Reserves Other than Those Relating to Asbestos and Toxic Waste Claims
global political conditions and the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events;
claims and litigation arising out of actual or alleged accounting or other corporate malfeasance by other companies;
claims and litigation relating to uncertainty in the credit and broader financial markets; and
general political, economic and market conditions, whether globally or in the markets in which we operate, including:
The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables and the evaluation of whether a decline in value of any investment is temporary or other than temporary. These estimates and judgments, which are discussed within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.
Net income was $1.7 billion in 2011 and $2.2 billion in both 2010 and 2009. The decrease in net income in 2011 compared with 2010 was due primarily to lower operating income and, to a lesser extent, lower net realized investment gains. Net income was similar in 2010 and 2009 as lower operating income in 2010 was offset by higher net realized investment gains. We define operating income as net income excluding realized investment gains and losses after tax.
Operating income was $1.5 billion in 2011, $1.9 billion in 2010 and $2.2 billion in 2009. The lower operating income in 2011 compared with that in 2010 and in 2010 compared with that in 2009 was due to lower underwriting income in our property and casualty insurance business, attributable in large part to an increasingly higher impact of catastrophes. Property and casualty investment income was flat in 2011 and increased slightly in 2010 compared with the respective prior year. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.
Underwriting results were profitable in 2011 and highly profitable in both 2010 and 2009. Our combined loss and expense ratio was 95.3% in 2011 compared with 89.3% in 2010 and 86.0% in 2009. The less profitable results in 2011 and 2010 compared to the respective prior year were primarily due to a substantially higher impact of catastrophes. The impact of catastrophes accounted for 8.9 percentage points of the combined ratio in 2011 compared with 5.7 percentage points in 2010 and 0.8 of a percentage point in 2009.
During 2011, 2010 and 2009, we experienced overall favorable development of $767 million, $746 million and $762 million, respectively, on loss reserves established as of the previous year end. The favorable development in 2011 and 2010 was due primarily to favorable loss experience in certain professional liability, commercial liability and personal insurance classes. The favorable development in 2009 was due primarily to favorable loss experience in certain professional liability and commercial liability classes as well as lower than expected emergence of losses in the homeowners and commercial property classes.
Total net premiums written increased by 5% in 2011 and 1% in 2010. Premium growth in 2010 was limited by the general economic downturn, especially in the United States. Growth in 2011 in the United States benefited from positive pricing trends in the standard commercial market as well as improving general economic conditions. Premium growth in both years benefited slightly from the impact of currency fluctuation on business written outside the United States. Net premiums written in the United States increased by 2% in 2011 and decreased by 1% in 2010. Net premiums written outside the United States increased by 11% in 2011 and 9% in 2010. Measured in local currencies, premiums outside the United States grew significantly in 2011 and modestly in 2010. In both years, overall premium growth reflected our emphasis on underwriting discipline in a highly competitive market.
Property and casualty investment income after tax was flat in 2011 and increased by 1% in 2010 in what continued to be a low yield investment environment. The increase in 2010 reflected the positive effect of currency fluctuation on income from our investments denominated in currencies other than the U.S. dollar. 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 the investment portfolio invested in tax exempt
Net premiums written amounted to $11.8 billion in 2011, $11.2 billion in 2010 and $11.1 billion in 2009.
The change in net premiums written is not presented since this business is in runoff.
Net premiums written increased by 5% in 2011 compared with 2010 and increased 1% in 2010 compared with 2009. Premiums written in the United States, which we define as premiums for U.S.-based exposures and which in 2011 represented about 72% of our total net premiums, increased by 2% in 2011 and decreased by 1% in 2010. Premiums written outside the United States, expressed in U.S. dollars, increased by 11% in 2011 and 9% in 2010. In both 2011 and 2010, the increase in net premiums written outside the United States included the positive impact of foreign currency fluctuation due to the impact of the weaker U.S. dollar relative to several currencies in which we wrote business in 2011 and 2010 compared to the respective prior year. As a result, overall premium growth in both 2011 and 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States. Measured in local currencies, net premiums written outside the United States grew in both years, but more significantly in 2011. We experienced particularly strong growth in our personal insurance business outside the United States in both years. The countries outside the United States which were significant contributors to net premiums written in recent years were the United Kingdom, Canada, Brazil, Australia and Germany.
In 2011 and 2010, we retained a high percentage of our existing customers and renewed those accounts at what we believe are acceptable rates relative to the risks. Overall, the percentage of business we retained on renewal was similar in 2011 compared with 2010. In both years, the slow improvement in the economic environment and the highly competitive market continued to make it challenging to obtain new business at acceptable rates. The overall level of new business improved slightly in 2011 compared with 2010, as an increase in new personal and commercial business, driven by business written outside the United States, was mostly offset by a modest decline in new professional liability business. The overall level of new business also 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.
The highly competitive market is likely to continue in 2012. Nevertheless, we expect that the positive pricing environment experienced in 2011, particularly in the commercial classes, will continue into 2012. In addition, there were some signs during 2011 that the economy was improving, which if it continues and is sustained, should have a positive impact on premiums, although there is typically a lag between a recovery and any resulting growth in premiums. We expect our net written premiums will be modestly higher in 2012 compared with 2011, assuming average foreign currency to U.S. dollar exchange rates in 2012 remain similar to 2011 year-end levels.
For property risks in the United States and Canada, we purchase traditional catastrophe reinsurance, including our primary treaty which we refer to as our North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our exposures in the northeastern United States. For certain exposures in the United States, we also have arranged for the purchase of multi-year, collateralized reinsurance funded through the issuance of collateralized risk linked securities, known as catastrophe bonds. For events outside the United States, we also purchase traditional catastrophe reinsurance.
The North American catastrophe treaty has an initial retention of $500 million and provides coverage for United States and Canadian exposures of approximately 64% of losses (net of recoveries from other available reinsurance) between $500 million and $1.65 billion. For catastrophic events in the northeastern part of the United States and in Florida, the North American catastrophe treaty, supplemental catastrophe reinsurance and/or the catastrophe bond arrangements provide additional coverages as discussed below.
In addition to catastrophe treaties, we also have a commercial property per risk treaty. This treaty provides coverage per risk of approximately $625 million to $850 million (depending upon the currency in which the insurance policy was issued) in excess of our initial retention. Our initial retention is generally between $25 million and $35 million.
Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated by foreign terrorists, and for nuclear, biological, chemical and radiological loss causes whether such acts are perpetrated by foreign or domestic terrorists.
After decreasing somewhat in 2010, reinsurance rates for property risks stabilized in 2011. Consequently, the overall cost of our property reinsurance program was similar in 2011 and 2010. We do not expect the changes we made to our reinsurance program during 2011 to have a material effect on the Corporation’s results of operations, financial condition or liquidity.
Our major, traditional property reinsurance treaties expire on April 1, 2012 and we are in the process of evaluating our 2012 property reinsurance program. Due to the significant worldwide catastrophe losses incurred by the industry in 2011, we expect that reinsurance rates for property risks will increase somewhat in 2012. The final structure of our reinsurance program and amount of coverage purchased, including the mixture of traditional catastrophe reinsurance and collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, is still being determined and will affect our total reinsurance costs in 2012.
In 2011, the impact of catastrophes was $1.0 billion, which represented 8.9 percentage points of the combined ratio. The impact of catastrophes was $634 million in 2010 and $91 million in 2009, which represented 5.7 percentage points and 0.8 percentage points, respectively, of the combined ratio. A significant portion of the catastrophe losses in 2011 related to flooding in Australia as well as tornadoes and other storms in the United States, including losses of about $300 million related to Hurricane Irene. A significant portion of the catastrophe losses in 2010 related to numerous storms in the United States and, to a lesser extent, an earthquake in Chile.
We did not have any recoveries from our primary catastrophe reinsurance treaties during the three year period ended December 31, 2011 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 made recoveries of about $60 million of our gross losses related to the 2010 earthquake in Chile.
Our expense ratio was higher in 2011 compared with 2010, which in turn was higher compared with 2009. The increase in 2011 was due primarily to an increase in commission rates on business written outside the United States partially offset by overhead expenses increasing at a lower rate than the rate of growth of premiums written. The increase in 2010 was due to an increase in commissions and, to a lesser extent, overhead expenses increasing at a rate that exceeded the rate of growth of premiums written. In both 2011 and 2010, our overall commission rate increased due primarily to premium growth outside the United States in classes of business with higher commission rates.
Net premiums written from personal insurance, which represented 34% of our premiums written in 2011, increased by 4% in 2011 and 5% in 2010 compared with the respective prior year. Net premiums written for the classes of business within the personal insurance segment were as follows:
Personal automobile premiums increased in 2011 and 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 United States increased slightly in 2011 and decreased slightly in 2010 as growth continued to be constrained by the highly competitive marketplace. Premiums for our homeowners business increased modestly in 2011 and increased slightly in 2010. Premium growth in this business has been constrained due to the downturn in the U.S. economy in recent years, which resulted in a slowdown in new housing construction as well as lower demand for jewelry and fine arts policy endorsements. In 2011, however, growth was achieved both inside and outside the United States, due primarily to new business and, to a lesser extent, increases in coverage on some existing policies. Premiums from our other personal business, which includes accident and health, excess liability and yacht coverages, increased slightly in 2011 due to moderate growth in the excess liability business. In accident and health, significant growth in our non-U.S. business in 2011, attributable to new business initiatives and, to a lesser extent, to the positive effect of currency fluctuation, was offset by a significant decrease in premiums in the United States, due to our decision to exit and run off the employer health care stop loss component of this business. The growth in other personal premiums in 2010 was primarily in our non-U.S. accident and health business and approximately half was attributable to the effect of currency fluctuation.
Homeowners results were breakeven in 2011 and highly profitable in 2010 and 2009. Results in each succeeding year were less profitable than the respective prior year due primarily to higher catastrophe losses. The impact of catastrophes accounted for 20.6 percentage points of the combined loss and expense ratio for this class in 2011 compared with 15.6 percentage points in 2010 and 1.5 percentage points in 2009. Results in 2011 were also adversely impacted by more severe non-catastrophe weather-related losses than in 2010.
Net premiums written from commercial insurance, which represented 43% of our premiums written in 2011, increased by 8% in 2011 and were flat in 2010 compared with the respective prior year. Net premiums written for the classes of business within the commercial insurance segment were as follows:
In 2011, premium growth occurred in all classes of our commercial insurance business. This premium growth reflected higher rates, new business opportunities and slightly higher amounts of audit and endorsement premiums in a market that continued to be highly competitive. In 2011, there was improvement in the overall rate environment, particularly in the United States, throughout the year. Average renewal rates in the United States increased over those in 2010 for all major classes of our commercial business. In 2011, the average renewal exposure change was flat in the United States and up slightly outside the United States, an improvement from 2010. Growth in our commercial classes in 2010 was limited by a very competitive marketplace and the restrained insurance purchasing demand of customers operating in weakened economies worldwide. Net premiums written in 2010 reflected slightly reduced exposures on renewal business in the United States due to the continuing effects of the weak economy, although the effect on renewal exposures progressively lessened throughout the year. On average, renewal rates in the United States for most classes of commercial insurance business were about flat in 2010 compared with 2009. Premium growth in both 2011 and 2010 in our commercial insurance business benefited slightly from the impact of currency fluctuation on business written outside the United States.
The combined loss and expense ratios for the classes of business within commercial insurance were as follows:
Results for our casualty business were profitable in each of the past three years, increasingly so in 2011 and 2010 compared to the respective prior year. The automobile and primary liability components of our casualty business were profitable in each of the past three years, but more so in 2011 due to a higher amount of favorable prior year loss development. Results in the excess liability component were increasingly profitable in each of the past three years. Excess liability results in all three years benefited from favorable prior year loss development mainly due to lower than expected claim severity. Casualty results in each of the three years were adversely affected by incurred losses related to toxic waste claims and, to a lesser extent in 2011, asbestos claims. Our analysis of these exposures resulted in increases in the estimate of our ultimate liabilities. Such losses represented 4.0 percentage points of the combined loss and expense ratio for this class in 2011, 3.5 percentage points in 2010 and 4.1 percentage points in 2009.
Net premiums written in our professional liability business were relatively flat in 2011 and 2010 compared with the respective prior year. Premium growth for this business has been constrained by the continuing effect of the economic downturn in recent years and a highly competitive marketplace due to an oversupply of capacity available from market participants. We experienced a slight overall decrease in our average renewal rates and new business volume but relatively strong retention of our expiring policies in 2011 and 2010 compared with the respective prior year. Premium growth in our professional liability business in 2011 and 2010 benefited slightly from the impact of currency fluctuation on business written outside the United States.
Retention levels in the professional liability classes remained strong over the last three years. New business volume declined slightly 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. 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 2011 and 2010 by the highly competitive environment and the lingering effects of the weak economic conditions on the construction business during the last few years. The slight growth in both 2011 and 2010 was attributable to new business in non-U.S. locations.
For a transition period of about two years, the same reinsurer underwrote specific reinsurance business on our behalf. We retained a portion of this business and ceded the balance to the reinsurer.
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.
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. earned premiums for the covered lines of business in the previous calendar year. For 2012, that deductible is 20% of direct premiums earned in 2011 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 the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $930 million in 2012.
Total gross case reserves related to our insurance business increased by $308 million in 2011. A majority of this increase was in the homeowners and property and marine classes due to catastrophe losses reported during the year that remained unpaid as of December 31, 2011. Total gross IBNR reserves related to our insurance business increased by $209 million in 2011. An increase in gross IBNR reserves in the commercial classes, primarily in the casualty and workers’ compensation classes due to increased exposures and in the property-related classes due to higher catastrophe-related reserves, was offset in part by a decrease in gross IBNR reserves in the professional liability classes, reflecting increased case activity and favorable prior year development.
Reserves for the professional liability classes other than fidelity were $6.8 billion, net of reinsurance, at December 31, 2011. Based on a review of our loss experience, if the loss development factor for each accident year changed such that the cumulative loss development factor for the most recent accident year changed by 10%, we estimate that the net reserves for professional liability classes other than fidelity would change by approximately $700 million, in either direction. This degree of change in the reported loss development pattern is within the historical variation around the averages in our data.
Reserves for commercial excess liability (excluding asbestos and toxic waste claims) were $3.1 billion, net of reinsurance, at December 31, 2011. 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.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional actuarial loss reserving techniques that rely on historical accident year loss development factors. Instead, we rely on an exposure-based analysis that involves a detailed review of individual policy terms and exposures. Because each policyholder presents different liability and coverage issues, we generally evaluate our exposure on a policyholder-by-policyholder basis, considering a variety of factors that are unique to each policyholder. Quantitative techniques have to be supplemented by subjective considerations including management’s judgment.
We believe that the loss reserves carried at December 31, 2011 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.
In recognition that many aspects of bankruptcy plans are unfair to certain classes of claimants and to the insurance industry, these plans are being more closely scrutinized by the courts and rejected when appropriate.
Our other asbestos exposures involve products and non-products liability on the part of “peripheral” defendants, including a mix of manufacturers, distributors and installers of certain products that contain asbestos in small quantities and owners or operators of properties where asbestos was present. Generally, these insureds are named defendants on a regional rather than a nationwide basis. As the financial resources of traditional asbestos defendants have been depleted, plaintiffs are targeting these viable peripheral parties with greater frequency and, in many cases, for large awards.
Our actuaries and claim personnel perform periodic analyses of our asbestos related exposures. The analyses during 2011 noted modest adverse developments related to a small number of accounts. Based on these developments, we increased our net asbestos loss reserves by $22 million in 2011. The analyses during 2010 and 2009 noted no significant developments that required a change in our estimate of ultimate liabilities related to asbestos claims.
the ability of claimants to bring a claim in a state in which they have no residency or exposure;
The U.S. federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) has been interpreted to impose strict, retroactive and joint and several liability on potentially responsible parties (PRPs) for the cost of remediating hazardous waste sites. Most sites have multiple PRPs.
Environmental remediation claims tendered by PRPs and others to insurers have frequently resulted in disputes over insurers’ contractual obligations with respect to pollution claims. The resulting litigation against insurers extends to issues of liability, coverage and other policy provisions.
At December 31, 2011, $169 million of the net toxic waste loss reserves were IBNR reserves.
Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable from reinsurers related to the losses we have incurred. At December 31, 2011, reinsurance recoverable included $139 million recoverable with respect to paid losses and loss expenses, which is included in other assets, and $1.7 billion recoverable on unpaid losses and loss expenses.
We experienced overall favorable development of about $310 million in the professional liability classes other than fidelity. The most significant amount of favorable development occurred in the directors and officers liability class, particularly from our business outside the United States, with additional favorable development in the fiduciary liability class, partially offset by adverse development in the errors and omissions liability class. The aggregate reported loss activity related to accident years 2008 and prior was less than expected. As these years have become increasingly mature, and as the reported loss experience has emerged better than we expected, we have gradually decreased the expected loss ratios for these accident years. The favorable development was recognized as one among many factors in the determination of loss reserves for more current accident years. Among other important factors were the continued uncertainty surrounding the recent crisis in the financial markets and its aftermath and the general downward trend in prices in recent years.
We experienced favorable development of about $80 million in the aggregate in the personal and commercial property classes, primarily related to the 2009 and 2010 accident years. The severity and frequency of late developing property claims that emerged during 2011 were lower than expected. Because the incidence of large property losses is subject to a considerable element of fortuity, reserve estimates for these claims are based on an analysis of past loss experience on average over a period of years. As a result, the favorable development in 2011 was recognized, but this factor had a relatively modest effect on our determination of carried property loss reserves at December 31, 2011.
We experienced unfavorable development of about $70 million in the fidelity class due to higher than expected reported loss emergence, related to the 2010 accident year and, to a lesser extent, the 2009 accident year. Loss reserve estimates at the end of 2010 included an expectation of less prior year loss activity than actually occurred in 2011. This activity was driven by case developments on a relatively small number of large claims related to the recent economic and financial environment. This continued adverse development was reflected in the determination of carried loss reserves at December 31, 2011.
We experienced favorable development of about $30 million in the personal automobile business due primarily to lower than expected frequency of prior year claims. This factor was reflected in our determination of carried personal automobile loss reserves at December 31, 2011.
We experienced favorable development of about $15 million in the surety business due to lower than expected loss emergence in recent accident years. Loss reserve estimates at the end of 2010 in this class included an expectation of more late reported losses than actually occurred in 2011. However, since the experience in this class is volatile and we would still expect such losses to occur over time, the favorable development in 2011 was given only modest weight in our determination of carried surety loss reserves at December 31, 2011.
We experienced unfavorable development of about $70 million in the fidelity class due to higher than expected reported loss emergence, mainly related to the 2009 accident year and primarily in the United States.
We experienced favorable development of about $40 million in the surety business due to lower than expected loss emergence.
We experienced favorable development of about $150 million in the aggregate in the commercial and personal liability classes. Favorable development, primarily in accident years 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 runoff of our reinsurance assumed business due primarily to better than expected reported loss activity from cedants.
We experienced favorable development of about $35 million in the surety business due to lower than expected loss emergence.
Property and casualty investment income before taxes was flat in 2011 compared with 2010 and increased by 1% in 2010 compared with 2009. In 2011, the slightly positive impact of currency fluctuation on income from our investments denominated in currencies other than the U.S. dollar was offset by the impact of lower average yields on our investment portfolio. In 2010, the impact of growth in average invested assets on investment income was substantially offset by the impact of lower average yields on our investment portfolio. In 2011 and 2010, the decrease in the average yield of our investment portfolio primarily resulted from lower reinvestment yields on fixed maturity securities that matured, were redeemed by the issuer or were sold during the year. The growth in investment income in 2011 was limited as average invested assets were similar in 2011 and 2010 as a result of substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2011 and 2010. Average invested assets increased only modestly in 2010 compared to 2009 also as a result of substantial dividend distributions made by the property and casualty subsidiaries during 2010 and 2009.
Corporate and other produced a loss before taxes of $246 million in 2011 compared with losses of $220 million and $238 million in 2010 and 2009, respectively. The higher loss in 2011 and 2009 compared to 2010 was primarily due to lower investment income in 2011 and 2009. Investment income in 2010 included a $20 million special dividend received on an equity security investment.
Chubb Financial Solutions (CFS), a wholly owned subsidiary of Chubb, participated in derivative financial instruments and has been in runoff since 2003. Since that date, CFS has terminated early or run off nearly all of its contractual obligations under its derivative contracts.
Decisions to sell equity securities and fixed maturities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized gains and losses on the sale of these investments may vary significantly from period to period. However, such gains and losses generally have little, if any, impact on shareholders’ equity as all of these investments are carried at fair value, with the unrealized appreciation or depreciation reflected in accumulated other comprehensive income.
The net realized gains and losses of other invested assets represent 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, these investments are generally reported on a one quarter lag. The net realized gains of the limited partnerships reported in 2011 reflect the strong performance of the equity and high yield investment markets in the fourth quarter of 2010 and in the first quarter of 2011. 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.
The determination of whether a decline in value of any investment is temporary or other than temporary requires the judgment of management. The assessment of other-than-temporary impairment of fixed maturities and equity securities is based on both quantitative criteria and qualitative information and also considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, general 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.
Information related to investment securities in an unrealized loss position at December 31, 2011 and 2010 is included in Note (3)(b) of the Notes to Consolidated Financial Statements.
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, 2011, the Corporation had shareholders’ equity of $15.6 billion and total debt of $3.6 billion.
Management regularly monitors the Corporation’s capital resources. In connection with our long term capital strategy, Chubb from time to time contributes capital to its property and casualty subsidiaries. In addition, in order to satisfy capital needs as a result of any rating agency capital adequacy or other future rating issues, or in the event we were to need additional capital to make strategic investments in light of market opportunities, we may take a variety of actions, which could include the issuance of additional debt and/or equity securities. We believe that our strong financial position and current debt level provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short term and long term basis.
In 2009, we repurchased 22,623,775 shares of Chubb’s common stock in open market transactions at a cost of $1,065 million. In 2010, we repurchased 37,667,829 shares of Chubb’s common stock in open market transactions at a cost of $2,008 million. In 2011, we repurchased 27,582,889 shares of Chubb’s common stock in open market transactions at a cost of $1,718 million. As of December 31, 2011, 909,407 shares remained under the December 2010 share repurchase authorization. We repurchased the shares remaining under the December 2010 authorization during January 2012 at a cost of $63 million.
In January 2012, the Board of Directors authorized the repurchase of up to $1.2 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 2013, subject to market conditions.
Our property and casualty operations provide liquidity in that insurance premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. Cash receipts from operations, consisting of insurance premiums and investment income, provide funds to pay losses, operating expenses and dividends to Chubb. After satisfying our cash requirements, excess cash flows are used to build the investment portfolio with the expectation of generating increased future investment income.
Chubb has a revolving credit agreement with a group of banks that provides for up to $500 million of unsecured borrowings. There have been no borrowings under this agreement. Various interest rate options are available to Chubb, all of which are based on market interest rates. The agreement contains customary restrictive covenants including a covenant to maintain a minimum consolidated shareholders’ equity, as adjusted. At December 31, 2011, Chubb was in compliance with all such covenants. The revolving credit facility is available for general corporate purposes and to support our commercial paper borrowing arrangement. The agreement has a termination date of October 19, 2012. Under the agreement Chubb is permitted to request on two occasions, at any time during the remaining term of the agreement, an extension of the maturity date for an additional one year period. On the termination date of the agreement, any borrowings then outstanding become payable.
The following table provides our future payments due by period under contractual obligations as of December 31, 2011, aggregated by type of obligation.
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, 2011, 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.
In 2011, market yields on fixed maturity investments declined resulting in an increase in the fair value of many of our fixed maturity investments.
Fair values of financial instruments are determined using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical assets or liabilities or other inputs, such as quoted prices for similar assets or liabilities that are observable, either directly or indirectly. In those instances where observable inputs are not available, fair values are measured using unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange.
The carrying value of short term investments approximates fair value due to the short maturities of these investments.
The methods and assumptions used to estimate the fair value of the Corporation’s pension plan and other postretirement benefit plan assets, other than assets invested in pooled funds, are similar to the methods and assumptions used for our other financial instruments. The fair value of pooled funds is based on the net asset value of the funds. At December 31, 2011 and December 31, 2010, approximately 99% of the pension plan and other postretirement benefit plan assets are categorized as Level 1 or Level 2 in the fair value hierarchy.
In 2011, primarily as a result of a decline in the discount rates used to value our pension and other postretirement obligations, and lower than expected return on plan assets, the liability related to our pension and other postretirement benefit plans increased. Postretirement benefit costs not recognized in net income increased by $329 million, which was reflected in other comprehensive income, net of applicable deferred income taxes.
In 2010, as a result of 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.
As a result of improvement in the financial markets in 2009, the fair value of the assets in our pension and other postretirement benefit plans increased, improving the funded status of these plans. Postretirement benefit costs not recognized in net income decreased by $134 million, which was reflected in other comprehensive income, net of applicable deferred income taxes.
Consolidated financial statements of the Corporation at December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 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, 2011 are listed in Item 15(a) of this report.