 2009 and not significant in 2008. Our yacht business was highly profitable in 2010 and 2009 compared with unprofitable results in 2008. Yacht results in 2008 were adversely affected by several large non-catastrophe losses as well as several losses related to Hurricane Ike. Our accident and health business produced profitable results in 2010 compared with breakeven results in 2009 and profitable results in 2008.
Net premiums written from commercial insurance, which represented 42% of our premiums written in 2010, were flat in 2010 and decreased 7% in 2009 compared with the respective prior years. Net premiums written for the classes of business within the commercial insurance segment were as follows:
Growth in our commercial classes in 2010 was limited by a very competitive marketplace and the restrained insurance purchasing demand of customers operating in weakened economies worldwide. Net premiums written in 2010 reflected slightly reduced exposures on renewal business in the U.S. due to the continuing effects of the weak economy, although the effect on renewal exposures progressively lessened throughout the year. On average, renewal rates in the United States for most classes of commercial insurance business were about flat in 2010 compared with 2009. Premium growth in 2010 in our commercial insurance business benefited slightly from the impact of currency fluctuation on business written outside the United States. The decrease in premiums in our commercial insurance business in 2009 was primarily attributable to the adverse effects of the economic downturn and, to a lesser extent, the negative impact of currency fluctuation on business written outside the United States. The decline in premiums in most of our commercial classes in 2009 also reflected the highly competitive marketplace, particularly for new business. The decrease in workers’ compensation premiums in 2009 reflected reduced exposures, due to lower amounts of covered payroll of our insureds, largely as a result of the downturn in the U.S. economy. Overall U.S. renewal rates were up slightly in 2009 for commercial insurance.
Our commercial insurance business produced profitable underwriting results in each of the past three years. Results in all three years benefited from favorable loss experience, disciplined risk selection and appropriate terms and conditions in recent years. The results in 2010 and 2008 were less profitable compared with 2009 largely due to a higher impact of catastrophes. The impact of catastrophes accounted for 5.4 percentage points of the combined loss and expense ratio for our commercial insurance business in 2010, compared with 1.2 percentage points in 2009 and 8.1 percentage points in 2008. Excluding the effect of catastrophes, results for our commercial insurance business were slightly more profitable in 2010 compared to 2009, reflecting higher favorable prior year loss development, and modestly less profitable in 2009 compared to 2008.
Results for our casualty business were profitable in each of the past three years, but more so in 2010. The automobile component of our casualty business was modestly profitable in 2010 and 2009 compared with highly profitable results in 2008. Results in the primary liability component were profitable in each of the past three years, but less so in each succeeding year, as earned rate levels did not keep pace with the projected costs. Results in the excess liability component were highly profitable in each of the past three years, but more so in 2010. While excess liability results in all three years benefited from favorable prior year loss development, the amount was highest in 2010, mainly due to better than expected claim severity. Casualty results in all three years were adversely affected by incurred losses related to toxic waste claims. Our analysis of these exposures resulted in increases in the estimate of our ultimate liabilities. Such losses represented 3.5 percentage points of the combined loss and expense ratio for this class in 2010, 4.1 percentage points in 2009 and 6.2 percentage points in 2008.
Collectively, the results for the professional liability classes benefited from favorable prior year loss development in each of the past three years due primarily to the recognition of the positive loss trends we have been experiencing related to accident years 2003 through 2007. These trends were largely the result of a favorable business climate, lower policy limits and better terms and conditions. The combined ratio for the 2010 accident year in our professional liability business is modestly below breakeven, while the combined ratios for the 2009 and 2008 accident years were higher since those accident years were more affected by the crisis in the financial markets.
In 2005, we transferred our ongoing reinsurance assumed business and certain related assets, including renewal rights, to a reinsurance company, Harbor Point Limited, which merged into Alterra Capital Holdings Limited in May 2010. 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.
For a transition period of about two years, Harbor Point underwrote specific reinsurance business on our behalf. We retained a portion of this business and ceded the balance to Harbor Point.
Net premiums written from our reinsurance assumed business during the past three years have not been significant as this business is in run-off.
Reinsurance assumed results were profitable in each of the past three years. Prior year loss development was favorable in all three years, but more so in 2009 and 2008.
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 2011, that deductible is 20% of direct premiums earned in 2010 for these lines of business. For
Loss reserves, net of reinsurance recoverable, increased by $115 million or 1% in 2010. The effect of catastrophes increased loss reserves by about $100 million and the effect of currency fluctuation decreased reserves by approximately $30 million, due to the strength of the U.S. dollar at December 31, 2010 compared to December 31, 2009. Loss reserves related to our insurance business increased by $263 million. Loss reserves related to our reinsurance assumed business, which is in run-off, decreased by $148 million.
The process of establishing loss reserves is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.
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 primary and excess liability, workers’ compensation 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. 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.
Bornheutter-Ferguson methods are combinations of an expected loss ratio method and a loss development factor method, where the loss development factor method is given more weight as an accident year matures.
For each class of business, we regularly adjust the assumptions and actuarial methods used in the estimation of loss reserves in response to our actual loss experience as well as our judgments regarding changes in trends and/or emerging patterns. In those instances where we primarily utilize analyses of historical patterns of the development of paid and reported losses this may be reflected, for example, in the selection of revised loss development factors. In those long tail classes of business that comprise a majority of our loss reserves and for which loss experience is less predictable due to potential changes in judicial interpretations, potential legislative actions and potential claims issues, this may be reflected in a judgmental change in our estimate of ultimate losses for particular accident years.
Two of the larger components of our loss reserves relate to the professional liability classes other than fidelity and to commercial excess liability. The respective reported loss development patterns are key assumptions in estimating loss reserves for these classes of business, both as applied directly to more mature accident years and as applied indirectly (e.g., via Bornheutter-Ferguson methods) to less mature accident years.
Reserves for the professional liability classes other than fidelity were $7.0 billion, net of reinsurance, at December 31, 2010. Based on a review of our loss experience, if the loss development factor for each accident year changed such that the cumulative loss development factor for the most recent accident year changed by 10%, we estimate that the net reserves for professional liability classes other than fidelity would change by approximately $625 million, in either direction. This degree of change in the reported loss development pattern is within the historical variation around the averages in our data.
Reserves for commercial excess liability (excluding asbestos and toxic waste claims) were $3.1 billion, net of reinsurance, at December 31, 2010. These reserves are included within commercial casualty. Based on a review of our loss experience, if the loss development factor for each accident year changed such that the cumulative loss development factor for the most recent accident year changed by 15%, we estimate that the net reserves for commercial excess liability would change by approximately $325 million, in either direction. This degree of change in the reported loss development pattern is within the historical variation around the averages in our data.
New asbestos claims and new exposures on existing claims have continued despite the fact that usage of asbestos has declined since the mid-1970’s. 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.
Various challenges to the mass screening of claimants have been mounted which have led to higher medical evidentiary standards. For example, several asbestos injury settlement trusts have suspended their acceptance of claims that were based on the diagnosis of specific physicians or screening companies. Further investigations of the medical screening process for asbestos claims are underway.
Various U.S. federal proposals to solve the ongoing asbestos litigation crisis have been considered by the U.S. Congress over the years, but none have yet been enacted. The prospect of federal asbestos reform legislation remains uncertain. As a result, we have assumed a continuation of the current legal environment with no benefit from any federal asbestos reform legislation.
Without federal movement on Superfund reform, the enforcement of Superfund liability has occasionally shifted 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 have seen 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.
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, past settlement values of similar claims, relevant judicial interpretations, applicable coverage defenses as well as facts that are unique to each insured.
The following table presents a reconciliation of our beginning and ending loss reserves, net of reinsurance recoverable, related to toxic waste claims. The reinsurance recoverable related to these claims is minimal.
At December 31, 2010, $156 million of the net toxic waste loss reserves were IBNR reserves.
Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable from reinsurers related to the losses we have incurred. At December 31, 2010, reinsurance recoverable included $186 million recoverable with respect to paid losses and loss expenses, which is included in other assets, and $1.8 billion recoverable on unpaid losses and loss expenses.
Ceded reinsurance contracts do not relieve us of our primary obligation to our policyholders. Consequently, an exposure exists with respect to reinsurance recoverable to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities we believe it has assumed under the reinsurance contracts. We are selective in regard to our reinsurers, placing reinsurance with only those reinsurers who we believe have strong 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 periodic evaluations of balances due from reinsurers, the financial condition 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, 2010 is as follows:
During 2010, we experienced overall favorable prior year development of $746 million, which represented 3.6% of the net loss reserves as of December 31, 2009. This compares with favorable prior year development of $762 million during 2009, which represented 3.8% of the net loss reserves at December 31, 2008, and favorable prior year development of $873 million during 2008, which represented 4.3% of the net loss reserves at December 31, 2007. Such favorable development was reflected in operating results in these respective years.
The following table presents the overall prior year loss development for the three years ended December 31, 2010 by accident year.
We experienced unfavorable development of about $70 million in the fidelity class due to higher than expected reported loss emergence, mainly related to the 2009 accident year and primarily in the U.S. Loss reserve estimates at the end of 2009 included an expectation of less prior year loss activity than actually occurred in 2010. This activity was driven by case developments on a relatively small number of large claims related to the recent economic and financial environment. As a result, this adverse development was reflected in but only had a modest effect on the determination of carried loss reserves at December 31, 2010.
The net favorable development of $762 million in 2009 was also due to various factors. The most significant factors were:
We experienced favorable development of about $160 million in the aggregate in the homeowners and commercial property classes, primarily related to the 2007 and 2008 accident years. The severity of late reported property claims that emerged during 2009 was lower than expected and development on prior year catastrophe events was favorable.
We experienced favorable development of about $35 million in the surety business due to lower than expected loss emergence, mainly related to more recent accident years.
The net favorable development of $873 million in 2008 was also due to various factors. The most significant factors were:
We experienced favorable development of about $390 million in the professional liability classes other than fidelity, including about $150 million outside the U.S. Favorable development occurred in each of the primary professional liability classes, including directors and officers liability, errors and omissions liability, fiduciary liability and employment practices liability. A majority of this favorable development was in the 2004 and 2005 accident years. Reported loss activity related to these accident years was less than expected, reflecting a favorable business climate, lower policy limits and better terms and conditions.
We experienced favorable development of about $75 million in the fidelity class due to lower than expected reported loss emergence, particularly outside the U.S., mainly related to recent accident years.
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 2010. The variability in reserve development over the ten year period illustrates the uncertainty of the loss reserving process. Conditions and trends that have affected reserve development in the past will not necessarily recur in the future. It is not appropriate to extrapolate future favorable or unfavorable reserve development based on amounts experienced in prior 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 2010. 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.
The effective tax rate on our investment income was 19.1% in 2010 compared with 19.2% in 2009 and 20.0% in 2008. The effective tax rate fluctuates as a result of our holding a different proportion of our investment portfolio in tax exempt securities during different periods.
On an after-tax basis, property and casualty investment income increased by 1% in 2010 and decreased by 3% in 2009. The after-tax annualized yield on the investment portfolio that supports our property and casualty insurance business was 3.29% in 2010 compared with 3.39% in 2009 and 3.49% in 2008.
CFS’s aggregate exposure, or retained risk, from each of its remaining in-force financial products contracts is referred to as notional amount. Notional amounts are used to calculate the exchange of contractual cash flows and are not necessarily representative of the potential for gain or loss. The notional amounts are not recorded on the balance sheet.
CFS’s remaining financial products contracts at December 31, 2010 included a derivative contract linked to an equity market index that terminates in 2012 and a few other insignificant transactions. We estimate that the notional amount under the remaining contracts was about $340 million and the fair value of our future obligations was $3 million at December 31, 2010.
A primary reason for the sale of fixed maturities in each of the last three years has been to improve our portfolio’s after-tax return without sacrificing quality where market opportunities have existed to do so.
In 2005, we transferred our ongoing reinsurance business and certain related assets to a reinsurance company, Harbor Point Limited. In exchange, we received $200 million of 6% convertible notes and warrants to purchase common stock of Harbor Point. The transaction resulted in a pre-tax gain of $204 million, of which $171 million was recognized in 2005. In 2008, the notes were converted into 2,000,000 shares of common stock of Harbor Point and we recognized the remaining $33 million gain.
Information related to investment securities in an unrealized loss position at December 31, 2010 and 2009 is included in Note (3)(b) of the Notes to Consolidated Financial Statements.
Chubb also has outstanding $1.0 billion of unsecured junior subordinated capital securities that become due on April 15, 2037, the scheduled maturity date, but only to the extent that Chubb has received sufficient net proceeds from the sale of certain qualifying capital securities. Chubb must use its
In connection with the issuance of the capital securities, Chubb entered into a replacement capital covenant in which it agreed that it will not repay, redeem or purchase the capital securities before March 29, 2047, unless, subject to certain limitations, it has received proceeds from the sale of replacement capital securities, as defined. Subject to the replacement capital covenant, the capital securities may be redeemed, in whole or in part, at any time on or after April 15, 2017 at a redemption price equal to the principal amount plus any accrued interest on or prior to April 15, 2017 at a redemption price equal to the greater of (i) the principal amount or (ii) a make-whole amount, in each case plus any accrued interest.
In 2008, we repurchased 26,328,770 shares of Chubb’s common stock in open market transactions at a cost of $1,311 million. In 2009, we repurchased 22,623,775 shares of Chubb’s common stock in open market transactions at a cost of $1,065 million. In 2010, we repurchased 37,667,829 shares of Chubb’s common stock in open market transactions at a cost of $2,008 million. As of December 31, 2010, 28,492,296 shares remained under the December 2010 share repurchase authorization, which has no expiration date. We expect to repurchase the shares remaining under the December 2010 authorization by the end of January 2012, subject to market conditions.
Our strong underwriting and investment results continued to generate substantial cash from operations in 2010. New cash available for investment by our property and casualty subsidiaries was approximately $250 million in 2010 compared with $1.3 billion in 2009 and $775 million in 2008. New cash available for investment by our property and casualty subsidiaries in 2010 was lower than in 2009 as a result of a $1.0 billion increase in dividends paid to Chubb by the property and casualty subsidiaries and modestly higher loss payments partially offset by lower income tax payments. New cash available for investment in 2009 was higher than in 2008 due to an $800 million decrease in dividends paid by the property and casualty subsidiaries to Chubb and lower loss payments, partially offset by lower premium collections and higher income tax payments.
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 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 2010, 2009 and 2008, these subsidiaries paid dividends to Chubb of $2.2 billion, $1.2 billion, and $2.0 billion, respectively. The $2.2 billion of dividends paid by the subsidiaries to Chubb during 2010 exceeded the maximum dividend distribution amount of approximately $1.5 billion that the subsidiaries could have made during 2010 without prior approval. Regulatory approval was obtained for those dividend payments deemed to be extraordinary in 2010. The maximum dividend distribution that may be made by the property and casualty subsidiaries to Chubb during 2011 without prior regulatory approval is approximately $2.0 billion.
Chubb has a revolving credit agreement with a group of banks that provides for up to $500 million of unsecured borrowings. There have been no borrowings under this agreement. 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 consolidated shareholders’ equity, as adjusted. At December 31, 2010, Chubb was in compliance with all such covenants. The revolving credit facility is available for general corporate purposes and to support our commercial paper borrowing arrangement. The agreement has a termination date of October 19, 2012. Under the agreement Chubb is permitted to request on two occasions, at any time during the remaining term of the agreement, an extension of the maturity date for an additional one year period. On the termination date of the agreement, any borrowings then outstanding become payable.
The following table provides our future payments due by period under contractual obligations as of December 31, 2010, aggregated by type of obligation.
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, 2010. 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 $765 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 $720 million at December 31, 2010 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.
The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment return while minimizing credit risk and managing interest rate risk in order to ensure that funds will be available to meet our insurance obligations. 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 of Chubb and its respective operating companies.
The net unrealized appreciation before tax of our fixed maturities and equity securities carried at fair value was $1,723 million at December 31, 2010 and $1,606 million at December 31, 2009 compared with net unrealized depreciation of $220 million at December 31, 2008. Such unrealized appreciation and depreciation is reflected in accumulated other comprehensive income, net of applicable deferred income taxes.
Fair values for fixed maturities are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from independent brokers. For fixed maturities that have quoted prices in active markets, market quotations are provided. For fixed maturities that do not trade on a daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference data, prepayment spreads and measures of volatility. Management reviews on an ongoing basis the reasonableness of the methodologies used by the relevant pricing service and brokers. In addition, management, using the prices received for the securities from the pricing service and brokers, determines the aggregate portfolio price performance and reviews it against applicable indices. If management believes that significant discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve the discrepancies.
Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service.
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, 2010 and December 31, 2009, 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.
In October 2010, the Financial Accounting Standards Board issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies which costs relating to the successful acquisition of new or renewal insurance contracts should be capitalized. This guidance is effective for the Corporation for the year beginning January 1, 2012 and may be applied prospectively or retrospectively. We are in the process of assessing the effect that the implementation of the new guidance will have on the Corporation’s financial position and results of operations. The amount of acquisition costs we will defer under the new guidance will be less than the amount deferred under our current accounting practice. If prospective application is elected, net income in the year of adoption would be reduced as the amount of acquisition costs eligible for deferral would be lower. Amortization of the balance of deferred policy acquisition costs as of the date of adoption would continue over the period in which the related premiums are earned. If retrospective application is elected, deferred policy acquisition costs and related deferred taxes would be reduced as of the beginning of the earliest period presented in the financial statements with a corresponding reduction to shareholders’ equity.
In January 2011, significant storms and related flooding occurred in and around the city of Brisbane, Australia. In February 2011, storms and flooding occurred in the area of Melbourne, Australia, and severe winter storms occurred in the Eastern and Midwestern parts of the United States. Based on information currently available, we estimate the aggregate losses from these catastrophes are about $150 million to $200 million before tax, including our previously announced estimated losses of $75 million to $100 million before tax for the Brisbane, Australia storms and related flooding losses in January. As more information becomes available about these events or if additional claims are reported, our estimate may be increased or decreased. On February 22, 2011, an earthquake took place in New Zealand but given its recent occurrence and the limited information available, we cannot estimate at this time the amount of any possible losses from this event. The impact of these catastrophes will be reflected in our first quarter 2011 results.
Consolidated financial statements of the Corporation at December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 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, 2010 are listed in Item 15(a) of this report.