XML 55 R11.htm IDEA: XBRL DOCUMENT v2.4.0.6
Investments
 9 Months Ended
Sep. 30, 2012
Investments
Investments
a) Fixed maturities
The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:
 
 
September 30, 2012
 
Amortized
Cost
 
Gross
Unrealized
Appreciation
 
Gross
Unrealized
Depreciation
 
Fair
Value
 
OTTI Recognized
in AOCI
 
(in millions of U.S. dollars)
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,357

 
$
197

 
$
—

 
$
3,554

 
$
—

Foreign
13,241

 
750

 
(24
)
 
13,967

 
(1
)
Corporate securities
14,677

 
1,192

 
(36
)
 
15,833

 
(12
)
Mortgage-backed securities
10,227

 
545

 
(36
)
 
10,736

 
(88
)
States, municipalities, and political subdivisions
2,256

 
159

 
(1
)
 
2,414

 
—

 
$
43,758

 
$
2,843

 
$
(97
)
 
$
46,504

 
$
(101
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,084

 
$
45

 
$
—

 
$
1,129

 
$
—

Foreign
919

 
52

 
(1
)
 
970

 
—

Corporate securities
2,182

 
140

 
—

 
2,322

 
—

Mortgage-backed securities
2,222

 
108

 
—

 
2,330

 
—

States, municipalities, and political subdivisions
1,086

 
46

 
(4
)
 
1,128

 
—

 
$
7,493

 
$
391

 
$
(5
)
 
$
7,879

 
$
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Appreciation
 
Gross
Unrealized
Depreciation
 
Fair
Value
 
OTTI Recognized
in AOCI
 
(in millions of U.S. dollars)
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,774

 
$
186

 
$
—

 
$
2,960

 
$
—

Foreign
12,025

 
475

 
(99
)
 
12,401

 
(2
)
Corporate securities
14,055

 
773

 
(135
)
 
14,693

 
(22
)
Mortgage-backed securities
9,979

 
397

 
(175
)
 
10,201

 
(151
)
States, municipalities, and political subdivisions
1,617

 
96

 
(1
)
 
1,712

 
—

 
$
40,450

 
$
1,927

 
$
(410
)
 
$
41,967

 
$
(175
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,078

 
$
48

 
$
—

 
$
1,126

 
$
—

Foreign
935

 
18

 
(23
)
 
930

 
—

Corporate securities
2,338

 
44

 
(45
)
 
2,337

 
—

Mortgage-backed securities
2,949

 
90

 
(3
)
 
3,036

 
—

States, municipalities, and political subdivisions
1,147

 
32

 
(3
)
 
1,176

 
—

 
$
8,447

 
$
232

 
$
(74
)
 
$
8,605

 
$
—


 
As discussed in Note 3 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above are the cumulative amounts of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders’ equity. For the three and nine months ended September 30, 2012, $46 million and $130 million, respectively, of net unrealized appreciation related to such securities is included in OCI. For the three and nine months ended September 30, 2011, $30 million and $38 million, respectively, of net unrealized depreciation related to such securities is included in OCI. At September 30, 2012 and December 31, 2011, AOCI includes net unrealized depreciation of $28 million and $155 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
Mortgage-backed securities (MBS) issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 6 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 86 percent and 84 percent of the total mortgage-backed securities at September 30, 2012 and December 31, 2011, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.
The following table presents fixed maturities by contractual maturity:
 
 
September 30, 2012
 
December 31, 2011
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(in millions of U.S. dollars)
Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
2,210

 
$
2,231

 
$
2,321

 
$
2,349

Due after 1 year through 5 years
12,591

 
13,174

 
12,325

 
12,722

Due after 5 years through 10 years
14,699

 
15,852

 
12,379

 
12,995

Due after 10 years
4,031

 
4,511

 
3,446

 
3,700

 
33,531

 
35,768

 
30,471

 
31,766

Mortgage-backed securities
10,227

 
10,736

 
9,979

 
10,201

 
$
43,758

 
$
46,504

 
$
40,450

 
$
41,967

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
676

 
$
681

 
$
393

 
$
396

Due after 1 year through 5 years
1,839

 
1,914

 
2,062

 
2,090

Due after 5 years through 10 years
2,118

 
2,272

 
2,376

 
2,399

Due after 10 years
638

 
682

 
667

 
684

 
5,271

 
5,549

 
5,498

 
5,569

Mortgage-backed securities
2,222

 
2,330

 
2,949

 
3,036

 
$
7,493

 
$
7,879

 
$
8,447

 
$
8,605


Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. 
b) Equity securities
The following table presents the cost and fair value of equity securities:
 
 
September 30

December 31
 
2012

2011
 
(in millions of U.S. dollars)
Cost
$
741

 
$
671

Gross unrealized appreciation
34

 
18

Gross unrealized depreciation
(5
)
 
(42
)
Fair value
$
770

 
$
647


c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.
Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.
For all non-fixed maturities, OTTI is evaluated based on the following:
•
the amount of time a security has been in a loss position and the magnitude of the loss position;
•
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
•
ACE’s ability and intent to hold the security to the expected recovery period.
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.
We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. We develop these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. We believe that use of a default assumption in excess of the historical mean is reasonable in light of current market conditions.
For the three and nine months ended September 30, 2012, credit losses recognized in net income for corporate securities were $5 million and $9 million, respectively. For the three and nine months ended September 30, 2011, credit losses recognized in net income for corporate securities were $4 million.
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
For the three and nine months ended September 30, 2012, credit losses recognized in net income for mortgage-backed securities were $2 million and $5 million, respectively. For the three and nine months ended September 30, 2011, credit losses recognized in net income for mortgage-backed securities were $5 million and $8 million, respectively.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary”:
 
 
Three Months Ended

Nine Months Ended
 
September 30

September 30
 
2012
 
2011
 
2012
 
2011
 
(in millions of U.S. dollars)
Fixed maturities:
 
 
 
 
 
 
 
OTTI on fixed maturities, gross
$
(10
)
 
$
(30
)
 
$
(18
)
 
$
(41
)
OTTI on fixed maturities recognized in OCI (pre-tax)
—

 
11

 
—

 
13

OTTI on fixed maturities, net
(10
)
 
(19
)
 
(18
)
 
(28
)
Gross realized gains excluding OTTI
71

 
92

 
287

 
309

Gross realized losses excluding OTTI
(14
)
 
(53
)
 
(120
)
 
(138
)
Total fixed maturities
47

 
20

 
149

 
143

Equity securities:
 
 
 
 
 
 
 
OTTI on equity securities
—

 
(1
)
 
(5
)
 
(1
)
Gross realized gains excluding OTTI
3

 
—

 
5

 
12

Gross realized losses excluding OTTI
(1
)
 
(1
)
 
(2
)
 
(2
)
Total equity securities
2

 
(2
)
 
(2
)
 
9

OTTI on other investments
—

 
—

 
(7
)
 
(3
)
Foreign exchange gains (losses)
(50
)
 
20

 
(64
)
 
(89
)
Investment and embedded derivative instruments
4

 
(89
)
 
(3
)
 
(157
)
Fair value adjustments on insurance derivative
83

 
(926
)
 
44

 
(925
)
S&P put options and futures
(147
)
 
220

 
(308
)
 
152

Other derivative instruments
—

 
2

 
(4
)
 
(1
)
Other
1

 
(5
)
 
1

 
(7
)
Net realized gains (losses)
$
(60
)
 
$
(760
)
 
$
(194
)
 
$
(878
)

 
The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2012
 
2011
 
2012
 
2011
 
(in millions of U.S. dollars)
Balance of credit losses related to securities still held – beginning of period
$
47

 
$
94

 
$
74

 
$
137

Additions where no OTTI was previously recorded
1

 
6

 
3

 
8

Additions where an OTTI was previously recorded
6

 
3

 
11

 
4

Reductions for securities sold during the period
(4
)
 
(24
)
 
(38
)
 
(70
)
Balance of credit losses related to securities still held – end of period
$
50

 
$
79

 
$
50

 
$
79

 
 
 
 
 
 
 
 

d) Gross unrealized loss
At September 30, 2012, there were 1,473 fixed maturities out of a total of 23,322 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $4 million. There were approximately 68 equity securities out of a total of 197 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $1 million. Fixed maturities in an unrealized loss position at September 30, 2012 comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase. Equity securities in an unrealized loss position include foreign fixed income securities held in a commingled fund structure for which fair value declined primarily due to widening credit spreads since the date of purchase.
The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
 
0 – 12 Months
 
Over 12 Months
 
Total
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
(in millions of U.S. dollars)
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Foreign
$
839

 
$
(14.8
)
 
$
186

 
$
(9.7
)
 
$
1,025

 
$
(24.5
)
Corporate securities
663

 
(20.1
)
 
195

 
(15.5
)
 
858

 
(35.6
)
Mortgage-backed securities
225

 
(1.3
)
 
412

 
(35.0
)
 
637

 
(36.3
)
States, municipalities, and political subdivisions
29

 
(1.3
)
 
59

 
(4.0
)
 
88

 
(5.3
)
Total fixed maturities
1,756

 
(37.5
)
 
852

 
(64.2
)
 
2,608

 
(101.7
)
Equity securities
543

 
(5.4
)
 
—

 
—

 
543

 
(5.4
)
Other investments
113

 
(6.3
)
 
—

 
—

 
113

 
(6.3
)
Total
$
2,412

 
$
(49.2
)
 
$
852

 
$
(64.2
)
 
$
3,264

 
$
(113.4
)
 
 
0 – 12 Months
 
Over 12 Months
 
Total
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
Fair Value
 
Gross
Unrealized
Loss
 
(in millions of U.S. dollars)
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Foreign
$
1,801

 
$
(82.2
)
 
$
529

 
$
(40.0
)
 
$
2,330

 
$
(122.2
)
Corporate securities
3,084

 
(148.2
)
 
268

 
(32.2
)
 
3,352

 
(180.4
)
Mortgage-backed securities
440

 
(7.5
)
 
586

 
(170.2
)
 
1,026

 
(177.7
)
States, municipalities, and political subdivisions
30

 
(0.4
)
 
98

 
(3.5
)
 
128

 
(3.9
)
Total fixed maturities
5,355

 
(238.3
)
 
1,481

 
(245.9
)
 
6,836

 
(484.2
)
Equity securities
484

 
(42.3
)
 
—

 
—

 
484

 
(42.3
)
Other investments
88

 
(8.3
)
 
—

 
—

 
88

 
(8.3
)
Total
$
5,927

 
$
(288.9
)
 
$
1,481

 
$
(245.9
)
 
$
7,408

 
$
(534.8
)

e) Restricted assets
ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. ACE is also required to restrict assets pledged under reverse repurchase agreements. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at September 30, 2012 and December 31, 2011, are fixed maturities and short-term investments totaling $16.3 billion and $14.9 billion, respectively, and cash of $116 million and $179 million, respectively.
The following table presents the components of restricted assets:
 
 
September 30
 
December 31
 
2012
 
2011
 
(in millions of U.S. dollars)
Trust funds
$
11,149

 
$
9,940

Deposits with non-U.S. regulatory authorities
2,120

 
2,240

Assets pledged under reverse repurchase agreements
1,402

 
1,251

Deposits with U.S. regulatory authorities
1,325

 
1,307

Other pledged assets
390

 
364

 
$
16,386

 
$
15,102