During 2008, AFG repurchased $37 million of its 7-1/8% Senior Debentures due April 2009, paid $190 million in cash and issued 2.4 million shares of Common Stock to redeem its Senior Convertible Notes and repurchased 1.8 million shares of its Common Stock for $47 million.
AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries' investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.
AFG has no material contractual purchase obligations or other long-term liabilities at December 31, 2009.
As detailed under "Net Unrealized Gain (Loss) on Marketable Securities" in Note E to the financial statements, unrealized gains and losses on AFG's fixed maturity and equity securities are included in Shareholders' Equity after adjustments for related changes in deferred policy acquisition costs and certain liabilities related to annuities, noncontrolling interests and deferred income taxes. DPAC applicable to annuity products is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding increases or decreases (net of tax) included in equity under "Accumulated other comprehensive income (loss)."
In general, the fair value of AFG's fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG's fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve would have at December 31, 2009 (dollars in millions). Increases or decreases from the 100 basis points illustrated would be approximately proportional.
The Specialty insurance operations generated an underwriting profit of $364 million in 2008 compared to $506 million in 2007. The 2008 combined ratio increased 6.0 points to 87.3%. Increased losses in the run-off residual value insurance ("RVI") operations, higher catastrophe losses, lower underwriting profits in the crop business and the effects of a softer market more than offset higher favorable reserve development. Specialty insurance results for 2008 include 8.7 points of favorable reserve development compared to 5.7 points in 2007. Losses from catastrophes (principally wind-related storm damage from hurricanes Gustav and Ike and tornadoes in the Midwestern part of the United States) totaled $59 million in 2008. By comparison, catastrophe losses for 2007 were negligible.
Gross and net written premiums for 2008 were comparable to 2007. This group reported an underwriting loss of $46 million in 2008 compared to an underwriting profit of $25 million in 2007. Its combined ratio was 109.2%, an increase of 14.6 points over 2007. The 2008 loss resulted from sharp declines in used car sales prices in the run-off RVI business under a policyholder contract which had not experienced losses prior to 2008. Excluding the effect of RVI, the group's 2008 combined ratio was 86.8%, a 2.1 point improvement over 2007. Results for 2008 include 2.9 points of favorable reserve development compared to 1.2 points in 2007.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. The unobservable inputs may include management's own assumptions about the assumptions market participants would use based on the best information available in the circumstances. AFG's Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information.
Cash payments for income taxes, net of refunds, were $189.8 million, $199.1 million and $224.9 million for 2009, 2008 and 2007, respectively.
Discontinued operations for 2007 represent additional gains on operations sold in previous years, primarily the settlement of a contingency associated with the sale of Chatham Bars Inn, a resort-hotel property located on Cape Cod.
AFG has reinsured approximately $19 billion in face amount of life insurance at December 31, 2009 and $21 billion at December 31, 2008. Life premiums ceded were $54 million, $57 million and $64 million for 2009, 2008 and 2007, respectively.
(a) Grossed up for reinsurance recoverables of $2,513 and $2,610 at December 31, 2009 and 2008, respectively.