Underwriting income in 2005 reflected net costs of $462 million ($300 million after-tax or $0.74 per share) related to Hurricane Katrina.
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of the Corporation as of December 31, 2008 compared with December 31, 2007 and the results of operations for each of the three years in the period ended December 31, 2008. This discussion should be read in conjunction with the consolidated financial statements and related notes and the other information contained in this report.
claims and litigation arising out of stock option “backdating,” spring loading” and other equity grant practices by public companies;
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.
Underwriting results were highly profitable in 2008, 2007 and 2006, but more so in 2007 and 2006. Our combined loss and expense ratio was 88.7% in 2008 compared with 82.9% in 2007 and 84.2% in 2006. The less profitable results in 2008 were due in large part to higher catastrophe losses and the cumulative impact of rate reductions experienced in our commercial and professional liability classes over the past several years. The impact of catastrophes accounted for 5.1 percentage points of the combined ratio in 2008 compared with 3.0 percentage points in 2007 and 1.4 percentage points in 2006.
Total net premiums written decreased by 1% in both 2008 and 2007. The lack of growth in both years reflected our continued emphasis on underwriting discipline in a highly competitive market environment. Net premiums written in the United States decreased by 2% in 2008 and 1% in 2007. Net premiums written outside the United States increased by 6% in 2008 and 10% in 2007; such growth was largely attributable to the impact of currency fluctuation.
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 rate reductions experienced over the past several years in our commercial and specialty insurance businesses. Property and casualty income before tax in 2007 was higher than in 2006 due to higher underwriting income, particularly in our specialty insurance business, as well as a substantial increase in investment income due to an increase in invested assets.
The overall lack of premium growth in both 2008 and 2007 reflected our continued emphasis on underwriting discipline in a highly competitive market environment. Rates were under competitive pressure that varied by class of business and geographic area. 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 continued to be disciplined, we found opportunities to write new business at acceptable rates; however, the number of such opportunities declined throughout 2007 and most of 2008.
exchange rates remain at current levels, premium growth expressed in U.S. dollars would be adversely affected, resulting in a modest decrease in premiums in 2009 compared to 2008.
Net reinsurance assumed premiums written decreased by 53% in 2008 and 65% in 2007. The significant premium decline reflects the sale of our ongoing reinsurance assumed business to Harbor Point Limited in December 2005, which is discussed below.
On our commercial property per risk treaty, in 2007 we increased the reinsurance coverage at the top of the program by $100 million.
On our commercial property per risk treaty, in 2008 we increased the reinsurance coverage in the top layer of the treaty by $60 million. This treaty now provides approximately $560 million of coverage per risk in excess of our $25 million retention.
The structure of our property catastrophe program for events in the United States was again modified in 2008, but the overall coverage remains similar to the previous program. We purchased $200 million of fully collateralized three-year reinsurance coverage in place of traditional reinsurance. This reinsurance was purchased from East Lane Re II Ltd., a Cayman Islands reinsurance company, which financed the provision of reinsurance through the issuance of $200 million in catastrophe bonds to investors under three separate bond tranches. The current traditional catastrophe reinsurance treaty, in combination with the collateralized coverage purchased in 2008, provides coverage of approximately 70% of losses (net of recoveries from other available reinsurance) between $350 million and $1.3 billion, with additional coverage of about 60% of losses between $1.3 billion and $2.05 billion in the northeastern part of the United States, where we have our greatest concentration of catastrophe exposure.
The fully collateralized four-year reinsurance coverage purchased in 2007 for homeowners-related losses sustained from qualifying hurricane loss events in the northeastern part of the United States remains in effect and now provides coverage of approximately 30% of covered losses between $1.35 billion and $2.2 billion.
We have additional reinsurance from the Florida Hurricane Catastrophe Fund, which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophic hurricane
Underwriting results were highly profitable in each of the last three years, but somewhat less so in 2008. The combined loss and expense ratio for our overall property and casualty business was as follows:
We did not have any recoveries from our catastrophe reinsurance treaties during the three year period ended December 31, 2008 because there was no individual catastrophe for which our losses exceeded our retention under the treaties.
In lieu of paying contingent commissions, beginning in 2007, we implemented a new guaranteed supplemental compensation program for agents and brokers in the United States with whom we previously had contingent commission agreements. Under this arrangement, agents and brokers are paid a percentage of written premiums on eligible lines of business in a calendar year based upon their prior performance. The change in our commission arrangements created a difference in the timing of expense recognition, which resulted in a one-time benefit to income during the 2007 transition year. The impact of the change in 2007 was to increase deferred policy acquisition costs by approximately $70 million. The change had no effect on the expense ratio.
Personal automobile premiums decreased in 2008 and 2007 due to a highly competitive U.S. marketplace. The termination of a collector vehicle program also contributed to the decrease in 2007. Premium growth in our homeowners business was constrained in 2008 due to an increasingly competitive market as well as the slowdown in new housing construction as a result of the downturn in the U.S. economy in the last half of the year. The premium growth in 2007 was due primarily to increases in coverage relative to increases in the replacement cost of insured properties. The in-force policy count for this class of business decreased slightly in 2008 and was relatively flat in 2007 compared to 2006. Our other personal business includes insurance for excess liability, yacht and accident and health coverages. The substantial growth in this business in 2008 and 2007 was due primarily to a significant increase in accident and health premiums. Growth in accident and health business was particularly strong outside the United States in both years; growth was also strong in 2008 in the United States due in large part to a select initiative. Excess liability premiums also grew in both years, although more so in 2007, due in part to a modest increase in rates.
Our personal automobile results were profitable in each of the past three years. Results in all three years benefited from lower claim frequency and modest favorable prior year loss development.
Homeowners results were highly profitable in each of the last three years. Results in 2008 were adversely impacted by the higher severity of large non-catastrophe losses. Results in 2006 benefited from relatively low catastrophe losses. The impact of catastrophes accounted for 7.8 percentage points of the combined loss and expense ratio for this class in 2008 compared with 9.6 percentage points in 2007 and 5.7 percentage points in 2006.
producing near breakeven results. Results for this business were unprofitable in 2007 and more so in 2006 due to inadequate pricing and unfavorable prior year loss development.
Results for our casualty business were similarly profitable in each of the past three years. The automobile component of our casualty business was highly profitable in each of the past three years, but more so in 2006. Results in the primary liability component were profitable in each of the past three years. Results in the excess liability component were profitable in 2008 and, to a lesser extent, in 2007, compared with unprofitable results in 2006. Excess liability results in 2008 and 2007 benefited from favorable prior year loss development, whereas results in 2006 were adversely affected by unfavorable loss development. Casualty results in 2008 and 2007 were adversely affected by incurred losses related to asbestos and toxic waste claims. Our analysis of these exposures resulted in increases in the estimate of our ultimate liabilities. Such losses represented 5.9 percentage points of the combined loss and expense ratio for this class in 2008 and 5.3 percentage points in 2007. The impact of such losses was not significant in 2006.
Workers’ compensation results were highly profitable in each of the past three years. Results in all three years benefited from our disciplined risk selection during the past several years as well as favorable claim cost trends, resulting in part from the positive effect of reforms in California. The modestly less profitable results in 2008 were primarily due to lower earned premiums, which were due to rate reductions associated with state reforms and increased competition.
Property and marine results were unprofitable in 2008 compared with highly profitable results in 2007 and 2006. The deterioration in 2008 results was due primarily to higher catastrophe losses, and to a lesser extent, an increase in the frequency and severity of large non-catastrophe losses. Catastrophe losses accounted for 22.1 percentage points of the combined loss and expense ratio in 2008 and 8.2 percentage points in 2007. The impact of catastrophes was negligible in 2006. Excluding the impact of catastrophes, the combined ratio was 86.7%, 76.1% and 73.4% in 2008, 2007 and 2006, respectively.
Renewal rates for the professional liability classes declined in 2007 compared to 2006. This downward trend continued in 2008 in most classes of business although it slowed as the year progressed, with overall rates for the professional liability classes being flat in the fourth quarter of 2008. Rates for directors and officers liability and errors and omissions liability insurance for financial institutions, however, increased throughout 2008, particularly for those companies implicated in the crisis in the financial markets. Retention levels in the professional liability classes remained strong over the last three years. New business volume declined modestly in each of the past two years due to the aggressive competition in the marketplace. Consistent with our strategy in recent years, we continued to direct our focus on small and middle market publicly traded and privately held companies. We continued to get what we believe are acceptable rates and appropriate terms and conditions on both new business and renewals.
The substantial growth in net premiums written for our surety business in 2007 was due primarily to strong public sector construction. Growth slowed in 2008 due to a more competitive environment and the impact of the weaker economy on the construction business. We expect these conditions will persist into 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 results in 2007 and 2006 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.
Net premiums written from our reinsurance assumed business, which is in run-off, decreased by 53% in 2008 and 65% in 2007. The significant decrease in premiums in both years was expected in light of the sale of our ongoing reinsurance assumed business to Harbor Point.
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. Each insurer has a separate deductible that it must meet in the event of an act of terrorism 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 2009, that deductible is 20% of direct premiums earned in 2008 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 $1 billion in 2009.
Gross case reserves for our professional liability classes decreased by $389 million in 2008 due primarily to generally low reported loss activity as well as settlements related to previously established case reserves and, to a lesser extent, the impact of currency fluctuation. The significant increase in gross loss reserves for the commercial property and marine business was due to losses related to Hurricane Ike as well as several large non-catastrophe losses incurred during the year that remained unpaid as of December 31, 2008.
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, 2008 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, 2008 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, 2008 were $20.2 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.
Most of our loss reserves relate to long tail liability classes of business. Long tail classes include directors and officers liability, errors and omissions liability and other professional liability coverages, commercial primary and excess liability, workers’ compensation and other liability coverages. For many liability claims significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long tail liability classes has limited statistical credibility because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. An accident year is the calendar year in which a loss is incurred or, in the case of claims-made policies, the calendar year in which a loss is reported. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for these classes
Our actuaries perform a comprehensive review of loss reserves for each of the numerous classes of business we write at least once a year. The timing of such review varies by class of business and by jurisdiction. The review process takes into consideration the variety of trends that impact the ultimate settlement of claims in each particular class of business. Additionally, each quarter our actuaries review the emergence of paid and reported losses relative to expectations and, as necessary, conduct reserve reviews for particular classes of business.
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.
Among the numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves are the following:
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. Recent examples of such issues include the number of directors and officers liability and errors and omissions liability claims arising out of the ongoing crisis in the financial markets, the number of directors and officers liability claims arising out of stock option “backdating” practices by certain public companies, the number and size of 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.
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
We believe that the loss reserves carried at December 31, 2008 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 establishing our asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider a variety of factors including: the available insurance coverage; limits and deductibles; the jurisdictions involved; past settlement values of similar claims; the potential role of other insurance, particularly underlying coverage below our excess liability policies; potential bankruptcy impact; relevant judicial interpretations; and applicable coverage defenses, including asbestos exclusions.
Of the net toxic waste loss reserves at December 31, 2008, $85 million was IBNR reserves.
Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development or reserve releases.
A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years ended December 31, 2008 is as follows:
During 2008, we experienced overall favorable prior year development of $873 million, which represented 4.3% of the net loss reserves as of December 31, 2007. This compares with favorable prior year development of $697 million during 2007, which represented 3.5% of the net loss reserves at December 31, 2006, and favorable prior year development of $296 million during 2006, which represented 1.6% of the net loss reserves at December 31, 2005. 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, 2008 by accident year.
The net favorable development of $873 million in 2008 was due to various factors. The most significant factors were:
We experienced favorable development of about $390 million in the professional liability classes other than fidelity, including about $150 million outside the U.S. Favorable development occurred in each of the primary professional liability classes, including directors and officers liability, errors and omissions liability, fiduciary liability and employment practices liability. A majority of this favorable development was in the 2004 and 2005 accident years. Reported loss activity related to these accident years has been less than expected due to 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 and 2008, were more influenced by the uncertainty surrounding the ongoing crisis in the financial markets as well as the downward trend in prices in recent years.
We experienced favorable development of about $75 million in the fidelity class due to lower than expected reported loss emergence, particularly outside the U.S., mainly related to recent accident years. Loss reserve estimates at the end of 2007 included an expectation of more late reported losses than actually occurred in 2008, and this factor was reflected in the determination of carried fidelity loss reserves at December 31, 2008.
We experienced favorable development of about $180 million in the homeowners and commercial property classes, primarily related to the 2006 and 2005 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.
We experienced favorable development of about $30 million in the personal automobile class. Case development during 2007 on previously reported claims was better than expected, reflecting improved case management. Also, the number of late reported claims was less than expected, reflecting a continuation of recent generally favorable frequency trends.
emerged during 2006 was lower than expected and case development, including salvage recoveries, on previously reported claims was better than expected.
We experienced favorable loss development of about $70 million in the fidelity class due to lower than expected reported loss emergence, mainly related to more recent accident years.
We experienced favorable development of about $45 million in the professional liability classes other than fidelity. Favorable development in the 2004 and 2005 accident years more than offset continued unfavorable development in accident years 2000 through 2002. Reported loss activity related to accident years 2004 and 2005 was less than expected due to a favorable business climate, lower policy limits and better terms and conditions. While these accident years were somewhat immature, we concluded that there was sufficient evidence to modestly decrease the expected loss ratios for these accident years. On the other hand, we continued to experience higher than expected reported loss activity related to the 2000 through 2002 accident years, largely from claims related to corporate failures and allegations of management misconduct and accounting irregularities. As a result, we increased the expected loss ratios for these accident years.
We experienced favorable development of about $25 million in the personal automobile class. Case development during 2006 on previously reported claims was better than expected, reflecting improved case management. The number of late reported claims was also less than expected.
We experienced adverse development of about $100 million in the commercial liability classes, including $24 million related to asbestos and toxic waste claims. The adverse development was primarily due to reported loss activity in accident years prior to 1997 that was worse than expected, primarily related to specific individual excess liability and other liability claims.
In Item 1 of this report, we present an analysis of our consolidated loss reserve development on a calendar year basis for each of the ten years prior to 2008. The variability in reserve development over the ten year period illustrates the uncertainty of the loss reserving process. Conditions and trends that have affected reserve development in the past will not necessarily recur in the future. It is not appropriate to extrapolate future favorable or unfavorable reserve development based on amounts experienced in prior years.
Property and casualty investment income before taxes increased by 2% in 2008 compared with 2007 and by 9% in 2007 compared with 2006. Growth in investment income in 2008 was due to an increase in average invested assets compared with 2007. The growth in investment income in 2008 was limited as average invested assets increased only modestly during the year as a result of substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2008 and 2007. Growth in 2007 compared with 2006 was due to an increase in invested assets, which reflected substantial cash flow from operations over the period.
The effective tax rate on our investment income was 20.0% in 2008 compared with 19.9% in 2007 and 19.8% in 2006. While similar in these years, the effective tax rate does fluctuate as a result of our holding a different proportion of our investment portfolio in tax exempt securities during different periods.
Other income, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was not significant in the last three years.
Corporate and other comprises investment income earned on corporate invested assets, interest expense and other expenses not allocated to our operating subsidiaries and the results of our non-insurance subsidiaries, including Chubb Financial Solutions, which is in run-off.
Corporate and other produced a loss before taxes of $214 million in 2008 compared with losses of $149 million and $89 million in 2007 and 2006, respectively. The higher loss in 2008 compared to 2007 was due to higher interest expense and lower investment income. The higher interest expense was due to higher average debt outstanding in 2008 as a result of the issuance of additional debt during 2007 and 2008. The lower investment income was primarily the result of a decrease in the average yield on short term investments. The higher loss in 2007 compared with 2006 was due primarily to higher interest expense as a result of the issuance of additional debt during the first half of 2007. The higher interest expense in 2008 and 2007 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.
CFS’s remaining financial products contracts at December 31, 2008 included a derivative contract linked to an equity market index that terminates in 2012 and a few other insignificant transactions. We estimate that the notional amount under the remaining contracts was about $340 million and the fair value of our future obligations was $5 million at December 31, 2008.
We regularly review those invested assets that have a fair value that 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.
Information related to investment securities in an unrealized loss position at December 31, 2008 and 2007 is included in Note (4)(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, 2008, the Corporation had shareholders’ equity of $13.4 billion and total debt of $4.0 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 conservative 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.
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 26, 2009.
The following table provides our future payments due by period under contractual obligations as of December 31, 2008, 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, 2008. 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 $1.1 billion. It is
our expectation that the capital securities will be redeemed at the end of the fixed interest rate period.
Our investment portfolio is primarily comprised of high quality bonds, principally tax exempt securities, mortgage-backed securities, corporate issues 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.
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 depreciation before tax of our fixed maturities and equity securities carried at fair value was $220 million at December 31, 2008 compared with net unrealized appreciation of $810 million at December 31, 2007 and net unrealized appreciation of $603 million at December 31, 2006. Such unrealized appreciation and depreciation is reflected in comprehensive income, net of applicable deferred income tax.
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, increased significantly during 2008 due to the declines in the financial markets. This resulted in a decline in the fair value of many of our fixed maturity investments.
As a result of the turmoil in the financial markets during 2008, the fair value of the assets in our pension and other postretirement benefit plans decreased significantly. As a result, the funded status of these plans deteriorated. Due primarily to this decline, postretirement benefit costs not yet recognized in net income increased by $437 million, which was reflected in comprehensive income, net of applicable deferred income taxes.
For a discussion regarding contingencies related to regulatory developments and legal proceedings, see Note (14) of the Notes to Consolidated Financial Statements.
Consolidated financial statements of the Corporation at December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 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, 2008 are listed in Item 15(a) of this report.