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Investments
 12 Months Ended
Dec. 31, 2012
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

a) Fixed maturities
The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:
December 31, 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
$
3,553

 
$
183

 
$
(1
)
 
$
3,735

 
$
—

Foreign
13,016

 
711

 
(14
)
 
13,713

 
—

Corporate securities
15,529

 
1,210

 
(31
)
 
16,708

 
(7
)
Mortgage-backed securities
10,051

 
458

 
(36
)
 
10,473

 
(84
)
States, municipalities, and political subdivisions
2,517

 
163

 
(3
)
 
2,677

 
—

 
$
44,666

 
$
2,725

 
$
(85
)
 
$
47,306

 
$
(91
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,044

 
$
39

 
$
—

 
$
1,083

 
$
—

Foreign
910

 
54

 
—

 
964

 
—

Corporate securities
2,133

 
142

 
—

 
2,275

 
—

Mortgage-backed securities
2,028

 
88

 
—

 
2,116

 
—

States, municipalities, and political subdivisions
1,155

 
44

 
(4
)
 
1,195

 
—

 
$
7,270

 
$
367

 
$
(4
)
 
$
7,633

 
$
—

 
 
 
 
 
 
 
 
 
 
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 d), 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 years ended December 31, 2012 and 2011, $137 million of net unrealized appreciation and $48 million of net unrealized depreciation, respectively, related to such securities is included in OCI. At December 31, 2012 and 2011, AOCI includes net unrealized depreciation of $25 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 10 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 85 percent and 84 percent of the total mortgage-backed securities at December 31, 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: 
 
December 31
 
 
December 31
 
 
 
 
2012

 
 
 
2011

(in millions of U.S. dollars)
Amortized Cost

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
1,887

 
$
1,906

 
$
2,321

 
$
2,349

Due after 1 year through 5 years
13,411

 
14,010

 
12,325

 
12,722

Due after 5 years through 10 years
15,032

 
16,153

 
12,379

 
12,995

Due after 10 years
4,285

 
4,764

 
3,446

 
3,700

 
34,615

 
36,833

 
30,471

 
31,766

Mortgage-backed securities
10,051

 
10,473

 
9,979

 
10,201

 
$
44,666

 
$
47,306

 
$
40,450

 
$
41,967

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
656

 
$
659

 
$
393

 
$
396

Due after 1 year through 5 years
1,870

 
1,950

 
2,062

 
2,090

Due after 5 years through 10 years
2,119

 
2,267

 
2,376

 
2,399

Due after 10 years
597

 
641

 
667

 
684

 
5,242

 
5,517

 
5,498

 
5,569

Mortgage-backed securities
2,028

 
2,116

 
2,949

 
3,036

 
$
7,270

 
$
7,633

 
$
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:
 
December 31


December 31

(in millions of U.S. dollars)
2012


2011

Cost
$
707

 
$
671

Gross unrealized appreciation
41

 
18

Gross unrealized depreciation
(4
)
 
(42
)
Fair value
$
744

 
$
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 other than temporarily impaired.

Evaluation of potential credit losses related to fixed maturities
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.

U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations
U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations represent less than $18 million of gross unrealized loss at December 31, 2012. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. ACE concluded that the high level of creditworthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in net income.

Corporate securities
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.

The following table presents default assumptions by Moody's rating category (historical mean default rate provided for comparison):
Moody's Rating Category
1-in-100 Year Default Rate

 
Historical Mean Default Rate

Investment Grade:
 
 
 
Aaa-Baa
0.0-1.4%

 
0.0-0.3%

Below Investment Grade:
 
 
 
Ba
4.9
%
 
1.1
%
B
12.8
%
 
3.4
%
Caa-C
53.4
%
 
13.8
%


Consistent with management's approach to developing default rate assumptions considering recent market conditions, ACE assumed a 32 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody's historical mean recovery rate of 42 percent. ACE believes that use of a recovery rate assumption lower than the historical mean is reasonable in light of recent market conditions.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for corporate securities of $14 million, $9 million, and $14 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Mortgage-backed securities
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.

ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming lower loss severity for Prime sector bonds versus ALT-A and Sub-prime bonds.

These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then we do not expect to recover our amortized cost basis and we recognize an estimated credit loss in net income.

Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities of $6 million, $11 million, and $32 million for the years ended December 31, 2012, 2011, and 2010, 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” and the change in net unrealized appreciation (depreciation) of investments: 
 
Years Ended December 31
 
(in millions of U.S. dollars)
2012

 
2011

 
2010

Fixed maturities:
 
 
 
 
 
OTTI on fixed maturities, gross
$
(26
)
 
$
(61
)
 
$
(115
)
OTTI on fixed maturities recognized in OCI (pre-tax)
1

 
15

 
69

OTTI on fixed maturities, net
(25
)
 
(46
)
 
(46
)
Gross realized gains excluding OTTI
388

 
410

 
569

Gross realized losses excluding OTTI
(133
)
 
(200
)
 
(143
)
Total fixed maturities
230

 
164

 
380

Equity securities:
 
 
 
 
 
OTTI on equity securities
(5
)
 
(1
)
 
—

Gross realized gains excluding OTTI
11

 
15

 
86

Gross realized losses excluding OTTI
(2
)
 
(5
)
 
(2
)
Total equity securities
4

 
9

 
84

OTTI on other investments
(7
)
 
(3
)
 
(13
)
Foreign exchange losses
(16
)
 
(13
)
 
(54
)
Investment and embedded derivative instruments
(6
)
 
(143
)
 
58

Fair value adjustments on insurance derivative
171

 
(779
)
 
(28
)
S&P put options and futures
(297
)
 
(4
)
 
(150
)
Other derivative instruments
(4
)
 
(4
)
 
(19
)
Other
3

 
(22
)
 
174

Net realized gains (losses)
78

 
(795
)
 
432

Change in net unrealized appreciation (depreciation) on investments:
 
 
 
 
 
Fixed maturities available for sale
1,099

 
569

 
451

Fixed maturities held to maturity
(94
)
 
(89
)
 
522

Equity securities
61

 
(47
)
 
(44
)
Other
50

 
40

 
(35
)
Income tax expense
(198
)
 
(157
)
 
(152
)
Change in net unrealized appreciation on investments
918

 
316

 
742

Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments
$
996

 
$
(479
)
 
$
1,174


 
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: 
 
Years Ended December 31
 
(in millions of U.S. dollars)
2012

 
2011

 
2010

Balance of credit losses related to securities still held – beginning of year
$
74

 
$
137

 
$
174

Additions where no OTTI was previously recorded
8

 
12

 
34

Additions where an OTTI was previously recorded
12

 
8

 
12

Reductions for securities sold during the period
(51
)
 
(83
)
 
(83
)
Balance of credit losses related to securities still held – end of year
$
43

 
$
74

 
$
137


d) Other investments
The following table presents the fair value and cost of other investments:
 
 
 
December 31

 
 
 
December 31

 
 
 
2012

 
 
 
2011

(in millions of U.S. dollars)
Fair Value

 
Cost

 
Fair Value

 
Cost

Investment funds
$
395

 
$
278

 
$
378

 
$
277

Limited partnerships
531

 
398

 
531

 
429

Partially-owned investment companies
1,186

 
1,187

 
904

 
904

Life insurance policies
148

 
148

 
127

 
127

Policy loans
164

 
164

 
143

 
143

Trading securities
243

 
242

 
194

 
195

Other
49

 
48

 
37

 
37

Total
$
2,716

 
$
2,465

 
$
2,314

 
$
2,112



Investment funds include one highly diversified fund investment as well as several direct funds that employ a variety of investment styles such as long/short equity and arbitrage/distressed. Included in limited partnerships and partially-owned investment companies are 65 individual limited partnerships covering a broad range of investment strategies including large cap buyouts, specialist buyouts, growth capital, distressed, mezzanine, real estate, and co-investments. The underlying portfolio consists of various public and private debt and equity securities of publicly traded and privately held companies and real estate assets.  The underlying investments across various partnerships, geographies, industries, asset types, and investment strategies provide risk diversification within the limited partnership portfolio and the overall investment portfolio.  Trading securities comprise $212 million of mutual funds supported by assets that do not quality for separate account reporting under GAAP at December 31, 2012 compared with $162 million at December 31, 2011. Trading securities also includes assets held in rabbi trusts of $23 million of equity securities and $8 million of fixed maturities at December 31, 2012, compared with $24 million of equity securities and $8 million of fixed maturities at December 31, 2011.

e) Investments in partially-owned insurance companies
The following table presents Investments in partially-owned insurance companies:
 
December 31
 
 
December 31
 
 
 
 
2012
 
 
2011
 
 
 
(in millions of U.S. dollars, except percentages)
Carrying Value

 
Issued Share Capital

 
Ownership Percentage

 
Carrying Value

 
Issued Share Capital

 
Ownership Percentage

 
Domicile
Huatai Group
$
350

(1) 
$
474

 
20.0
%
 
$
228

 
$
457

 
20.0
%
 
China
Huatai Life Insurance Company
84

 
205

 
20.0
%
 
103

 
196

 
20.0
%
 
China
Freisenbruch-Meyer
9

 
6

 
40.0
%
 
8

 
5

 
40.0
%
 
Bermuda
ACE Cooperative Ins. Co. - Saudi Arabia
9

 
27

 
30.0
%
 
7

 
27

 
30.0
%
 
Saudi Arabia
Russian Reinsurance Company
2

 
4

 
23.3
%
 
2

 
4

 
23.3
%
 
Russia
Island Heritage
—

 
—

 
—

 
4

 
27

 
10.8
%
 
Cayman Islands
Total
$
454

 
$
716

 
 
 
$
352

 
$
716

 
 
 
 

(1) 
Includes additional investment of approximately $100 million which is pending regulatory approval.
Huatai Group and Huatai Life Insurance Company provide a range of P&C, life, and investment products.

f) Gross unrealized loss
At December 31, 2012, there were 2,029 fixed maturities out of a total of 23,679 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $5 million. There were 56 equity securities out of a total of 193 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 December 31, 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.

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
 
December 31, 2012
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
440

 
$
(1.4
)
 
$
—

 
$
—

 
$
440

 
$
(1.4
)
Foreign
1,234

 
(8.6
)
 
88

 
(5.8
)
 
1,322

 
(14.4
)
Corporate securities
1,026

 
(22.7
)
 
85

 
(7.9
)
 
1,111

 
(30.6
)
Mortgage-backed securities
855

 
(3.8
)
 
356

 
(32.6
)
 
1,211

 
(36.4
)
States, municipalities, and political subdivisions
316

 
(3.0
)
 
48

 
(3.6
)
 
364

 
(6.6
)
Total fixed maturities
3,871

 
(39.5
)
 
577

 
(49.9
)
 
4,448

 
(89.4
)
Equity securities
29

 
(4.2
)
 
—

 
—

 
29

 
(4.2
)
Other investments
68

 
(4.9
)
 
—

 
—

 
68

 
(4.9
)
Total
$
3,968

 
$
(48.6
)
 
$
577

 
$
(49.9
)
 
$
4,545

 
$
(98.5
)
 
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2011
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

(in millions of U.S. dollars)
 
 
 
 
 
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
)

g) Net investment income
The following table presents the sources of net investment income:
 
Years Ended December 31
 
(in millions of U.S. dollars)
2012

 
2011

 
2010

Fixed maturities
$
2,134

 
$
2,196

 
$
2,071

Short-term investments
28

 
43

 
34

Equity securities
34

 
36

 
26

Other
104

 
62

 
44

Gross investment income
2,300

 
2,337

 
2,175

Investment expenses
(119
)
 
(95
)
 
(105
)
Net investment income
$
2,181

 
$
2,242

 
$
2,070


h) 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 December 31, 2012 and 2011, are fixed maturities and short-term investments totaling $16.6 billion and $14.9 billion, respectively, and cash of $139 million and $179 million, respectively.
The following table presents the components of restricted assets: 
 
December 31

 
December 31

(in millions of U.S. dollars)
2012

 
2011

Trust funds
$
11,389

 
$
9,940

Deposits with non-U.S. regulatory authorities
2,133

 
2,240

Assets pledged under reverse repurchase agreements
1,401

 
1,251

Deposits with U.S. regulatory authorities
1,338

 
1,307

Other pledged assets
456

 
364

 
$
16,717

 
$
15,102