Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of December 31, 2009 compared with December 31, 2008 and the results of operations for each of the three years in the period ended December 31, 2009. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
the effects of changes in market practices in the U.S. property and casualty insurance industry arising from any legal or regulatory proceedings, related settlements and industry reform, including changes that have been announced and changes that may occur in the future;
Operating income was $2.2 billion in 2009, $2.0 billion in 2008 and $2.6 billion in 2007. Higher operating income in 2009 compared with that in 2008 was due to higher underwriting income in our property and casualty insurance business offset in part by lower investment income. The lower operating income in 2008 compared with that in 2007 was due primarily to substantially lower underwriting income in our property and casualty insurance business in 2008 than in 2007. 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.
Total net premiums written decreased by 6% in 2009 and 1% in 2008. The decrease in 2009 was largely attributable to the general downturn in the economy and, to a lesser extent, the impact of currency fluctuation on business written outside the United States due to the strengthening of the U.S. dollar in 2009 compared to 2008. The lack of premium growth in both years also reflects our continued emphasis on underwriting discipline in a highly competitive market environment. Net premiums written in the United States decreased by 6% in 2009 and 2% in 2008. Net premiums written outside the United States decreased by 6% in 2009 and increased by 6% in 2008. Measured in local currencies, premiums outside the United States grew modestly in both years.
Property and casualty investment income after tax decreased by 3% in 2009 and increased by 2% in 2008. The decline 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 growth in 2008 was limited as average invested assets increased only modestly during the year. 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.
Net realized investment gains before taxes were $23 million ($15 million after tax) in 2009 compared with net realized losses before taxes of $371 million ($241 million after tax) in 2008 and net realized gains before taxes of $374 million ($243 million after tax) in 2007. The net realized losses in 2008 were primarily attributable to other-than-temporary impairment losses on equity securities. The net realized gains in 2007 were primarily attributable to gains from investments in limited partnerships.
Property and casualty income before tax in 2009 was higher 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 substantially lower catastrophe losses, offset in part by a lower amount of favorable prior year loss development and a slight reduction in underwriting profitability excluding 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. Property and casualty income before tax in 2008 was lower than in 2007 due to substantially lower underwriting income. The decrease in underwriting income in 2008 was due in large part to higher catastrophe losses and the cumulative impact of the rate reductions in the commercial and specialty insurance businesses over the past several years.
Net premiums written amounted to $11.1 billion in 2009, a decrease of 6% compared with 2008. Net premiums written in 2008 decreased by 1% compared with 2007.
Net premiums written decreased by 6% in 2009 compared with 2008 and 1% in 2008 compared with 2007. Premiums in the United States, which represent about 75% of our total net premiums, decreased by 6% in 2009 and 2% in 2008. Premiums outside the U.S., expressed in U.S. dollars, decreased by 6% in 2009 and increased by 6% in 2008. In 2009, the decrease in net premiums written outside the U.S. was attributable to the impact of currency fluctuation due to the strengthening of the U.S. dollar. Conversely, in 2008, approximately half of the premium growth outside the U.S. was due to the impact of currency fluctuation due to the weakness of the U.S. dollar. In 2009 and 2008, net premiums written outside the U.S. grew modestly when measured in local currencies.
In both years, we retained a high percentage of our existing customers and renewed these accounts at what we believe are acceptable rates relative to the risks. While we found opportunities to write new business at acceptable rates, we continued to be disciplined and the number of such opportunities declined throughout 2008 and 2009. During the second half of 2008, the property and casualty insurance market experienced disruption as a result of broader issues in the financial markets and the economies of the United States and other countries. The crisis in the financial markets had an adverse impact on some of our competitors, resulting in opportunities for us to write new business. During 2009, we were able to write some new business due to this dislocation in the insurance markets. The modestly positive effect of this was offset by the decrease in demand in nearly all classes of our insurance business caused by the general downturn in the economy.
Reinsurance assumed net premiums written decreased by 67% in 2009 and 53% in 2008. The significant premium decline reflects the sale of our ongoing reinsurance assumed business in December 2005, which is discussed below.
For property risks in the United States and Canada, we purchase catastrophe reinsurance in two forms. We purchase a traditional catastrophe reinsurance treaty which we refer to as our North American catastrophe treaty. In recent years, we have also arranged for the purchase of multi-year, collateralized reinsurance coverage funded through the issuance of collateralized risk linked securities, known as catastrophe bonds.
Our North American catastrophe treaty has been in place for many years. For the 2009 treaty, our initial retention is $500 million per occurrence. We did not renew the coverage for 45% of covered losses between $350 million and $500 million we had under the 2008 treaty. We also converted a northeastern United States-only layer into a layer that covers all of the United States and Canada. The overall impact of these changes was to slightly reduce the maximum amount that we can recover per occurrence under the North American catastrophe treaty.
The combination of the 2009 North American catastrophe treaty and a portion of the catastrophe bond coverages in effect during 2009, collectively, provide coverage for United States and Canadian exposures of approximately 72% of losses (net of recoveries from other available reinsurance) between $500 million and $1.15 billion and 60% of losses between $1.15 billion and $1.65 billion.
For catastrophe events in the northeastern part of the United States, in addition to the United States and Canadian coverage discussed above, we have reinsurance that covers approximately 35% of losses (net of recoveries from other available reinsurance) between $1.15 billion and $2.05 billion. This coverage is provided through a combination of our North American catastrophe reinsurance treaty and the catastrophe bond coverage that we established in 2008. Additionally, the catastrophe bond coverage established in 2007 provides coverage for approximately 30% of homeowners-related hurricane losses between $1.45 billion and $2.25 billion.
For hurricane events in Florida, we have a combination of reinsurance coverages that operate in conjunction with the United States and Canadian coverage discussed above. 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. Coverage under this program,
Our property catastrophe treaty for events outside the United States was renewed in 2009 with only modest changes in coverage. We increased both our initial retention and the reinsurance coverage in the top layer of the treaty by $25 million and increased our participation in the program. The treaty provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million.
In addition to our catastrophe treaties, we also have a commercial property per risk treaty which was renewed in 2009 with only slight changes in coverage. This treaty currently provides up to approximately $800 million (depending upon the currency in which the insurance policy was issued) of coverage per risk in excess of our initial retention, which is generally between $25 million and $35 million.
Our major property reinsurance treaties expire on April 1, 2010. Due to a lower than average impact from catastrophes on the industry during 2009, we currently expect that reinsurance rates for property risks will decrease in 2010. The final structure of our program and amount of coverage purchased will be determinants of our total reinsurance costs in 2010.
Underwriting results were highly profitable in each of the last three years. The combined loss and expense ratio for our overall property and casualty business was as follows:
Our expense ratio was higher in 2009 compared with 2008. The increase was due primarily to an increase in commission rates in certain classes of business in the United States and, to a lesser extent, a decline in premiums written at a rate that exceeded the rate of reduction in our overhead expenses. Our expense ratio was similar in 2008 and 2007, as an increase in commissions was substantially offset by lower operating costs related to the run-off of our reinsurance business. The increase in commissions in 2008 compared with 2007 was largely the result of premium growth outside the United States in countries where commission rates are higher than in the United States as well as modestly higher commission rates in the United States in certain classes of business. The overhead expense component of our expense ratio related to our ongoing businesses was similar in 2008 and 2007.
Net premiums written from personal insurance, which represented 33% of our premiums written in 2009, decreased by 4% in 2009 and increased by 3% in 2008. Net premiums written for the classes of business within the personal insurance segment were as follows:
Personal automobile premiums decreased in 2009 and 2008 due to a highly competitive U.S. marketplace. The decrease in 2009 was also attributable to the impact of currency fluctuation on business written outside the United States. Premium growth in our homeowners business was constrained in both 2009 and 2008 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. The in-force policy count for this class of business decreased modestly in 2009 and 2008. Premiums from our other personal business, which includes insurance for accident and health, excess liability and yacht coverages, decreased in 2009 after a substantial increase in 2008. 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 was offset in part by growth in the U.S. component of this business, due primarily to a select initiative. The substantial growth in our other personal business in 2008 was due primarily to a significant increase in accident and health premiums, which had strong growth both in the United States as well as outside the United States. Excess liability premiums were flat in 2009, after growing modestly in 2008.
Homeowners results were highly profitable in each of the last three years. The impact of catastrophes accounted for 1.5 percentage points of the combined loss and expense ratio for this class in 2009 compared with 7.8 percentage points in 2008 and 9.6 percentage points in 2007. Results in 2009 and 2008 were adversely impacted by the higher frequency and severity of large non-catastrophe losses.
Other personal business produced profitable results in each of the past three years. Results for our excess liability business were highly profitable in 2009 compared with near breakeven results in 2008 and unprofitable results in 2007. Results in 2009 benefited from favorable prior year loss development. Prior year loss development for our excess liability business was not significant in 2008 compared with
Net premiums written from commercial insurance, which represented 42% of our premiums written in 2009, decreased by 7% in 2009 and 2% in 2008. Net premiums written for the classes of business within the commercial insurance segment were as follows:
The decrease in premiums in our commercial insurance business in 2009 was primarily attributable to the adverse effects of the economic downturn, and to a lesser extent, the impact of currency fluctuation on business written outside the United States. The decline in premiums in most of our commercial classes in 2009 and 2008 also reflected the highly competitive marketplace, particularly for new business. The decrease in workers’ compensation premiums in 2009 reflected reduced exposures, due to lower amounts of covered payroll of our insureds, largely as a result of the downturn in the U.S. economy. U.S. renewal rates were up slightly in 2009, both in workers’ compensation and for commercial insurance overall. In 2008, we experienced modest decreases in renewal rates in the U.S., which were more pronounced in certain classes, such as workers’ compensation and large property risks, and also varied by geographic area. Growth in the property and marine classes in 2008 was primarily from a syndicated large risks program in both the U.S. and outside the U.S. and a marine initiative.
We have continued to maintain our underwriting discipline in the highly competitive market, renewing business and writing new business only where we believe we are securing acceptable rates and appropriate terms and conditions for the exposures.
Our commercial insurance business produced profitable underwriting results in each of the past three years. Results in all three years benefited from favorable loss experience, disciplined risk selection and appropriate terms and conditions in recent years. The results in 2008 were less profitable largely due to substantially higher catastrophe losses in the multiple peril and property and marine classes, primarily from Hurricane Ike. The impact of catastrophes accounted for 1.2 percentage points of the combined loss and expense ratio for our commercial insurance business in 2009, compared with 8.1 percentage points in 2008 and 2.6 percentage points in 2007. Excluding the effect of catastrophe losses, results for our
commercial insurance business were modestly less profitable in each succeeding year, due in large part to the cumulative impact of rate reductions experienced over the past several years.
Workers’ compensation results were profitable in 2009 compared with highly profitable results in 2008 and 2007. Results in these years benefited from our disciplined risk selection during the past several years as well as relatively favorable claim frequencies. Results in 2009 and 2008 were less profitable than the respective prior years due in part to lower rate levels associated with state reforms and increased competition. Results in 2009 were adversely impacted by increased large loss activity and modest unfavorable prior year loss development compared with favorable prior year loss development in 2008 and 2007.
Net premiums written from specialty insurance, which represented 25% of our premiums written in 2009, decreased by 6% in 2009 and 2% in 2008 compared with the respective prior years. Net premiums written for the classes of business within the specialty insurance segment were as follows:
Overall renewal rates in our professional liability business in the U.S. increased slightly in 2009. This reversed a downward trend in renewal rates for the professional liability classes that had begun several years earlier and had continued in 2008 in most classes of business, although it had slowed as the year progressed. Rates for directors and officers liability and errors and omissions liability insurance for financial institutions, however, increased in both 2009 and 2008, particularly for those companies implicated in the crisis in the financial markets.
Premium growth in our surety business began to slow in the latter half of 2008 due to a more competitive environment and the impact of the weaker economy on the construction business. This trend generally continued in 2009.
Collectively, the results for the professional liability classes benefited from favorable prior year loss development in each of the past three years, due primarily to the recognition of the positive loss trends we have been experiencing related to accident years 2003 through 2006. These trends were largely the result of a favorable business climate, lower policy limits and better terms and conditions. The combined ratio for the 2009 accident year in our professional liability business is modestly above breakeven, due in part to the uncertainty surrounding the crisis in the financial markets that began in 2008 and continued in 2009.
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 2009 and 2007 due to the adverse impact of one large loss. Our surety business tends to be characterized by infrequent but potentially high severity losses. When losses occur, they are mitigated, at times, by recovery rights to the customer’s assets, contract payments, collateral and bankruptcy recoveries.
The majority of our surety obligations are intended to be performance-based guarantees. We manage our exposure on an absolute basis and by specific bond type. We have substantial commercial and construction surety exposure for current and prior customers, including exposures related to surety bonds issued on behalf of companies that have experienced deterioration in creditworthiness since we issued bonds to them. We therefore may experience an increase in filed claims and may incur high severity losses, especially in light of the ongoing economic downturn. Such losses would be recognized if and when claims are filed and determined to be valid, and could have a material adverse effect on the Corporation’s results of operations.
Net premiums written from our reinsurance assumed business, which is in run-off, decreased by 67% in 2009 and 53% in 2008. The significant decrease in premiums in both years was expected in light of the sale of our ongoing reinsurance assumed business to Harbor Point.
Reinsurance assumed results were profitable in each of the past three years. While the volume of business declined substantially in each of the past three years, results in all three years, particularly in 2007, benefited from significant favorable prior year loss development.
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. Also, the risk concentration management tool referred to above 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 and has restricted us from writing others.
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 $950 million in 2010.
For certain classes of business, such as workers’ compensation, terrorism coverage is mandatory. For those classes of business where it is not mandatory, policyholders may choose not to accept terrorism coverage, which would, subject to other statutory or regulatory restrictions, reduce our exposure.
For short tail classes, the emergence of paid and incurred losses generally exhibits a reasonably stable pattern of loss development from one accident year to the next. Thus, for these classes, the loss development factor method is generally relatively straightforward to apply and usually requires only modest extrapolation. For long tail classes, applying the loss development factor method often requires more judgment in selecting development factors as well as more significant extrapolation. For those long tail classes with high frequency and relatively low per-loss severity (e.g., workers’ compensation), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, except in the most recent accident years.
The following discussion includes disclosure of possible variation from current estimates of loss reserves due to a change in certain key assumptions for particular classes of business. These impacts are estimated individually, without consideration for any correlation among such assumptions or among lines of business. Therefore, it would be inappropriate to take the amounts and add them together in an attempt to estimate volatility for our loss reserves in total. We believe that the estimated variation in reserves detailed below is a reasonable estimate of the possible variation that may occur in the future. However, if such variation did occur, it would likely occur over a period of several years and therefore its impact on the Corporation’s results of operations would be spread over the same period. It is important to note, however, that there is the potential for future variation greater than the amounts discussed below.
We believe that the loss reserves carried at December 31, 2009 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.
There is substantial uncertainty involved in estimating our liabilities related to these claims. First, the liabilities of the claimants are extremely difficult to estimate. At any given waste site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly depending on a variety of factors. Second, different courts have addressed liability and coverage issues regarding pollution claims
Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable from reinsurers related to the losses we have incurred. At December 31, 2009, reinsurance recoverable included $209 million recoverable with respect to paid losses and loss expenses, which is included in other assets, and $2.1 billion recoverable on unpaid losses and loss expenses.
A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years ended December 31, 2009 is as follows:
During 2009, we experienced overall favorable prior year development of $762 million, which represented 3.8% of the net loss reserves as of December 31, 2008. This compares with favorable prior year development of $873 million during 2008, which represented 4.3% of the net loss reserves at December 31, 2007, and favorable prior year development of $697 million during 2007, which represented 3.5% of the net loss reserves at December 31, 2006. Such favorable development was reflected in operating results in these respective years.
The following table presents the overall prior year loss development for the three years ended December 31, 2009 by accident year.
The net favorable development of $762 million in 2009 was due to various factors. The most significant factors were:
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. 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. This favorable development was recognized as one among many factors in the determination of loss reserves for more current accident years. Our estimates of expected loss ratios for more recent accident years, particularly 2007 through 2009, were more influenced by the uncertainty surrounding the crisis in the financial markets as well as the general downward trend in prices in recent years.
We experienced favorable development of about $160 million in the aggregate in the homeowners and commercial property classes, primarily related to the 2007 and 2008 accident years. The severity of late reported property claims that emerged during 2009 was lower than expected and development on prior year catastrophe events was favorable. Because the incidence of large property losses is subject to a considerable element of fortuity, reserve estimates for these classes are based on an analysis of past loss experience on average over a period of years. As a result, the favorable development in 2009 was recognized, but had a relatively modest effect on our determination of carried property loss reserves at December 31, 2009.
We experienced favorable development of about $30 million in the personal automobile business due primarily to lower than expected severity. This factor was given only modest weight in our determination of carried personal automobile loss reserves at December 31, 2009.
We experienced favorable development of about $170 million in the aggregate in the homeowners and commercial property classes, primarily related to the 2006 and 2007 accident years. The severity of late reported property claims that emerged during 2008 was lower than expected.
We experienced favorable development of about $30 million in the workers’ compensation class due in part to the positive effects of reforms in California.
We experienced favorable development of about $300 million in the professional liability classes other than fidelity, including about $100 million outside the U.S. A majority of this favorable development was in the 2003 through 2005 accident years. Reported loss activity related to these accident years was less than expected, reflecting a favorable business climate, lower policy limits
and better terms and conditions. While these accident years were still somewhat immature, we concluded that there was sufficient evidence to modestly decrease the expected loss ratios for these accident years.
We experienced favorable development of about $180 million in the aggregate in the homeowners and commercial property classes, primarily related to the 2005 and 2006 accident years. This favorable development arose from the lower than expected emergence of actual losses during 2007 relative to expectations used to establish our loss reserves at the end of 2006. The severity of late reported property claims that emerged during 2007 was lower than expected and case development, including salvage recoveries, on previously reported claims was better than expected.
Our U.S. property and casualty subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. These annual statements include an analysis of loss reserves, referred to as Schedule P, that presents accident year loss development information by line of business for the nine years prior to 2009. It is our intention to post the Schedule P for our combined U.S. property and casualty subsidiaries on our website as soon as it becomes available.
Property and casualty investment income before taxes decreased by 5% in 2009 compared with 2008 and increased by 2% in 2008 compared with 2007. 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. Growth in investment income in 2008 was due to an increase in average invested assets compared with 2007. The growth in investment income in 2009 and 2008 was limited as average invested assets increased only modestly in each year as a result of substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2009, 2008 and 2007.
The effective tax rate on our investment income was 19.2% in 2009 compared with 20.0% in 2008 and 19.9% in 2007. The effective tax rate fluctuates as a result of our holding a different proportion of our investment portfolio in tax exempt securities during different periods.
If investment yields and average foreign currency to U.S. dollar exchange rates in 2010 are similar to 2009 year-end levels, property and casualty investment income for 2010 is expected to be about the same as in 2009.
Corporate and other produced a loss before taxes of $238 million in 2009 compared with losses of $214 million and $149 million in 2008 and 2007, respectively. The higher loss in 2009 and 2008 compared to the respective prior year was due in both years to increasingly higher interest expense and lower investment income. The higher interest expense was primarily due to an increase in average debt outstanding in both 2009 and 2008 as a result of the issuance of additional debt during 2008 and 2007. The lower investment income was primarily the result of a decrease in the average yield on short term investments. The higher interest expense in 2009 and 2008 was not offset by an increase in investment income as the proceeds from the issuance of the debt were used to repurchase Chubb’s common stock.
Chubb Financial Solutions (CFS) participated in derivative financial instruments and has been in run-off since 2003. Since that date, CFS has terminated early or run-off nearly all of its contractual obligations within its financial products portfolio.
The net realized gains and losses on other invested assets represent 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 the 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 reported on a one quarter lag.
In March 2007, Chubb issued $1.0 billion of unsecured junior subordinated capital securities. The capital securities will become due on April 15, 2037, the scheduled maturity date, but only to the extent that Chubb has received sufficient net proceeds from the sale of certain qualifying capital securities. Chubb must use its 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 December 2006, the Board of Directors authorized the repurchase of up to 20,000,000 shares of Chubb’s common stock. In March 2007, the Board of Directors authorized an increase of 20,000,000 shares to the December 2006 authorization. In December 2007 and December 2008, the Board of Directors authorized the repurchase of up to an additional 28,000,000 shares and 20,000,000 shares, respectively, of common stock. As of December 31, 2009, no shares remained under these share repurchase authorizations. In December 2009, the Board of Directors authorized the repurchase of up to an additional 25,000,000 shares of common stock.
Credit ratings assess a company’s ability to make timely payments of interest and principal on its debt. The following table summarizes the Corporation’s credit ratings from the major independent rating organizations as of February 24, 2010.
Financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders. The following table summarizes our property and casualty subsidiaries’ financial strength ratings from the major independent rating organizations as of February 24, 2010.
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 credit facility and we believe we could issue debt or equity securities.
Our strong underwriting results continued to generate substantial new cash in 2009. New cash from operations available for investment by the property and casualty subsidiaries was approximately $1.3 billion in 2009 compared with $775 million in 2008 and $1.6 billion in 2007. New cash available in 2009 was higher than in 2008 due to an $800 million decrease in dividends paid by the property and casualty subsidiaries to Chubb and lower loss payments, partially offset by lower premium collections and higher income tax payments. New cash available in 2008 was lower than in 2007 due to a $450 million increase in dividends paid by the property and casualty subsidiaries to Chubb and higher loss payments, partially offset by lower income tax payments.
As a holding company, Chubb’s ability to continue to pay dividends to shareholders and to satisfy its debt obligations relies on the availability of liquid assets, which is dependent in large part on the dividend paying ability of its property and casualty subsidiaries. The timing and amount of dividends paid by the property and casualty subsidiaries to Chubb may vary from year to year. Our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount of dividends they may pay without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders’ surplus as determined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered “extraordinary” and require prior regulatory approval. During 2009, 2008 and 2007, these subsidiaries paid dividends to Chubb of $1.2 billion, $2.0 billion and $1.55 billion, respectively. The maximum dividend distribution that may be made by the property and casualty subsidiaries to Chubb during 2010 without prior regulatory approval is approximately $1.5 billion.
The following table provides our future payments due by period under contractual obligations as of December 31, 2009, aggregated by type of obligation.
Junior subordinated capital securities of $1 billion bear interest at a fixed rate of 6.375% through April 14, 2017 and at a rate equal to the three-month LIBOR rate plus 2.25% thereafter. For purposes of the above table, interest after April 14, 2017 was calculated using the three-month LIBOR rate as of December 31, 2009. The table includes future interest payments through the scheduled maturity date, April 15, 2037. Interest payments for the period from the scheduled maturity date through the final maturity date, March 29, 2067, would increase the contractual obligation by $750 million. It is our expectation that the capital securities will be redeemed at the end of the fixed interest rate period.
The above table excludes certain commitments totaling $850 million at December 31, 2009 to fund limited partnership investments. These commitments can be called by the partnerships (generally over a period of five years or less), if and when needed by the partnerships to fund certain partnership expenses or the purchase of investments. It is uncertain whether and, if so, when we will be required to fund these commitments. There is no predetermined payment schedule.
Our investment portfolio primarily comprises high quality bonds, principally tax exempt securities, corporate issues, mortgage-backed securities and U.S. Treasury securities, as well as foreign government and corporate bonds that support our operations outside the United States. The portfolio also includes equity securities, primarily publicly traded common stocks, and other invested assets, primarily private equity limited partnerships, all of which are held with the primary objective of capital appreciation.
Limited partnership investments by their nature are less liquid and involve more risk than other investments. We actively manage our risk through type of asset class and domestic and international diversification. At December 31, 2009, we had investments in about 90 separate partnerships. We review the performance of these investments on a quarterly basis and we obtain audited financial statements annually.
We classify our fixed maturity securities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize
after-tax returns, as available-for-sale. Fixed maturities classified as available-for-sale are carried at fair value.
The net unrealized appreciation before tax of our fixed maturities and equity securities carried at fair value was $1,606 million at December 31, 2009 compared with net unrealized depreciation of $220 million at December 31, 2008 and net unrealized appreciation of $810 million at December 31, 2007. Such unrealized appreciation and depreciation is reflected in accumulated other comprehensive income, net of applicable deferred income taxes.
Consolidated financial statements of the Corporation at December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 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, 2009 are listed in Item 15(a) of this report.