Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding our loss reserve and reinsurance recoverable estimates; asbestos and toxic waste liabilities and related developments; the number and severity of surety-related claims; the impact of changes to our reinsurance program in 2010 and the cost of reinsurance in 2011; the adequacy of the rates at which we renewed and wrote new business; premium volume and competition in 2011; property and casualty investment income during 2011; cash flows generated by our fixed income investments; currency rate fluctuations; estimates with respect to our credit derivatives exposure; the repurchase of common stock under our share repurchase program; our capital adequacy and funding of liquidity needs; the funding and timing of loss payments; and the redemption of our capital securities. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with:
premium pricing and profitability or growth estimates overall or by lines of business or geographic area, and related expectations with respect to the timing and terms of any required regulatory approvals;
the impact of economic factors on companies on whose behalf we have issued surety bonds, and in particular, on those companies that file for bankruptcy or otherwise experience deterioration in creditworthiness;
claims and litigation arising out of stock option “backdating,” “spring loading” and other equity grant practices by public companies;
Property and casualty investment income after tax increased by 1% in 2010 and decreased by 3% in 2009. The increase in 2010 reflected the positive effect of currency fluctuation on income from our non-U.S. investments, in what continued to be a low yield investment environment. The decline in 2009 was due to lower yields, particularly on short term investments, as well as the negative effect of currency fluctuation on income from our non-U.S. investments. Management uses
property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment performance because it reflects the impact of any change in the proportion of the investment portfolio invested in tax exempt securities and is therefore more meaningful for analysis purposes than investment income before income tax.
Property and casualty income before tax was lower in 2010 than in 2009 due to lower underwriting income. The decrease in underwriting income in 2010 was primarily the result of a higher impact of catastrophes during 2010, offset in part by a modest increase in underwriting profitability excluding the impact of catastrophes in the current accident year. Investment income in 2010 was slightly higher than in 2009. Property and casualty income before tax was higher in 2009 than in 2008 due to higher underwriting income, offset in part by lower investment income. The increase in underwriting income in 2009 was primarily due to a substantially lower impact of catastrophes, offset in part by a lower amount of favorable prior year loss development and a slight reduction in underwriting profitability excluding the impact of catastrophes in the current accident year. The decrease in investment income in 2009 was due to lower yields, particularly on short term investments, as well as the effects of currency fluctuation on income from our non-U.S. investments.
The profitability of our property and casualty insurance business depends on the results of both our underwriting and investment operations. We view these as two distinct operations since the underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.
Net premiums written increased by 1% in 2010 compared with 2009 and decreased by 6% in 2009 compared with 2008. Premiums in the United States, which represent about 74% of our total net premiums, decreased by 1% in 2010 and 6% in 2009. Premiums outside the U.S., expressed in U.S. dollars, increased by 9% in 2010 and decreased by 6% in 2009. In 2010, the increase in net premiums written outside the U.S. was largely attributable to the impact of the weaker U.S. dollar relative to several currencies in which we wrote business in 2010 compared to 2009. As a result, overall premium growth in 2010 benefited slightly from the impact of currency fluctuation on business written outside the U.S. In 2009, the decrease in net premiums written outside the U.S. was attributable to the impact of currency fluctuation due to the strength of the U.S. dollar. In 2010 and 2009, net premiums written outside the U.S. grew modestly when measured in local currencies.
In 2010 and 2009, we retained a high percentage of our existing customers and renewed those accounts at what we believe are acceptable rates relative to the risks. The percentage of accounts we successfully retained on renewal was higher for most classes of business in 2010 compared with 2009. Obtaining desirable new business was a challenge in both years. The overall level of new business improved slightly in 2010 over 2009 levels, as a modest increase in new commercial business was offset to a small extent by a decline in new professional liability business. In 2010, the slow improvement in the economic environment and the highly competitive market continued to make it difficult to obtain new business. The overall level of new business was down in 2009 compared with 2008, consistent with the decrease in demand in nearly all classes of our business caused by the general economic downturn.
The highly competitive market is likely to continue in 2011. Although there were some signs during 2010 that the economy was improving, it remains uncertain whether the improvement will continue and will be sustained. Even if an economic recovery does occur, any resulting growth in premiums will lag any recovery that takes place. We expect our net written premiums will be flat or slightly higher in 2011 compared with 2010, assuming average foreign currency to U.S. dollar exchange rates in 2011 remain similar to 2010 year-end levels.
Reinsurance assumed net premiums written decreased by 62% in 2010 and 67% in 2009. This business has been in run-off since the sale of our ongoing reinsurance assumed business in December 2005.
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 the 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 certain years, we cede premiums to reinsurance companies and receive few, if any, loss recoveries. However, in a year in which there is a significant catastrophic event 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, 2010 is presented in Note (9) of the Notes to Consolidated Financial Statements.
The catastrophe bond coverages generally 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 three catastrophe bond coverages in effect: a $250 million reinsurance arrangement that expires in April 2011 that provides coverage for homeowners-related hurricane losses in the northeastern part of the United States; a $200 million reinsurance arrangement that expires in March 2011 that provides coverage for homeowners and commercial exposures for loss events in the northeastern part of the United States (for losses occurring elsewhere in the continental United States or Canada, the coverage is limited to $55 million); and a $150 million reinsurance arrangement that expires in March 2012 that provides coverage for homeowners-related hurricane losses in Florida.
For hurricane events in Florida, we have reinsurance from the Florida Hurricane Catastrophe Fund (FHCF), which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane losses. Our participation in this program limits our initial retention in Florida for homeowners-related losses to approximately $155 million and provides coverage of 90% of covered losses between approximately $155 million and $560 million. Additionally, certain catastrophe bond coverages provide coverage of approximately 50% of Florida homeowners-related hurricane losses between $850 million and $1.15 billion.
We did not have any recoveries from our primary catastrophe reinsurance treaties during the three year period ended December 31, 2010 because there was no individual catastrophe for which our losses exceeded our retention under the treaties. Under a region-specific property catastrophe reinsurance treaty, we expect to recover about $60 million of our gross losses related to the 2010 earthquake in Chile.
Net premiums written from personal insurance, which represented 34% of our premiums written in 2010, increased by 5% in 2010 and decreased by 4% in 2009 compared with the respective prior years. Net premiums written for the classes of business within the personal insurance segment were as follows:
Personal automobile premiums increased in 2010, reflecting new business growth in select non-U.S. locations and the positive impact of currency fluctuation on business written outside the United States. Personal automobile premiums in the U.S. decreased slightly in 2010. Personal automobile premiums decreased in 2009 due to a highly competitive U.S. marketplace as well as the negative impact of currency fluctuation on business written outside the United States. Premiums for our homeowners business increased slightly in 2010 after decreasing in 2009. Premium growth in this business was constrained in both 2010 and 2009 due to the downturn in the U.S. economy that began in 2008, which resulted in a slowdown in new housing construction as well as lower demand for jewelry and fine arts policy endorsements. Premiums from our other personal business, which includes insurance for accident and health, excess liability and yacht, increased in 2010 after a decrease in 2009. The growth in 2010 was primarily in our non-U.S. accident business and approximately half was attributable to the effect of currency fluctuation. The decrease in 2009 was driven by our accident and health business, due primarily to the effect of currency fluctuation on the non-U.S. component of this business. The adverse impact of currency fluctuation in 2009 was offset in part by growth in the U.S. component of this business, due primarily to a select initiative. Excess liability premiums grew modestly in 2010 and were flat in 2009.
Our personal automobile results were profitable in each of the past three years. Results in all three years benefited from modest favorable prior year loss development and generally lower claim frequency.
Homeowners results were highly profitable in each of the last three years, but less so in 2010 due to higher catastrophe losses. The impact of catastrophes accounted for 15.6 percentage points of the combined loss and expense ratio for this class in 2010 compared with 1.5 percentage points in 2009 and 7.8 percentage points in 2008. Results in 2009 and 2008 were adversely impacted by a higher frequency and severity of large non-catastrophe losses.
Multiple peril results were profitable in 2010 compared with highly profitable results in 2009 and 2008. The less profitable results in 2010 compared with 2009 were due primarily to a higher impact of catastrophes in the property component of this business and, to a lesser extent, less profitable results in the liability component. The liability component deteriorated in 2010 compared to 2009 due to margin compression in the current accident year, as rate changes did not keep pace with the projected costs. Substantial improvement in the property component of the multiple peril business in 2009 compared with 2008, due to lower catastrophe losses, was offset by less profitable results in the liability component, due in part to a lower amount of favorable prior year loss development. The impact of catastrophes accounted for 10.3 percentage points of the combined loss and expense ratio for the multiple peril class in 2010 compared with 1.6 percentage points in 2009 and 8.5 percentage points in 2008. The property component benefited from low non-catastrophe losses in all three years, particularly outside the United States in both 2010 and 2008.
Workers’ compensation results were profitable in 2010 and 2009 compared with highly profitable results in 2008. Results in these years benefited from our disciplined risk selection during the past several years. Results in 2010 and 2009 were less profitable than the respective prior year due in part to the cumulative effect of rate decreases over the past several years. Prior year loss development was slightly favorable in 2010, slightly unfavorable in 2009 and modestly favorable in 2008.
Property and marine results were profitable in 2010 compared with highly profitable results in 2009 and unprofitable results in 2008. The less profitable results in 2010 compared to 2009 were due to higher catastrophe losses. The unprofitable results in 2008 were due primarily to high catastrophe losses and, to a lesser extent, a high frequency of large non-catastrophe losses. Catastrophe losses accounted for 8.9 percentage points of the combined loss and expense ratio in 2010 compared with 1.5 percentage points in 2009 and 22.1 percentage points in 2008. Excluding the impact of catastrophes, the combined ratio was 81.6%, 81.8% and 86.7% in 2010, 2009 and 2008, respectively.
Net premiums written from specialty insurance, which represented 24% of our premiums written in 2010, were flat in 2010 and decreased by 6% in 2009 compared with the respective prior years. Net premiums written for the classes of business within the specialty insurance segment were as follows:
Net premiums written in our professional liability business decreased 1% in 2010 compared with 2009 due to the continuing effect of the economic downturn and a highly competitive marketplace. A slight overall decrease in renewal rates and modestly reduced new business volume were partially offset by the effect of strong retention of our expiring policies in 2010 compared with 2009. Premium growth in our professional liability business in 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States. The decrease in net premiums written in our professional liability classes of business in 2009 was due to several factors. The continuation of the adverse effects of the economic downturn and a highly competitive marketplace in 2009 contributed to a modest decrease in retention levels, fewer attractive new business opportunities and fewer nonrecurring and merger and acquisition related coverage opportunities. In addition, the negative impact of currency fluctuation on business written outside the United States contributed to the decline in premiums in 2009.
Retention levels in the professional liability classes remained strong over the last three years. New business volume declined in each of the past two years, due in varying degrees to the competition in the marketplace as well as the effects of the economic downturn. The decline in new business was greater in 2009 due to a decrease in demand for insurance resulting from the economic downturn, even though we obtained some new business as a result of the market dislocation in the insurance industry. We maintained our focus on small and middle market publicly traded and privately held companies and our commitment to maintaining underwriting discipline in this environment. We continued to obtain what we believe are acceptable rates and appropriate terms and conditions on both new and renewal business.
Premium growth in our surety business was constrained in 2010 and 2009 by the competitive environment and the impact of the weaker economy on the construction business. The slight growth in 2010 was attributable to new business in non-U.S. locations.
Our professional liability business produced highly profitable results in each of the past three years. The profitability of our professional liability business was particularly strong outside the United States in all three years. The employment practices liability and fiduciary liability classes each produced highly profitable results in each of the three past years. The directors and officers liability class was profitable in all three years, particularly in 2010. The fidelity class was profitable in each of the past three years, but less so in each successive year, due in part to increased large loss activity resulting from alleged third-party and insured-employee criminal activity in recent years. Our errors and omissions liability business produced highly unprofitable results in 2010 and 2009 compared with near breakeven results in 2008 due to the impact of the financial crisis related claims against financial institutions and differences in prior year loss development among the years.
Our surety business produced highly profitable results in each of the past three years due to favorable loss experience. Results in 2008 were less profitable than those in 2010 and 2009 due to the adverse impact of one large loss. Our surety business tends to be characterized by losses that are infrequent but have the potential to be highly severe. When losses occur, they are mitigated, at times, by recovery rights to the customer’s assets, contract payments, collateral and bankruptcy recoveries.
The extent of losses from a natural catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We regularly assess our concentration of risk exposures in natural catastrophe exposed areas globally and have strategies and underwriting standards to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in natural catastrophe exposed areas in the United States, such as California and the gulf and east coasts, as well as in natural catastrophe exposed areas in other countries. The information provided by the catastrophe modeling and the risk concentration management tool has resulted in our non-renewing some accounts and refraining from writing others. Actual results may differ materially from those suggested by the model. 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 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.
Despite these efforts, the occurrence of one or more severe natural catastrophic events in heavily populated areas could have a material adverse effect on the Corporation’s results of operations, financial condition or liquidity.
The September 11, 2001 attack changed the way the property and casualty insurance industry views catastrophic risk. That tragic event demonstrated that numerous classes of business we write are subject to terrorism related catastrophic risks in addition to the catastrophic risks related to natural occurrences. This, together with the limited availability of terrorism reinsurance, has required us to change how we identify and evaluate risk accumulations. We have licensed a terrorism model that provides loss estimates under numerous event scenarios. Actual results may differ materially from those suggested by the model. The risk concentration management tool referred to above also enables us to identify locations and geographic areas that are exposed to risk accumulations. The information provided by the terrorism model and the risk concentration management tool has resulted in our non-renewing some accounts, subject to regulatory constraints, and refraining from writing others.
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 the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $900 million in 2011.
We regularly review our loss reserves using a variety of actuarial techniques. We update the reserve estimates as historical loss experience develops, additional claims are reported and/or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed.
Incurred but not reported (IBNR) reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which are not yet known to the insured, as well as a provision for future development on reported claims. A relatively large proportion of our net loss reserves, particularly for long tail liability classes, are reserves for IBNR losses. In fact, more than 70% of our aggregate net loss reserves at December 31, 2010 were for IBNR losses.
Total gross case reserves related to our insurance business decreased by $248 million in 2010. A majority of this decrease was in the professional liability business primarily due to the settlement in 2010 of a significant number of large losses that were unpaid as of December 31, 2009.
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, 2010 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, 2010 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, 2010 were $20.9 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.
In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions change. These issues have had, and may continue to have, a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of such issues include professional liability claims arising out of the recent crisis in the financial markets, directors and officers liability claims arising out of stock option “backdating” practices by certain public companies, directors and officers liability and errors and omissions liability claims arising out of investment banking practices and accounting and other corporate malfeasance, and exposure to claims asserted for bodily injury as a result of long term exposure to harmful products or substances. As a result of issues such as these, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have grown, further complicating the already complex loss reserving process.
We believe that the loss reserves carried at December 31, 2010 for asbestos and toxic waste claims were adequate. However, given the judicial decisions and legislative actions that have broadened the scope of coverage and expanded theories of liability in the past and the possibilities of similar interpretations in the future, it is possible that our estimate of loss reserves relating to these exposures may increase in future periods as new information becomes available and as claims develop.
Asbestos claims against the major manufacturers, distributors or installers of asbestos products were typically presented under the products liability section of primary general liability policies as well as under excess liability policies, both of which typically had aggregate limits that capped an insurer’s exposure. In recent years, a number of asbestos claims by insureds are being presented as “non-products” claims, such as those by installers of asbestos products and by property owners or operators who allegedly had asbestos on their property, under the premises or operations section of primary general liability policies. Unlike products exposures, these non-products exposures typically had no aggregate limits on coverage, creating potentially greater exposure. Further, in an effort to seek additional
insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits. It is difficult to predict whether insureds will be successful in asserting claims under non-products coverage or whether insurers will be successful in asserting additional defenses. Accordingly, the ultimate cost to insurers of the claims for coverage not subject to aggregate limits is uncertain.
Most PRPs named to date are parties who have been generators, transporters, past or present landowners or past or present site operators. These PRPs had proper government authorization in many instances. However, relative fault has not been a factor in establishing liability. Insurance policies issued to PRPs were not intended to cover claims arising from gradual pollution. Since 1986, most policies have specifically excluded such exposures.
In each of the past three years, the analysis of our toxic waste exposures indicated that some of our insureds had become responsible for the remediation of additional polluted sites and that, as clean up standards continue to evolve as a result of technology advances, the estimated cost of remediation of certain sites had increased. Based on these developments, we increased our net toxic waste loss reserves by $61 million in 2010, $90 million in 2009 and $85 million in 2008.
The net favorable development of $746 million in 2010 was due to various factors. The most significant factors were:
We experienced favorable development of about $265 million in the aggregate in the personal and commercial liability classes. Favorable development in the more recent accident years, particularly in accident years 2004 to 2008, more than offset adverse development in accident years 2000 and prior, which included $61 million of incurred losses related to toxic waste claims. The overall frequency and severity of prior period liability claims were lower than expected and the effects of underwriting changes that affected these years have been more positive than expected, especially in the commercial excess liability class. These factors were reflected in the determination of the carried loss reserves for these classes at December 31, 2010.
We experienced favorable development of about $40 million in the surety business due to lower than expected loss emergence in recent accident years. Loss reserve estimates at the end of 2009 in this class included an expectation of more late reported losses than actually occurred in 2010. However, since the experience in this class is volatile and we would still expect such losses to occur over time, the favorable development in 2010 was given only modest weight in our determination of carried surety loss reserves at December 31, 2010.
We experienced favorable development of about $25 million in the run-off of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
We experienced favorable development of about $340 million in the professional liability classes other than fidelity, including about $110 million outside the U.S. A significant amount of favorable development occurred in the directors and officers liability, fiduciary liability and employment practices liability classes. We had a modest amount of unfavorable development in the errors and omissions liability class, particularly outside the U.S. A majority of the favorable development in the professional liability classes was in accident years 2004 through 2006. 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 $150 million in the aggregate in the commercial and personal liability classes. Favorable development in more recent accident years, particularly 2004 through 2006, was partially offset by adverse development in accident years 1999 and prior, which included $90 million of incurred losses related to toxic waste claims. The frequency and severity of prior period excess and primary liability claims have been generally lower than expected and the effects of underwriting changes that affected these years appear to have been more positive than expected.
We experienced favorable development of about $55 million in the run-off of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
We experienced favorable development of about $30 million in the personal automobile business due primarily to lower than expected severity.
We experienced favorable development of about $120 million in the commercial liability classes. Favorable development, particularly in excess liability and multiple peril liability classes in accident years 2002 through 2006, more than offset adverse development in accident years prior to 1998, which was mostly due to $85 million of incurred losses related to toxic waste claims.
Property and casualty investment income before taxes increased by 1% in 2010 compared with 2009 and decreased by 5% in 2009 compared with 2008. The impact of growth in average invested assets on investment income in 2010 compared to 2009 was substantially offset by the impact of lower average yields on our investment portfolio. The decrease in the average yield of our investment portfolio in 2010 primarily resulted from lower reinvestment yields on fixed maturity securities that matured, were redeemed by the issuer or were sold during the year. Investment income in 2010 benefited slightly from the impact of currency fluctuation on income from our non-U.S. investments. Lower yields, primarily on short term investments, contributed to the decrease in investment income in 2009. In addition, almost half of the decline in 2009 was related to currency fluctuation on income from our non-U.S. investments. The growth in investment income in 2010 and 2009 was limited as average invested assets increased only modestly as a result of substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2010, 2009 and 2008.
If investment yields and average foreign currency to U.S. dollar exchange rates in 2011 are similar to 2010 year-end levels, property and casualty investment income after taxes for 2011 is expected to decline modestly. This expected decline is primarily as a result of the assumption that funds from maturing securities will be reinvested in securities with yields lower than the yields of the maturing securities.
The net realized gains and losses of other invested assets represent primarily the aggregate of 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, these investments are generally reported on a one quarter lag. The net realized gains of the limited partnerships reported in 2010 reflected the strong performance of the equity and high yield investment markets in the fourth quarter of 2009 and for the first nine months of 2010.
We regularly review those invested assets whose fair value is less than cost to determine if an other-than-temporary decline in value has occurred. We have a monitoring process overseen by a committee of investment and accounting professionals that is responsible for identifying those securities to be specifically evaluated for a potential other-than-temporary impairment.
market conditions and industry or sector specific factors. The decision to recognize a decline in the value of a security carried at fair value as other than temporary rather than temporary has no impact on shareholders’ equity.
In determining whether fixed maturities are other than temporarily impaired, prior to April 1, 2009, we considered many factors including the intent and ability to hold a security for a period of time sufficient to allow for the recovery of the security’s cost. When an impairment was deemed other than temporary, the security was written down to fair value and the entire writedown was included in net income as a realized investment loss. Effective April 1, 2009, the Corporation adopted new guidance which modified the previous guidance on the recognition and presentation of other-than-temporary impairments of debt securities. Under the new guidance, we are required to recognize an other-than-temporary impairment loss for a fixed maturity when we conclude that we have the intent to sell or it is more likely than not that we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely it will not recover the amortized cost value of an impaired security. Also under this guidance, if we have the intent to sell or it is more likely than not we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value, the security is written down to fair value and the entire amount of the writedown is included in net income as a realized investment loss. For all other impaired fixed maturities, the impairment loss is separated into the amount representing the credit loss and the amount representing the loss related to all other factors. The amount of the impairment loss that represents the credit loss is included in net income as a realized investment loss and the amount of the impairment loss that relates to all other factors is included in other comprehensive income.
During each of the last three years, particularly during 2008 as a result of the significant financial market disruption, the fair value of some of our investments declined to a level below our cost. Some of these investments were deemed to be other-than-temporarily impaired. The issuers of the equity securities deemed to be other-than-temporarily impaired in each of the last three years were not concentrated within any individual industry or sector. About 75% of the fixed maturities deemed to be other than temporarily impaired in 2008 were corporate securities within the financial services sector.
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At December 31, 2010, the Corporation had shareholders’ equity of $15.5 billion and total debt of $4.0 billion.
Chubb has outstanding $400 million of 6% notes due in 2011, $275 million of 5.2% notes due in 2013, $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.
commercially reasonable efforts, subject to certain market disruption events, to sell enough qualifying capital securities to permit repayment of the capital securities on the scheduled maturity date or as soon thereafter as possible. Any remaining outstanding principal amount will be due on March 29, 2067, the final maturity date. The capital securities bear interest at a fixed rate of 6.375% through April 14, 2017. Thereafter, the capital securities will bear interest at a rate equal to the three-month LIBOR rate plus 2.25%. Subject to certain conditions, Chubb has the right to defer the payment of interest on the capital securities for a period not exceeding ten consecutive years. During any such period, interest will continue to accrue and Chubb generally may not declare or pay any dividends on or purchase any shares of its capital stock.
In 2007, 2008 and 2009, the Board of Directors authorized the repurchase of up to 28,000,000 shares, 20,000,000 shares and 25,000,000 shares, respectively, of common stock. In June 2010, the Board of Directors authorized an increase of 14,000,000 shares of common stock to the authorization approved in 2009. As of December 31, 2010, no shares remained under these share repurchase authorizations. In December 2010, the Board of Directors authorized the repurchase of up to an additional 30,000,000 shares of common stock.
Credit ratings assess a company’s ability to make timely payments of interest and principal on its debt. Financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders.
more limited means to access capital. A downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.
The Corporation’s liquidity requirements in the past have generally been met by funds from operations and we expect that in the future funds from operations will continue to be sufficient to meet such requirements. Liquidity requirements could also be met by funds received upon the maturity or sale of marketable securities in our investment portfolio. The Corporation also has the ability to borrow under its existing $500 million credit facility and we believe we could issue debt or equity securities.
Our property and casualty subsidiaries maintain substantial investments in highly liquid, short term marketable securities. Accordingly, we do not anticipate selling long term fixed maturity investments to meet any liquidity needs.
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, 2010, we had investments in about 80 separate partnerships. We review the performance of these investments on a quarterly basis and we obtain audited financial statements annually.
In our U.S. operations, during 2010, we invested new cash primarily in tax exempt fixed maturities and we reduced our holdings of mortgage-backed securities. In 2009 and 2008, we invested new cash in tax exempt fixed maturities and taxable fixed maturities. The taxable fixed maturities we invested in were corporate bonds while we reduced our holdings of mortgage-backed securities. Our objective is to achieve the appropriate mix of taxable and tax exempt securities in our portfolio to balance both investment and tax strategies. At December 31, 2010 and December 31, 2009, 67% of our U.S. fixed maturity portfolio was invested in tax exempt securities compared with 69% at December 31, 2008.
Credit spreads, which refer to the difference between a risk-free yield (the yield on U.S. Treasury securities) and the actual yields on all other fixed maturity investments, decreased significantly for almost all fixed maturity investments during 2009 due to improvements in the financial markets. This resulted in an increase in the fair value of many of our fixed maturity investments. The fair value of our equity investments increased in 2009 due to the improvements in the financial markets. During 2008, credit spreads increased significantly due to declines in the financial markets. This resulted in the decrease in the fair value of many of our fixed maturity investments. The fair value of our equity securities also decreased in 2008 due to the weakness in the financial markets.
We use a pricing service to estimate fair value measurements 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, 2010 and December 31, 2009, we did not hold financial instruments in our investment portfolio for which a lack of market liquidity impacted our determination of fair value.
In 2010, as a result of continued improvement in the financial markets, the fair value of the assets in our pension and other postretirement benefit plans increased. Postretirement benefit costs not recognized in net income decreased by $20 million, which was reflected in other comprehensive income, net of applicable deferred income taxes. This decline reflected the periodic amortization of net actuarial loss and prior service cost 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 substantially offset by actuarial losses primarily from a decrease in the discount rates used to value our pension benefit obligations.