Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of December 31, 2013 compared with December 31, 2012 and the results of operations for each of the three years in the period ended December 31, 2013. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
changes in credit ratings, interest rates, market credit spreads and the performance of the financial markets;
our expectations with respect to cash flow and investment income and with respect to other income;
our plans to repurchase shares of our common stock, including as a result of changes in:
Net income was $2.3 billion in 2013, $1.5 billion in 2012 and $1.7 billion in 2011. The increase in net income in 2013 compared with 2012 was due to higher operating income and higher net realized investment gains. The decrease in net income in 2012 compared with 2011 was due to lower operating income and lower net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.
Underwriting results were highly profitable in 2013 compared with profitable results in 2012 and 2011. Our combined loss and expense ratio was 86.1% in 2013 and 95.3% in 2012 and 2011. The more profitable underwriting results in 2013 compared with 2012 and 2011 were primarily due to a substantially lower impact of catastrophes and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. The impact of catastrophes accounted for 3.4 percentage points of the combined ratio in 2013 compared with 9.6 percentage points in 2012 and 8.9 percentage points in 2011.
Total net premiums written increased by 3% in 2013 and 1% in 2012. The effect of foreign currency translation on total net premium growth was insignificant in 2013 compared with a slightly negative impact in 2012. Net premiums written in the United States increased by 4% in 2013 and 2% in 2012. Net premiums written outside the United States were flat in 2013 and decreased by 3% in 2012. When measured in local currencies, such premiums grew modestly in 2013 and grew slightly in 2012. In both years, premium growth both inside and outside the United States was limited by our emphasis on underwriting discipline in a highly competitive market and our focus on rate adequacy and profitability for both renewal and new business.
Property and casualty investment income after tax decreased by 5% in both 2013 and 2012 compared with the respective prior year, due to a decline in the average yield on our investment portfolio. 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 $402 million ($261 million after tax) in 2013 compared with $193 million ($125 million after tax) in 2012 and $288 million ($187 million after tax) in 2011. In 2013, net realized investment gains included the recognition of a gain in connection with the business combination of an issuer in which we held equity securities and warrants. The remaining net realized gains in 2013 were primarily related to investments in limited partnerships, which generally are reported on a quarter lag, and sales of equity securities. The net realized gains in 2012 were primarily related to sales of fixed maturities and investments in limited partnerships. The net realized gains in 2011 were primarily related to investments in limited partnerships.
Property and casualty income before tax was higher in 2013 than in 2012, due to substantially higher underwriting income, offset in part by a decline in investment income. The increase in underwriting income in 2013 was primarily attributable to a substantially lower impact of catastrophes and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. Property and casualty income before tax in 2012 was modestly lower than in 2011, due primarily to a decrease in investment income. Underwriting income was similar in 2012 and 2011.
Net premiums written were $12.2 billion in 2013, $11.9 billion in 2012 and $11.8 billion in 2011. Net premiums written by business unit were as follows:
Net premiums written in the United States increased in 2012 as a result of growth in our personal and commercial insurance segments. Net premiums written in the United States for our specialty insurance segment decreased in 2012. Growth in our personal insurance business was attributable to new business, strong retention of existing business as well as higher rates and insured exposures upon renewal. While the pricing environment was positive during 2012 in both the commercial and
Premium growth in our professional liability business remained constrained in 2012 by the continuing effects of the economic downturn and our focus on rate adequacy and profitability in the highly competitive marketplace.
Average renewal rates for our personal insurance business in the United States were up modestly in 2013 and up slightly in 2012 compared with expiring rates, driven in both years by our homeowners business. We continued to retain a high percentage of our customers in both years.
Overall, average renewal rates in 2013 and 2012 in the United States were up significantly in both our commercial and professional liability businesses in comparison to expiring rates. The amounts of coverage purchased or the insured exposures, both of which are bases upon which we calculate the premiums we charge, were down slightly in 2013 and flat in 2012 compared with the respective prior year. We continued to retain a high percentage of our existing business in our commercial and professional liability classes in both years. Renewal retention levels in our commercial insurance business were similar in 2013 and 2012 but lower than those in 2011. Renewal retention levels in our professional liability business were slightly higher in 2013 after declining in 2012. Renewal retention levels reflected our continued efforts to seek renewal rate increases in most of the classes within these businesses, and to take underwriting actions to improve profitability, particularly in some of the professional liability classes. The overall level of new business was down in our commercial insurance business in 2013 and 2012 compared with the respective prior year. New business was up modestly in our professional liability business in 2013 after declining in 2012. The levels of new business reflected the competitive market as well as our underwriting discipline.
Net premiums written outside the United States decreased modestly in 2012, as slight growth in our personal insurance segment was more than offset by decreases in our commercial and specialty insurance segments. The lack of growth in our business outside the United States was primarily due to a lower level of new business in a weak rate environment for commercial and specialty insurance products and, to a lesser extent, the negative impact of foreign currency translation.
The reinsurance assumed business has been in runoff since the sale of our ongoing reinsurance assumed business in 2005. Most of our insurance policies are issued on a direct basis to personal, commercial or specialty insurance customers, but we do opportunistically participate in the business of
other insurance carriers for some lines of business. The business that is assumed from other insurance carriers is included within the personal, commercial and specialty insurance business results. Information regarding the amount of business written on a direct and assumed basis is presented in Note (8) of the Notes to Consolidated Financial Statements.
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 reinsurers and receive few, if any, loss recoveries related to these contracts. 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, 2013 is presented in Note (8) of the Notes to Consolidated Financial Statements.
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 northeast 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.
The catastrophe bond arrangements provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the North American catastrophe treaty. We currently have two catastrophe bond arrangements in effect. We have a $475 million reinsurance arrangement, a portion of which expires in March 2014 and the remainder in March 2015, that provides coverage for our exposure to homeowners and commercial
losses related to certain hurricane, earthquake, severe thunderstorm and winter storm loss events in twelve states in the northeast United States and the District of Columbia. We also have a $150 million reinsurance arrangement that expires in March 2016 that provides coverage for homeowners-related hurricane and severe thunderstorm losses in eight states along the southern U.S. coastline.
For the indicated catastrophic events in the northeast United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and the $475 million catastrophe bond arrangement provides additional coverage of approximately 65% of losses (net of recoveries from other available reinsurance) between $1.65 billion and $3.65 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, which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this program, for which the most recent annual period began on June 1, 2013, provides coverage of 90% of homeowners-related hurricane losses in Florida in excess of our initial retention of $160 million per event. Under the terms of the program, our aggregate recoveries during the annual coverage period are limited to approximately $380 million, based on our current level of participation.
Our commercial property per risk treaty provides coverage for property exposures both inside and outside the United States. Depending upon the currency in which the covered insurance policy was issued, the treaty provides coverage per risk of approximately $555 million to $835 million in excess of our initial retention, which is generally between $25 million and $35 million.
Recoveries under our property reinsurance treaties are subject to certain coinsurance requirements that affect the interaction of some elements of our reinsurance program.
As a result of changes in coverage we made in 2013 upon renewal of the major components of our program, the overall cost of our property reinsurance program was modestly lower in 2013 than in 2012. For the North American catastrophe treaty, we incurred a slight increase in cost upon renewal. However, the renewal costs associated with the catastrophe treaty that covers events outside the United States and the commercial property per risk treaty were lower. We do not expect the changes we made to our property reinsurance program during 2013 to have a material effect on the Corporation’s results of operations, financial condition or liquidity.
The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. Management evaluates the performance of our underwriting operations and of each of our business units using, among other measures, the combined loss and expense ratio calculated in accordance with U.S. statutory accounting principles. It is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio) plus the ratio of statutory underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.
Statutory accounting principles applicable to U.S. property and casualty insurance companies differ in certain respects from generally accepted accounting principles in the United States (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, certain 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 2013, the net impact of catastrophes was $412 million, which represented 3.4 percentage points of the combined ratio. A significant portion of the catastrophe losses in 2013 related to flooding in Alberta, Canada, as well as several severe storms in the central United States and flooding in Ontario, Canada. In 2012, the net impact of catastrophes was $1.1 billion, which represented 9.6 percentage points of the combined ratio. We incurred just under $1.1 billion of catastrophe losses and $53 million of related reinsurance reinstatement premium costs. Most of the impact of catastrophes in 2012 was due to Storm Sandy, but there were also catastrophe losses related to other events, including several severe hail and wind storms in the United States. In 2011, the net impact of catastrophes was $1.0 billion, which represented 8.9 percentage points of the combined ratio. A significant portion of the catastrophe losses in 2011 related to tornadoes and other storms in the United States, including Hurricane Irene, as well as flooding in Australia.
Our expense ratio increased only slightly in 2013 and 2012 compared with the respective prior year.
Our personal insurance business produced highly profitable underwriting results in 2013 compared with profitable results in 2012 and 2011. Results were more profitable in 2013 compared with 2012 due to better results in our homeowners business, driven primarily by a lower impact of catastrophes. Results were more profitable in 2012 compared with 2011, also due to better results in our homeowners business, driven mainly by improvement in the current accident year loss ratio excluding catastrophes. The impact of catastrophes accounted for 7.2 percentage points of the combined loss and expense ratio for our personal insurance business in 2013, compared with 13.7 percentage points in 2012 and 13.1 percentage points in 2011. A significant portion of the catastrophe losses in 2013 related to water damage associated with flooding in Alberta and Ontario, Canada as well as other weather-related events in the
central United States. 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 also related to storms in the United States, including Hurricane Irene. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:
Retention levels of our existing policyholders both inside and outside the United States remained strong in 2013 and 2012, but were down from the levels in 2011. The decline in retention was largely due to both our effort to increase rates in several classes of business and our non-renewal of some underperforming or catastrophe-exposed accounts. The average renewal exposure change was down slightly in 2013 and close to flat in 2012, both inside and outside the United States. The amount of new business was down in both 2013 and 2012 compared with the respective prior year as we continued to maintain our underwriting discipline and our focus on obtaining adequate rates in the competitive market. The amount of new business was down in both years inside the United States. Outside the United States, the amount of new business was up slightly in 2013 but down in 2012.
Our commercial insurance business produced highly profitable underwriting results in 2013 compared with near breakeven underwriting results in 2012 and 2011. The more profitable results in 2013 compared with 2012 and 2011 were due in large part to a lower impact of catastrophes. The impact of catastrophes accounted for 2.1 percentage points of the combined loss and expense ratio for our commercial insurance business in 2013, compared with 11.4 percentage points in 2012 and 10.5 percentage points in 2011. Results in all three years benefited from favorable prior year loss development. Results in both 2013 and 2012 benefited from a lower current accident year loss ratio excluding catastrophes compared with the respective prior year. The benefit of the lower current accident year loss ratio excluding catastrophes in 2012 compared with 2011 was largely offset by a lower amount of favorable prior year loss development.
Our professional liability business produced highly profitable results in 2013 and 2011 and profitable results in 2012. The more profitable results in 2013 and 2011 compared with 2012 were due to a lower current accident year combined ratio and to a higher amount of favorable prior year loss development. The fiduciary liability class produced highly profitable results in each of the past three years. Results for the directors and officers liability class were also highly profitable in all three years, but more so in 2013 and 2011. Results for both the fiduciary liability and directors and officers liability classes reflected favorable prior year loss development in each of the past three years. For the fidelity class, results were breakeven in 2013, unprofitable in 2012 and slightly profitable in 2011. Results for this class in recent years reflected large loss activity resulting from alleged third party and insured-employee criminal activity. Results for the employment practices liability class were highly unprofitable in 2013 and 2012 compared with near breakeven results in 2011. The less profitable results in 2013 and 2012 in this class were due to higher current accident year loss ratios relative to 2011. Results in 2013 and 2012 also reflected unfavorable prior year loss development. Employment practices liability claims have been more numerous and protracted in recent years due primarily to the lingering effect of the economic downturn and resulting unemployment levels. Our errors and omissions liability business produced highly unprofitable results in each of the past three years, reflecting unfavorable prior year loss development, mostly outside the United States.
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
A new version of one of the third party catastrophe models that we and others in the insurance industry utilize for estimating potential losses from natural catastrophes was released in the second quarter of 2013. On a preliminary basis, the new version of the model indicates lower risk estimates in certain catastrophe exposed geographical areas where we have exposures to natural catastrophes, including the northeast United States and Florida. We are currently in the process of further analyzing the model. At this time, we have not concluded if the new model will result in any significant change in how we manage our risk aggregations related to catastrophes.
We also continue to actively explore and analyze credible scientific evidence, including the potential impact of global climate change, that may affect our ability to manage our exposure under the insurance policies we issue as well as the impact that laws and regulations intended to combat climate change may have on us.
The Terrorism Risk Insurance Act of 2002, and more recently the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively TRIA), are limited duration programs under which the U.S. federal government has agreed to share the risk of loss arising from certain acts of terrorism with the insurance industry. The current program, which will terminate on December 31, 2014, is applicable only to select lines of commercial business and excludes, among others, commercial automobile, surety and professional liability insurance, other than directors and officers liability. The current program provides protection from all foreign and domestic acts of terrorism.
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. In the event of an act of terrorism, each insurer has a separate deductible that it must meet before federal assistance becomes available. The deductible is based on a percentage of direct U.S. premiums earned for the covered lines of business in the previous calendar year. For 2014, that deductible is 20% of direct premiums earned in 2013 for these lines of business. For losses above the deductible, the federal government will pay for 85% of covered losses, while the insurer retains 15%. There is a combined 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. While we expect the provisions of TRIA will mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $1.0 billion in 2014.
We will continue to manage this type of catastrophic risk by monitoring terrorism risk aggregations. If TRIA is not extended beyond its current December 31, 2014 termination date and a robust reinsurance market for terrorism risks does not develop so we can continue to mitigate our exposure to a large scale terrorism attack, we may not renew some policies in some locations and we may curtail new business writing in some major U.S. cities and other geographic areas where our exposure aggregations could become unacceptable. Given the unpredictability of the targets, frequency and severity of potential terrorist events, and notwithstanding measures we have taken or may take to mitigate terrorism exposure as well as the programs that governmental entities provide, however limited, to cover some of that exposure (including any extension of TRIA), the occurrence of a terrorist event could have a material adverse effect on the Corporation’s results of operations, financial condition or liquidity.
In establishing the loss reserves of our property and casualty subsidiaries, we consider facts currently known and the present state of the law and coverage litigation. Based on all information currently available, we believe that the aggregate loss reserves at December 31, 2013 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as described below, there are significant uncertainties inherent in the loss reserving process. It is therefore possible that management’s estimate of the ultimate liability for losses that had occurred as of December 31, 2013 may change, which could have a material effect on the Corporation’s results of operations and financial condition.
Given 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 in those instances where settlements do not occur until well into the future. Our net loss reserves at December 31, 2013 were $21.3 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on the Corporation’s results of operations.
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.
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. In doing so, management must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. 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.
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.
Reserves for commercial excess liability (excluding asbestos and toxic waste claims) were $3.1 billion, net of reinsurance, at December 31, 2013. 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 20%, we estimate that the net reserves for commercial excess liability would change by approximately $400 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.
Asbestos Reserves. Asbestos remains the most significant and difficult mass tort for the insurance industry in terms of claims volume and dollar exposure. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Tort theory affecting asbestos litigation has evolved over the years. Early court cases established the “continuous trigger” theory with respect to insurance coverage. Under this theory, insurance coverage is deemed to be triggered from the time a claimant is first exposed to asbestos until the manifestation of any disease. This interpretation of a policy trigger can involve insurance policies over many years and increases insurance companies’ exposure to liability. Generally, judicial interpretations and legislative actions have attempted to maximize insurance availability from both a coverage and liability standpoint.
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.
those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket, which preserves the right to pursue litigation in the future.
reporting asbestos claims for the first time. Based on these developments, we increased our net asbestos loss reserves by $51 million in 2013, $28 million in 2012 and $22 million in 2011.
The following table presents the number of policyholders with open claims and the related net loss reserves at December 31, 2013 as well as the net losses paid during 2013 by component.
the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims;
the volume of claims by plaintiffs suffering from other malignancies such as lung cancer and their ability to establish a causal link between their disease and exposure to asbestos;
the efforts by insureds to claim the right to non-products coverage not subject to aggregate limits;
The following table presents a reconciliation of our beginning and ending loss reserves, net of reinsurance recoverable, related to toxic waste claims. Reinsurance recoverable related to these claims is minimal.
A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years ended December 31, 2013 is as follows:
The following table presents the overall prior year loss development for the three years ended December 31, 2013 by accident year.
The net favorable development of $712 million in 2013 was due to various factors. The most significant factors were:
period of years. Due to the cumulative favorable recent experience, however, this lower emergence was reflected in our determination of carried loss reserves for these classes at December 31, 2013.
We experienced overall favorable development of about $260 million in the professional liability classes other than fidelity. This favorable development was driven by the directors and officers liability and fiduciary liability classes, partially offset by adverse development in the errors and omissions liability and employment practices liability classes. Overall, the reported loss activity was less than expected, with aggregate favorable emergence from accident years 2010 and prior. This development was recognized as one among many factors in the determination of carried loss reserves for these classes at December 31, 2013. Among other important factors were the continued uncertainty from the crisis in the financial markets and its aftermath, the effects of the ensuing economic downturn and other recent litigation dynamics, as well as the positive pricing trends experienced in the last two years.
We experienced unfavorable development of about $50 million in the fidelity class due to higher than expected reported loss emergence, related mostly to accident years subsequent to 2007. Loss reserve estimates at the end of 2012 included an expectation of less prior year loss activity than actually occurred in 2013. This activity was driven by unfavorable development on a relatively small number of claims related to the recent economic and financial environment. This continued adverse development was reflected in the determination of carried loss reserves for this class at December 31, 2013.
We experienced favorable development of about $35 million in the personal automobile business due primarily to more favorable case reserve development and lower severity of prior period claims than expected. This factor was reflected in our determination of carried loss reserves for this class at December 31, 2013.
liability and fiduciary liability classes, partially offset by adverse development in the errors and omissions liability and employment practices liability classes. Overall, the reported loss activity was less than expected, with aggregate favorable emergence from accident years 2008 and prior partly offset by some adverse emergence in the more recent accident years.
We experienced favorable development of about $40 million in the personal automobile business due primarily to lower than expected frequency of prior period claims.
We experienced favorable development of about $25 million in the surety business due to lower than expected loss emergence in 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 2013. The variability in reserve development over
Our U.S. property and casualty insurance 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 for the nine years prior to 2013. It is our intention to post the Schedule P for our combined U.S. property and casualty insurance subsidiaries on our website as soon as it becomes available.
Other income and charges, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was income of $6 million in 2013 compared with income of $10 million and $21 million in 2012 and 2011, respectively. The income in 2013, 2012 and 2011 primarily included income from several small property and casualty insurance companies in which we have an interest.
The net realized gains and losses of other invested assets include 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.
Chubb has outstanding $600 million of 5.75% notes and $100 million of 6.6% debentures due in 2018, $200 million of 6.8% debentures due in 2031, $800 million of 6% notes due in 2037 and $600 million of 6.5% notes due in 2038, all of which are unsecured.
As of December 31, 2013, $107 million remained under the January 2013 share repurchase authorization.
On January 30, 2014, the Board of Directors authorized the repurchase of up to $1.5 billion of Chubb’s common stock. The authorization has no expiration date. We expect to complete the repurchase of shares under this authorization by the end of January 2015, subject to market conditions and other factors.
Credit ratings assess a company’s ability to make timely payments of interest and principal on its debt. The following table presents Chubb’s credit ratings as determined by the major independent rating organizations as of February 26, 2014.
Our strong underwriting and investment results generated substantial operating cash flows in each of the last three years. In 2013, cash provided by the property and casualty subsidiaries’ operating activities decreased approximately $530 million compared with 2012 primarily as a result of higher tax payments and higher loss payments. The higher tax payments in 2013 are attributable to improved profitability compared with 2012. The higher amount of loss payments in 2013 compared with 2012 reflected substantially higher catastrophe-related payments during the year, including payments related to Storm Sandy. In 2013, cash provided by the property and casualty subsidiaries’ operating activities exceeded cash used for financing activities by the property and casualty subsidiaries (primarily the
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. In the United States, 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.
Chubb has 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, 2013, 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.
The following table provides our future payments due by period under contractual obligations as of December 31, 2013, aggregated by type of obligation.
(c) There is typically no stated contractual commitment associated with property and casualty insurance loss reserves. The obligation to pay a claim arises only when a covered loss event occurs and a settlement is reached. The vast majority of our loss reserves relate to claims for which settlements have not yet been reached. Our loss reserves therefore represent estimates of future payments. These estimates are dependent on the outcome of claim settlements that will occur over many years. Accordingly, the payment of the loss reserves is not fixed as to either amount or timing. The estimate of the timing of future payments is based on our historical loss payment patterns. The ultimate amount and timing of loss payments will likely differ from our estimate and the differences could be material. We expect that these loss payments will be funded, in large part, by future cash receipts from operations.
The above table excludes certain commitments totaling approximately $660 million at December 31, 2013 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 Corporation does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the Corporation’s financial condition, results of operations, liquidity or capital resources, other than as disclosed in Note (12) of the Notes to Consolidated Financial Statements.
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, 2013, we had investments in about 85 separate partnerships. We review the performance of these investments on a quarterly basis and we obtain audited financial statements annually.
During 2013 and 2012, we increased our holdings of corporate bonds and we reduced our holdings of tax exempt fixed maturities, mortgage-backed securities and private equity limited partnerships. 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. 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, 2013, 62% of our U.S. fixed maturity portfolio was invested in tax exempt securities compared with 65% and 68% at December 31, 2012 and December 31, 2011, respectively.
The net unrealized appreciation before tax of our fixed maturities and equity securities carried at fair value was $1.9 billion at December 31, 2013, $3.1 billion at December 31, 2012 and $2.7 billion at December 31, 2011. Such unrealized appreciation is reflected in accumulated other comprehensive income, net of applicable deferred income taxes.
At December 31, 2013 and December 31, 2012, a pricing service provided 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, 2013 and December 31, 2012, 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.
In 2013, the liability related to our pension and other postretirement plans decreased, primarily as a result of actuarial gains attributable to the increase in the discount rates used to value our pension and other postretirement obligations and an increase in the fair value of the assets held by our pension and other postretirement benefit plans in excess of the expected return on plan assets. Postretirement benefits costs not recognized in net income decreased by $715 million before tax, which was reflected in other comprehensive income, net of applicable deferred income taxes.
In 2012, the liability related to our pension and other postretirement benefit plans increased, primarily as a result of actuarial losses attributable to the decline in the discount rates used to value our pension and other postretirement obligations, partially offset by an increase in the fair value of the assets held by our pension and other postretirement benefit plans in excess of the expected return on plan assets. In 2011, the liability related to our pension and other postretirement benefit plans increased, primarily as a result of actuarial losses attributable to the decline in the discount rates used to value our pension and other postretirement obligations, and, to a lesser extent, lower than expected return on plan assets. Postretirement benefit costs not recognized in net income increased by $45 million before tax in 2012 and $329 million before tax in 2011, which were reflected in other comprehensive income, net of applicable deferred income taxes.
Employee benefits are discussed further in Note (10) of the Notes to Consolidated Financial Statements.
In January 2014, severe winter weather occurred in the United States. That weather resulted in two declared catastrophes related to the freezing and winter storms that occurred between January 3 and January 8 in 19 states. In January, we announced that we estimated the aggregate losses from these catastrophes to be $150 million to $200 million before tax. The impact of these catastrophes will be reflected in our first quarter 2014 results.
Consolidated financial statements of the Corporation at December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 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, 2013 are listed in Item 15(a) of this report.