Diluted net income per share of $6.62 in 2010 increased by 5% over diluted net income per share of $6.33 in 2009, despite a decrease in reported net income, due to the favorable impact of common share repurchases over the previous twelve months. Net income of $3.22 billion in 2010 was $406 million lower than in 2009, primarily reflecting a significant increase in catastrophe losses, a modest decline in net favorable prior year reserve development and reduced underwriting margins related to pricing and loss cost trends, partially offset by increases in net investment income and net realized investment gains. The cost of catastrophes in 2010 and 2009 totaled $1.11 billion and $457 million, respectively. Net favorable prior year reserve development in 2010 and 2009 totaled $1.25 billion and $1.33 billion, respectively. In addition, net income in 2009 reflected a reduction in income tax expense of $89 million resulting from the favorable resolution of various prior year tax
In 2009, operating income of $2.59 billion was $252 million, or 11%, higher than 2008 operating income of $2.34 billion, primarily reflecting the significant decline in catastrophe losses, which was partially offset by reduced underwriting margins and fee income. Catastrophe losses in 2009 and 2008 totaled $176 million and $706 million, respectively. The 2008 total was principally comprised of $642 million of claims and claim adjustment expenses and $62 million of property windpool assessments that were included in general and administrative expenses. Net favorable prior year reserve development totaled $1.03 billion and $1.12 billion in 2009 and 2008, respectively. Operating income in 2009 also included the favorable resolution of various prior year tax matters and reduction in the estimate of property windpool assessments benefits described above.
Industry-Focused Underwriting. Net written premiums of $2.30 billion in 2010 increased 1% over 2009. Premium growth in 2010 was concentrated in the Technology, Agribusiness and Oil & Gas business units. In the Technology business unit, the 3% growth in net written premiums over 2009 reflected continued strong business retention rates and new business levels. In the Agribusiness business unit, the 5% growth in net written premiums was primarily driven by an increase in renewal premium changes and strong business retention rates. In the Oil & Gas business unit, net written premiums increased by 3% over 2009, primarily reflecting a decline in ceded premiums.
In 2009, net written premiums of $1.57 billion were 2% lower than in 2008, primarily due to the Inland Marine and Ocean Marine business units, reflecting the impact of general economic conditions and a decline in new business volume. Partially offsetting the declines in these business units was strong growth in National Property premium volume in 2009 due to significant increases in renewal premium changes. Excess Casualty written premiums also increased over 2008, due to a change in the terms of certain reinsurance treaties that resulted in a higher level of business retained.
In 2010, net written premiums in the Agency Homeowners and Other line of business increased 8% over 2009, primarily driven by increases in renewal premium changes, business retention rates and new business levels.
In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers' conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. The Company anticipates the filing of other direct actions against insurers, including the Company, in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions.
As in prior years, the annual claim review considered active policyholders and litigation cases for potential product and "non-product" liability. Compared with the prior year period, the Home Office and Field Office categories, which account for the vast majority of policyholders with active asbestos-related claims, experienced an overall reduction in the number of policyholders who, for the first time, were tendering asbestos claims. However, gross defense and indemnity payment patterns in these categories remained consistent with what the Company has experienced in recent years due to the high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury continue to target previously peripheral defendants.
The following table shows the geographic distribution of the $32.24 billion of municipal bonds at December 31, 2010 that were not pre-refunded.
including trust agreements, escrow funds and letters of credit, under certain reinsurance agreements. The Company monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. After reinsurance is purchased, the Company has limited ability to manage the credit risk to a reinsurer. In addition, in a number of jurisdictions, particularly the European Union and the United Kingdom, a reinsurer is permitted to transfer a reinsurance arrangement to another reinsurer, which may be less creditworthy, without a counterparty's consent, provided that the transfer has been approved by the applicable regulatory and/or court authority.
Catastrophe losses are inherently unpredictable from year to year, and the Company's results of operations would be adversely impacted by significant catastrophe losses in 2011.
The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those years. In accordance with the provisions of the guidance, all prior-period basic and diluted EPS data presented were restated to reflect the retrospective application of its computational guidance. The adoption of the guidance on January 1, 2009 did not have a material effect on the Company's basic or diluted EPS.
For structured fixed maturity securities (primarily residential and commercial mortgage-backed securities, collateralized mortgage obligations and pass-through securities), the Company estimates the present value of the security by projecting future cash flows of the assets underlying the securitization, allocating the flows to the various tranches based on the structure of the securitization, and determining the present value of the cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). The Company incorporates levels of delinquencies, defaults and severities as well as credit attributes of the remaining assets in the securitization, along with other economic data, to arrive at its best estimate of the parameters applied to the assets underlying the securitization. In order to project cash flows, the following assumptions are applied to the assets underlying the securitization: (1) voluntary prepayment rates, (2) default rates and (3) loss severity. The key assumptions made for the Prime, Alt-A and Sub-Prime mortgage-backed securities at December 31, 2010 were as follows:
The fair value of commercial paper included in debt outstanding at December 31, 2010 and 2009 approximated its book value because of its short-term nature.
In choosing the expected long-term rate of return on plan assets, the Company's Pension Plan Investment Committee considered the historical returns of equity and fixed maturity markets in conjunction with today's economic and financial market conditions.
Future minimum annual rental payments under noncancellable operating leases for 2011, 2012, 2013, 2014, 2015 are $159 million, $136 million, $100 million, $79 million, $64 million, respectively, and $75 million for 2016 and thereafter. Future sublease rental income aggregating approximately $6 million will partially offset these commitments.