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1. General
ACE Limited (ACE or the Company) is a holding company incorporated in Zurich, Switzerland. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 9.
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
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2. Significant accounting policies
New accounting pronouncements
Adopted in the six months ended June 30, 2010
Consolidation of variable interest entities and accounting for transfers of financial assets
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets (ASU 2009-16) and ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17). ASU 2009-16 amends Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, by removing the exemption from consolidation for qualifying special purpose entities. This statement also limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. ASU 2009-17 amends ASC Topic 810, Consolidation, to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-16 and ASU 2009-17 were effective for interim and annual reporting periods beginning on January 1, 2010. The adoption of these provisions did not have a material impact on ACE's financial condition or results of operations.
Fair value measurements and disclosures
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). The provisions of ASU 2010-06 amend ASC Topic 820, Fair value measurements and Disclosures, (Topic 820) to require reporting entities to make new disclosures about recurring and nonrecurring fair value measurements including the amounts of and reasons for significant transfers into and out of Level 1 and Level 2 fair value measurements and separate disclosure of purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010.
To be adopted after June 30, 2010
Embedded Credit Derivatives
In March 2010, the FASB issued ASU No. 2010-11, Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11). The provisions of ASU 2010-11 amend ASC Topic 815, Derivatives and Hedging, to provide clarification on the bifurcation scope exception for embedded credit derivative features. ASU 2010-11 is effective for interim and annual reporting periods beginning on July 1, 2010. ACE does not expect the adoption of these provisions to have a material impact on ACE's financial condition or results of operations.
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3. Investments
a) Fixed maturities
The following tables present the fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI.
June 30, 2010 | ||||||||||||||
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 | $ | 3,401 | $ | 140 | $ | - | $ | 3,541 | $ | - | ||||
Foreign | 10,878 | 413 | (87) | 11,204 | (28) | |||||||||
Corporate securities | 14,123 | 784 | (132) | 14,775 | (36) | |||||||||
Mortgage-backed securities | 10,405 | 421 | (235) | 10,591 | (229) | |||||||||
States, municipalities, and political subdivisions | 1,397 | 56 | (10) | 1,443 | - | |||||||||
$ | 40,204 | $ | 1,814 | $ | (464) | $ | 41,554 | $ | (293) | |||||
Held to maturity | ||||||||||||||
U.S. Treasury and agency | $ | 925 | $ | 39 | $ | - | $ | 964 | $ | - | ||||
Foreign | 21 | - | - | 21 | - | |||||||||
Corporate securities | 301 | 13 | - | 314 | - | |||||||||
Mortgage-backed securities | 1,277 | 64 | (6) | 1,335 | - | |||||||||
States, municipalities, and political subdivisions | 698 | 8 | (1) | 705 | - | |||||||||
$ | 3,222 | $ | 124 | $ | (7) | $ | 3,339 | $ | - |
December 31, 2009 | ||||||||||||||
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 | $ | 3,680 | $ | 48 | $ | (19) | $ | 3,709 | $ | - | ||||
Foreign | 10,960 | 345 | (160) | 11,145 | (37) | |||||||||
Corporate securities | 12,707 | 658 | (150) | 13,215 | (41) | |||||||||
Mortgage-backed securities | 10,058 | 239 | (455) | 9,842 | (227) | |||||||||
States, municipalities, and political subdivisions | 1,580 | 52 | (18) | 1,614 | - | |||||||||
$ | 38,985 | $ | 1,342 | $ | (802) | $ | 39,525 | $ | (305) | |||||
Held to maturity | ||||||||||||||
U.S. Treasury and agency | $ | 1,026 | $ | 33 | $ | (2) | $ | 1,057 | $ | - | ||||
Foreign | 26 | 1 | - | 27 | - | |||||||||
Corporate securities | 313 | 10 | (1) | 322 | - | |||||||||
Mortgage-backed securities | 1,440 | 39 | (10) | 1,469 | - | |||||||||
States, municipalities, and political subdivisions | 676 | 11 | (1) | 686 | - | |||||||||
$ | 3,481 | $ | 94 | $ | (14) | $ | 3,561 | $ | - |
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" column above is the cumulative amount 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 statement of comprehensive income. For the three and six months ended June 30, 2010, $33 million and $96 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At June 30, 2010, and December 31, 2009, AOCI includes net unrealized depreciation of $143 million and $162 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
The following table presents fixed maturities at June 30, 2010, and December 31, 2009, by contractual maturity. 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.
June 30 | December 31 | ||||||||||
2010 | 2009 | ||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
(in millions of U.S. dollars) | |||||||||||
Available for sale; maturity period | |||||||||||
Due in 1 year or less | $ | 1,525 | $ | 1,606 | $ | 1,354 | $ | 1,352 | |||
Due after 1 year through 5 years | 13,976 | 14,430 | 14,457 | 14,905 | |||||||
Due after 5 years through 10 years | 11,222 | 11,827 | 9,642 | 10,067 | |||||||
Due after 10 years | 3,076 | 3,100 | 3,474 | 3,359 | |||||||
29,799 | 30,963 | 28,927 | 29,683 | ||||||||
Mortgage-backed securities | 10,405 | 10,591 | 10,058 | 9,842 | |||||||
$ | 40,204 | $ | 41,554 | $ | 38,985 | $ | 39,525 | ||||
Held to maturity; maturity period | |||||||||||
Due in 1 year or less | $ | 591 | $ | 599 | $ | 755 | $ | 766 | |||
Due after 1 year through 5 years | 1,255 | 1,304 | 1,096 | 1,129 | |||||||
Due after 5 years through 10 years | 15 | 16 | 108 | 115 | |||||||
Due after 10 years | 84 | 85 | 82 | 82 | |||||||
1,945 | 2,004 | 2,041 | 2,092 | ||||||||
Mortgage-backed securities | 1,277 | 1,335 | 1,440 | 1,469 | |||||||
$ | 3,222 | $ | 3,339 | $ | 3,481 | $ | 3,561 |
b) Equity securities
The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities at June 30, 2010, and December 31, 2009.
June 30 | December 31 | ||||
2010 | 2009 | ||||
(in millions of U.S. dollars) | |||||
Cost | $ | 200 | $ | 398 | |
Gross unrealized appreciation | 16 | 70 | |||
Gross unrealized depreciation | (2) | (1) | |||
Fair value | $ | 214 | $ | 467 |
c) Net realized gains (losses)
The Company adopted provisions included in ASC Topic 320, Investments-Debt and Equity Securities, (Topic 320) related to the recognition and presentation of OTTI as at April 1, 2009. Under these provisions, when an OTTI related to a fixed maturity has occurred, ACE is required to record the OTTI in net income if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security. Further, in cases where the Company does not intend to sell the security and it is more likely than not that it 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. For fixed maturities, prior to this adoption, ACE was required to record OTTI in net income unless the Company had the intent and ability to hold the impaired security to recovery. These provisions do not have any impact on the accounting for OTTI for any other type of investment.
The cumulative effect recorded at the date of adoption, April 1, 2009, reflected a reduction to AOCI and an increase to Retained earnings of $267 million. These adjustments reflected the Company's best estimate at the adoption date of the net of tax amount ($349 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that had not suffered a credit loss, the Company did not intend to sell, and it was more likely than not that ACE would not be required to sell before the recovery of their amortized cost. Retained earnings and Deferred tax assets as at April 1, 2009, were also reduced by $46 million as a result of an increase in the Company's valuation allowance against deferred tax assets, which was a direct effect of the adoption. In the quarter following the period of initial adoption, the cumulative effect of adoption was ultimately adjusted by $25 million ($44 million pre-tax). The $44 million pre-tax adjustment reflected the true-up of ACE's prior estimate of reversals of non-credit OTTI for securities impaired prior to 2006 (Pre-2006 OTTI) for which a detailed review of securities held at the adoption date of the new OTTI standards was not completed until the third quarter of 2009. Upon completion of the detailed review of securities held at the adoption date, ACE determined that fewer Pre-2006 OTTI securities were held than previously estimated, which resulted in an overstatement of the original reversal estimate of non-credit OTTI on Pre-2006 OTTI. The adjustment resulted in an increase to AOCI and an offsetting decrease in Retained earnings with no impact on net income or shareholders' equity.
Each quarter, the Company reviews its securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.
For impaired fixed maturities, the Company assesses OTTI based on the provisions of Topic 320 as described above. The factors that the Company considers when determining if a credit loss exists related to a fixed maturity are discussed in "Evaluation of potential credit losses related to fixed maturities" below. Prior to the adoption, when evaluating fixed maturities for OTTI, the Company principally considered its ability and intent to hold the impaired security to the expected recovery period, the issuer's financial condition, and the Company's assessment (using available market information such as credit ratings) of the issuer's ability to make future scheduled principal and interest payments on a timely basis.
The Company reviews all non-fixed maturities for OTTI based on the following:
ACE, as a general rule, also considers that equity securities in an unrealized loss position for twelve consecutive months are impaired.
Evaluation of potential credit losses related to fixed maturities
ACE reviews each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, ACE considers 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 ACE determines 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. The specific methodologies and significant assumptions used by asset class are discussed below. 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 $20 million of gross unrealized loss at June 30, 2010. 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 credit worthiness 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. ACE develops 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. ACE believes that use of a default assumption in excess of the historical mean is reasonable in light of recent 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 | 4.8% | 1.1% | ||
B | 12.9% | 3.4% | ||
Caa-C | 53.6% | 13.8% |
Consistent with management's approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 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 40 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 for the three and six months ended June 30, 2010, of $Nil and $1 million, respectively. Credit losses recognized in net income for corporate securities from the date of adoption to June 30, 2009, were $34 million.
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:
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 the Company does not expect to recover its amortized cost basis and recognizes an estimated credit loss in net income.
The following table presents the significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for potential credit loss at June 30, 2010, by sector and vintage.
Range of Significant Assumptions Used | ||||||
Sector(1) | Vintage | Default Rate(2) | Loss Severity Rate(2) | |||
Prime | 2003 and prior | 11% | 22% | |||
2004 | 21-42% | 37-48% | ||||
2005 | 9-44% | 45-55% | ||||
2006-2007 | 13-73% | 40-63% | ||||
ALT-A | 2003 and prior | 26% | 39% | |||
2004 | 33% | 45% | ||||
2005 | 9-51% | 48-63% | ||||
2006-2007 | 32-70% | 59-66% | ||||
Option ARM | 2003 and prior | 28% | 29% | |||
2004 | 56% | 45% | ||||
2005 | 68-85% | 57-64% | ||||
2006-2007 | 73-81% | 65-66% | ||||
Sub-prime | 2003 and prior | 57% | 65% | |||
2004 | 62% | 64% | ||||
2005 | 73% | 74% | ||||
2006-2007 | 58-85% | 55-82% |
(1) Prime, ALT-A, and Sub-prime sector bonds are categorized based on credit worthiness of the borrower. Option ARM sector bonds are categorized based on the type of mortgage product, rather than credit worthiness of the borrower.
(2) Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2010, of $5 million and $22 million, respectively. Credit losses recognized in net income for mortgage-backed securities from the date of adoption to June 30, 2009, were $26 million.
The following table presents, for the periods indicated, the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused the Company to conclude the decline in fair value of certain investments was "other-than-temporary".
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
Fixed maturities: | |||||||||||
OTTI on fixed maturities, gross | $ | (18) | $ | (281) | $ | (68) | (369) | ||||
OTTI on fixed maturities recognized in OCI (pre-tax) | 13 | 191 | 45 | 191 | |||||||
OTTI on fixed maturities, net | (5) | (90) | (23) | (178) | |||||||
Gross realized gains excluding OTTI | 128 | 179 | 296 | 330 | |||||||
Gross realized losses excluding OTTI | (46) | (160) | (115) | (271) | |||||||
Total fixed maturities | 77 | (71) | 158 | (119) | |||||||
Equity securities: | |||||||||||
OTTI on equity securities | - | (1) | - | (26) | |||||||
Gross realized gains excluding OTTI | 32 | 61 | 77 | 65 | |||||||
Gross realized losses excluding OTTI | - | (141) | - | (220) | |||||||
Total equity securities | 32 | (81) | 77 | (181) | |||||||
OTTI on other investments | (13) | (23) | (13) | (102) | |||||||
Foreign exchange gains (losses) | 61 | (56) | 52 | (24) | |||||||
Investment and embedded derivative instruments | 5 | (21) | 24 | 34 | |||||||
Fair value adjustments on insurance derivative | (301) | 284 | (205) | 283 | |||||||
S&P put options and futures | 143 | (181) | 84 | (156) | |||||||
Other derivative instruments | 4 | (39) | (5) | (66) | |||||||
Other | 1 | (37) | 5 | (15) | |||||||
Net realized gains (losses) | $ | 9 | $ | (225) | $ | 177 | $ | (346) |
The following table presents, for the periods indicated, a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI. For 2009, the roll forward is presented from April 1, 2009, the date of adoption of the then new OTTI standard, to June 30, 2009.
Three Months Ended | Six Months | |||||||
June 30 | Ended | |||||||
2010 | 2009 | June 30, 2010 | ||||||
(in millions of U.S. Dollars) | ||||||||
Balance of credit losses related to securities still held-beginning of period | $ | 163 | $ | 130 | $ | 174 | ||
Additions where no OTTI was previously recorded | 5 | 54 | 22 | |||||
Additions where an OTTI was previously recorded | - | 6 | 1 | |||||
Reductions reflecting amounts previously recorded in OCI but subsequently reflected in net income | - | (2) | - | |||||
Reductions for securities sold during the period | (31) | - | (60) | |||||
Balance of credit losses related to securities still held-end of period | $ | 137 | $ | 188 | $ | 137 | ||
d) Gross unrealized loss
At June 30, 2010, there were 3,023 fixed maturities out of a total of 18,992 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $10 million. Fixed maturities in an unrealized loss position at June 30, 2010, were comprised of both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase and included non-agency mortgage-backed securities that suffered a decline in value since their original date of purchase.
The following tables present, for all securities in an unrealized loss position at June 30, 2010, and December 31, 2009 (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 | ||||||||||||
June 30, 2010 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | - | $ | - | $ | 7 | $ | (0.1) | $ | 7 | $ | (0.1) | |||||
Foreign | 1,556 | (36.1) | 395 | (50.8) | 1,951 | (86.9) | |||||||||||
Corporate securities | 1,926 | (42.3) | 480 | (89.9) | 2,406 | (132.2) | |||||||||||
Mortgage-backed securities | 184 | (5.0) | 1,141 | (235.7) | 1,325 | (240.7) | |||||||||||
States, municipalities, and political subdivisions | 308 | (9.4) | 26 | (2.0) | 334 | (11.4) | |||||||||||
Total fixed maturities | 3,974 | (92.8) | 2,049 | (378.5) | 6,023 | (471.3) | |||||||||||
Equity securities | 17 | (1.6) | 1 | (0.3) | 18 | (1.9) | |||||||||||
Total | $ | 3,991 | $ | (94.4) | $ | 2,050 | $ | (378.8) | $ | 6,041 | $ | (473.2) |
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
December 31, 2009 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 1,952 | $ | (19.4) | $ | 21 | $ | (1.1) | $ | 1,973 | $ | (20.5) | |||||
Foreign | 2,568 | (124.0) | 363 | (36.4) | 2,931 | (160.4) | |||||||||||
Corporate securities | 1,222 | (52.3) | 865 | (99.1) | 2,087 | (151.4) | |||||||||||
Mortgage-backed securities | 1,731 | (54.8) | 1,704 | (409.7) | 3,435 | (464.5) | |||||||||||
States, municipalities, and political subdivisions | 455 | (13.9) | 60 | (5.0) | 515 | (18.9) | |||||||||||
Total fixed maturities | 7,928 | (264.4) | 3,013 | (551.3) | 10,941 | (815.7) | |||||||||||
Equity securities | 111 | (1.3) | - | 0.0 | 111 | (1.3) | |||||||||||
Other investments | 81 | (16.4) | - | 0.0 | 81 | (16.4) | |||||||||||
Total | $ | 8,120 | $ | (282.1) | $ | 3,013 | $ | (551.3) | $ | 11,133 | $ | (833.4) |
e) Restricted assets
The Company 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. The Company also utilizes 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. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at June 30, 2010, are fixed maturities and short-term investments totaling $12.1 billion and cash of $165 million. The following table presents the components of the restricted assets at June 30, 2010, and December 31, 2009.
June 30 | December 31 | |||||||
2010 | 2009 | |||||||
(in millions of U.S. dollars) | ||||||||
Trust funds | $ | 8,226 | $ | 8,402 | ||||
Deposits with non-U.S. regulatory authorities | 2,450 | 2,475 | ||||||
Deposits with U.S. regulatory authorities | 1,366 | 1,199 | ||||||
Other pledged assets | 232 | 245 | ||||||
$ | 12,274 | $ | 12,321 |
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4. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The following table presents income and expenses relating to guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
GMDB | |||||||||||
Net premiums earned | $ | 27 | $ | 27 | $ | 56 | $ | 50 | |||
Policy benefits | $ | 22 | $ | 21 | $ | 46 | $ | 65 | |||
GMIB | |||||||||||
Net premiums earned | $ | 40 | $ | 39 | $ | 81 | $ | 79 | |||
Policy benefits | 6 | 6 | 13 | 8 | |||||||
Realized gains (losses) | (301) | 284 | (205) | 283 | |||||||
Gain (loss) recognized in income | $ | (267) | $ | 317 | $ | (137) | $ | 354 | |||
Net cash received (disbursed) | $ | 40 | $ | 38 | $ | 80 | $ | 78 | |||
Net (increase) decrease in liability | $ | (307) | $ | 279 | $ | (217) | $ | 276 |
At June 30, 2010, reported liabilities for GMDB and GMIB reinsurance were $197 million and $776 million, respectively, compared with $212 million and $559 million, respectively, at December 31, 2009. The reported liability for GMIB reinsurance of $776 million at June 30, 2010, and $559 million at December 31, 2009, includes a fair value derivative adjustment of $648 million and $443 million, respectively. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitant's account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more information, such as market conditions and demographics of in-force annuities.
GMDB reinsurance
At June 30, 2010, and December 31, 2009, the Company's net amount at risk from its GMDB reinsurance programs was $4.2 billion and $3.8 billion, respectively. For GMDB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
At June 30, 2010, if all of the Company's cedants' policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable by the Company, taking into account all appropriate claims limits, would be approximately $1.4 billion. As a result of the annual claim limits on the GMDB reinsurance agreements, the claims payable are lower in this case than if all the policyholders were to die over time, all else equal.
GMIB reinsurance
At June 30, 2010, and December 31, 2009, the Company's net amount at risk from its GMIB reinsurance programs was $1.1 billion and $683 million, respectively. For GMIB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 66.
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5. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities (TBA), discussed below, these are the most numerous and frequent derivative transactions.
ACE maintains positions in convertible bond investments that contain embedded derivatives. In addition, the Company purchases TBAs as part of its investing activities. These securities are included within the Company's fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of GMIBs associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company's GMIB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GMIBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). The Company also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity and interest rate exposure in the GMDB and GMIB block of business.
In relation to certain debt issuances, the Company has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. Although the use of these interest rate swaps has the economic effect of fixing or reducing borrowing costs on a net basis, gross interest expense on the related debt issuances is included in Interest expense while the settlements related to the interest rate swaps are reflected in Net realized gains (losses) in the consolidated statements of operations. ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.
The Company carries all derivative instruments at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are used as hedges for accounting purposes.
The following table presents the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of the Company's derivative instruments at June 30, 2010, and December 31, 2009.
June 30, 2010 | December 31, 2009 | |||||||||
Consolidated Balance Sheet Location | Fair Value | Notional Value/ Payment Provision | Fair Value | Notional Value/ Payment Provision | ||||||
(in millions of U.S. dollars) | ||||||||||
Investment and embedded derivative instruments | ||||||||||
Foreign currency forward contracts | AP | $ | 3 | $ | 715 | $ | 6 | $ | 393 | |
Futures contracts on money market instruments | AP | 8 | 4,143 | 4 | 4,711 | |||||
Futures contracts on notes and bonds | AP | (2) | 819 | (2) | 500 | |||||
Options on money market instruments | AP | - | 1,024 | - | 200 | |||||
Options on notes and bonds futures | AP | 1 | 20 | (1) | 305 | |||||
Convertible bonds | FM AFS | 345 | 825 | 354 | 725 | |||||
TBAs | FM AFS | 48 | 45 | 11 | 10 | |||||
$ | 403 | $ | 7,591 | $ | 372 | $ | 6,844 | |||
Other derivative instruments | ||||||||||
Futures contracts on equities | AP | $ | 38 | $ | 934 | $ | (9) | $ | 960 | |
Options on equity market indices | AP | 74 | 250 | 56 | 250 | |||||
Interest rate swaps | AP | (33) | 500 | (24) | 500 | |||||
Credit default swaps | AP | 14 | 350 | 2 | 350 | |||||
Other | AP | - | 17 | 12 | 37 | |||||
$ | 93 | $ | 2,051 | $ | 37 | $ | 2,097 | |||
GMIB(1) | AP/FPB | $ | (776) | $ | 1,092 | $ | (559) | $ | 683 |
(1) Note that the payment provision related to GMIB is the net amount at risk. The concept of a notional value does not apply to the GMIB reinsurance contracts.
The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations for the periods indicated.
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
Investment and embedded derivative instruments | |||||||||||
Foreign currency forward contracts | $ | 23 | $ | (35) | $ | 36 | $ | (14) | |||
All other futures contracts and options | 2 | (18) | 10 | (4) | |||||||
Convertible bonds | (20) | 38 | (22) | 57 | |||||||
TBAs | - | (6) | - | (5) | |||||||
$ | 5 | $ | (21) | $ | 24 | $ | 34 | ||||
GMIB and other derivative instruments | |||||||||||
GMIB | $ | (301) | $ | 284 | $ | (205) | $ | 283 | |||
Futures contracts on equities | 117 | (89) | 66 | (102) | |||||||
Options on equity market indices | 26 | (92) | 18 | (54) | |||||||
Interest rate swaps | (8) | 10 | (17) | (15) | |||||||
Credit default swaps | 11 | (49) | 11 | (52) | |||||||
Other | 1 | - | 1 | 1 | |||||||
$ | (154) | $ | 64 | $ | (126) | $ | 61 | ||||
$ | (149) | $ | 43 | $ | (102) | $ | 95 |
Derivative instrument objectives
(i) Foreign currency exposure management
A foreign currency forward contracts (forward) is an agreement between participants to exchange specific foreign currencies at a future date. The Company uses forwards to minimize the effect of fluctuating foreign currencies.
(ii) Duration management and market exposure
Futures
Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded bond and note futures contracts are used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business.
Options
An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company's synthetic strategy as described above. Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the credit worthiness of its counterparties and obtains collateral. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company's investment guidelines.
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty's payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. The Company also employs interest rate swaps related to certain debt issuances for the purpose of either fixing and/or reducing borrowing costs.
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller pays the protection buyer the difference between the fair value of assets and the principal amount. The Company has purchased a credit default swap to mitigate its global credit risk exposure to one of its reinsurers.
(iii) Convertible security investments
A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer's equity at certain times prior to the bond's maturity. The convertible option is an embedded derivative within the fixed maturity host instruments which are classified in the investment portfolio as available for sale. The Company purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) TBA
By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company's position is accounted for as a derivative in the consolidated financial statements. The Company purchases TBAs both for their total return and for the flexibility they provide related to ACE's mortgage-backed security strategy.
(v) GMIB
Under the GMIB program, as the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents management's estimate of exit price and thus, includes a risk margin. The Company may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (i.e., increased annuitization or decreased lapse rates) although the Company expects the business to be profitable. The Company believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
b) Other investments
Included in Other investments are investments in limited partnerships and partially-owned investment companies with a carrying value of $936 million. In connection with these investments, the Company has commitments that may require funding of up to $748 million over the next several years.
c) Taxation
d) Legal proceedings
(i) Claims and other litigation
The Company's insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company's subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in the Company's loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE's management, ACE's ultimate liability for these matters is not likely to have a material adverse effect on ACE's consolidated financial condition, although it is possible that the effect could be material to ACE's consolidated results of operations for an individual reporting period.
(ii) Business practices litigation
Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries were issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG) and the Pennsylvania Insurance Department. Such inquiries concerned underwriting practices and non-traditional or loss mitigation insurance products.
On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance. On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolved the issues raised by the Department and the OAG arising from their investigation of ACE's underwriting practices and contingent commission payments. On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolved investigations of ACE's underwriting practices and contingent commission payments.
In June 2008, in an action filed by the NYAG against another insurer, a New York court held that "[c]ontingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between parties, defendants[s] had no duty to disclose the existence of the contingent commission agreement." New York v. Liberty Mut. Ins. Co., 52 A.D. 3d 378, 379 (2008) (citing Hersch v. DeWitt Stern Group, Inc., 43 A.D. 3d 644, 645 (2007). In February 2010, the NYAG amended its agreement with the country's three largest insurance brokers, eliminating the ban on contingent commissions that was levied in 2005.
ACE, ACE INA Holdings, Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of "B" quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients' business with insurers through related wholesale entities that acted as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants' reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
In 2006 and 2007, the Court dismissed plaintiffs' first two attempts to properly plead a case without prejudice and permitted plaintiffs one final opportunity to re-plead. The amended complaint, filed on May 22, 2007, purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. On June 21, 2007, defendants moved to dismiss the amended complaint and moved to strike the new parties. The Court granted defendants' motions and dismissed plaintiffs' antitrust and RICO claims with prejudice on August 31, 2007, and September 28, 2007, respectively. The Court also declined to exercise supplemental jurisdiction over plaintiffs' state law claims and dismissed those claims without prejudice. On October 10, 2007, plaintiffs filed a Notice of Appeal of the antitrust and RICO rulings to the United States Court of Appeals for the Third Circuit. The parties fully briefed the appeal and argued before the Third Circuit on April 21, 2009. The court took the case under advisement, but did not indicate when it would issue a decision.
There are a number of federal actions brought by policyholders based on allegations similar to the allegations in the consolidated federal actions that were filed in, or transferred to, the United States District Court for the District of New Jersey for coordination. All proceedings in these actions are currently stayed.
Three cases have been filed in state courts with allegations similar to those in the consolidated federal actions described above.
ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania and the Court appointed Sheet Metal Workers' National Pension Fund and Alaska Ironworkers Pension Trust as lead plaintiffs. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs allege that ACE's public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of "B" quotes and contingent commissions and that ACE's revenues and earnings were inflated by these practices. Plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10(b)-5 promulgated thereunder, and Section 20(a) of the Securities Act (control person liability). In 2005, ACE and the individual defendants filed a motion to dismiss. The Court heard oral argument on November 10, 2008, but did not rule on the motion. On December 16, 2008, the parties entered into a Stipulation of Settlement in which the parties agreed – contingent upon Court approval – that ACE would pay the plaintiffs $1.95 million in exchange for a full release of all claims. On June 9, 2009, the Court approved the settlement and dismissed the multidistrict litigation (including the four underlying suits) with prejudice.
ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, are named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. In Delaware, the shareholder plaintiffs filed an amended complaint (their third pleading effort), on April 14, 2008, which drops Evan Greenberg as a defendant (plaintiffs in the New York action subsequently dismissed Evan Greenberg as well). On June 13, 2008, ACE filed a motion to dismiss, and on April 20, 2009, the court heard oral argument on the motion. On June 17, 2009, the Court dismissed all claims against ACE with prejudice; final judgment in favor of ACE was entered on July 13, 2009. The derivative plaintiffs appealed and argument was held before a three judge panel of the Delaware Supreme Court on February 17, 2010. On February 22, 2010, the three judge panel ordered further oral argument to the Court en banc without scheduling a date. The New York derivative action is currently stayed.
In all of the lawsuits described above, plaintiffs seek compensatory and in some cases special damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and, accordingly, no liability for compensatory damages has been established in the consolidated financial statements.
ACE's ultimate liability for these matters is not likely to have a material adverse effect on ACE's consolidated financial condition, although it is possible that the effect could be material to ACE's consolidated results of operations for an individual reporting period.
(iii) Legislative activity
The State of New York, as part of the 2009-10 State budget, has adopted language that requires an insurer which (1) paid to the Workers' Compensation Board (WCB) various statutory assessments in an amount less than that insurer "collected" from insured employers in a given year and (2) "has identified and held any funds collected but not paid to the WCB, as measurable and available, as of January 1, 2009" to pay retroactive assessments to the WCB. The language, and impact, of this new law is at present uncertain because it uses terms and dates that are not readily identifiable with respect to insurers' statutory financial statements and because the State has not promulgated implementing regulations or other explanatory materials. The Company's understanding is that the law is intended to address certain inconsistencies in the New York State laws regulating the calculation of workers' compensation assessments by insurance carriers and the remittance of those funds to the State. In July 2009, ACE received a subpoena from the NYAG requesting documents related to these issues, and in October 2009, ACE received a request from the WCB asking ACE to explain whether or not it was an "affected carrier" under the new law. In addition, the New York State legislature, as part of the 2010-11 State budget, has enacted language that appears to require an insurer who paid to the WCB various statutory assessments in an amount less than that insurer "collected" from insured employers for the period April 1, 2008, through March 31, 2009, to pay such "excess assessment funds" to the WCB. Although the Company cannot at this time predict the interpretation that will be afforded the legislative language, ACE is confident that it has complied with the law governing workers' compensation surcharges and assessments. ACE has established a contingency based on the Company's best estimate of the potential liability that could result from the legislation or other events surrounding this topic, based on the facts and circumstances at this time. Such contingency will be increased or decreased as circumstances develop. The Company does not expect these events to have a material impact on its financial condition or results of operations.
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8. Fair value measurements
Fair value hierarchy
The provisions of Topic 820 define fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect management's judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ACE makes decisions regarding the categorization of assets or liabilities within the valuation hierarchy based on the inputs used to determine respective fair values at the balance sheet date. Accordingly, transfers between levels within the valuation hierarchy are determined on the same basis.
The Company utilizes one or more pricing services to obtain fair value measurements for the majority of the investment securities it holds. Based on management's understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. The following is a description of the valuation techniques and inputs used to determine fair values for the Company's financial instruments carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
Fixed maturities
The Company utilizes pricing services to estimate fair value measurements for the majority of its fixed maturities. The pricing services utilize market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependant on the asset class and the market conditions. Additionally, given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Fixed maturities for which pricing is unobservable are classified within Level 3.
Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2.
Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase, that are traded in active markets are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates par value.
Securities lending collateral
The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as the Company's other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to the Company's obligation to return the collateral plus interest.
Other investments
Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which the Company has used NAV as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investment or will not have the contractual option to redeem the investments in the near term. The remainder of such investments are classified within Level 2. Equity securities and fixed maturities held in rabbi trusts maintained by the Company for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as the Company's other equity securities and fixed maturities.
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies are classified within Level 3.
Investment derivative instruments
For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, the Company obtains quoted market prices to determine fair value. As such, these instruments are included within Level 1.
Guaranteed minimum income benefits
The liability for GMIBs arises from the Company's life reinsurance programs covering living benefit guarantees whereby the Company assumes the risk of GMIBs associated with variable annuity contracts. For GMIB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. Based on the Company's second quarter valuation review, ACE made changes to the valuation model as follows:
The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as appropriate with industry estimates. The Company views the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GMIB reinsurance is classified within Level 3.
Short- and long-term debt and trust preferred securities
Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including the Company's incremental borrowing rates, which reflect ACE's credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. As such, these instruments are classified within Level 2.
Other derivative instruments
The Company maintains positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for GMDB and GMIB reinsurance business. The Company's position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the Company's remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. The Company's position in credit default swaps is typically included within Level 3.
The following tables present, by valuation hierarchy, the financial instruments carried or disclosed at fair value, and measured on a recurring basis, at June 30, 2010, and December 31, 2009.
Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
June 30, 2010 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,766 | $ | 1,775 | $ | - | $ | 3,541 | |||
Foreign | 250 | 10,926 | 28 | 11,204 | |||||||
Corporate securities | 76 | 14,578 | 121 | 14,775 | |||||||
Mortgage-backed securities | 23 | 10,556 | 12 | 10,591 | |||||||
States, municipalities, and political subdivisions | - | 1,440 | 3 | 1,443 | |||||||
2,115 | 39,275 | 164 | 41,554 | ||||||||
Fixed maturities held to maturity | |||||||||||
U.S. Treasury and agency | 384 | 580 | - | 964 | |||||||
Foreign | - | 21 | - | 21 | |||||||
Corporate securities | - | 314 | - | 314 | |||||||
Mortgage-backed securities | - | 1,335 | - | 1,335 | |||||||
States, municipalities, and political subdivisions | - | 705 | - | 705 | |||||||
384 | 2,955 | - | 3,339 | ||||||||
Equity securities | 188 | 10 | 16 | 214 | |||||||
Short-term investments | 1,150 | 947 | - | 2,097 | |||||||
Other investments | 32 | 203 | 1,227 | 1,462 | |||||||
Securities lending collateral | - | 1,429 | - | 1,429 | |||||||
Investments in partially-owned insurance companies | - | - | 459 | 459 | |||||||
Investment derivative instruments | 11 | (1) | - | 10 | |||||||
Other derivative instruments | 38 | 41 | 14 | 93 | |||||||
Total assets at fair value | $ | 3,918 | $ | 44,859 | $ | 1,880 | $ | 50,657 | |||
Liabilities: | |||||||||||
GMIB | $ | - | $ | - | $ | 776 | $ | 776 | |||
Short-term debt | - | 152 | - | 152 | |||||||
Long-term debt | - | 3,467 | - | 3,467 | |||||||
Trust preferred securities | - | 357 | - | 357 | |||||||
Total liabilities at fair value | $ | - | $ | 3,976 | $ | 776 | $ | 4,752 |
There were no significant gross transfers between Level 1 and Level 2 during the three and six months ended June 30, 2010.
Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
December 31, 2009 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,611 | $ | 2,098 | $ | - | $ | 3,709 | |||
Foreign | 207 | 10,879 | 59 | 11,145 | |||||||
Corporate securities | 31 | 13,016 | 168 | 13,215 | |||||||
Mortgage-backed securities | - | 9,821 | 21 | 9,842 | |||||||
States, municipalities, and political subdivisions | - | 1,611 | 3 | 1,614 | |||||||
1,849 | 37,425 | 251 | 39,525 | ||||||||
Fixed maturities held to maturity | |||||||||||
U.S. Treasury and agency | 414 | 643 | - | 1,057 | |||||||
Foreign | - | 27 | - | 27 | |||||||
Corporate securities | - | 322 | - | 322 | |||||||
Mortgage-backed securities | - | 1,424 | 45 | 1,469 | |||||||
States, municipalities, and political subdivisions | - | 686 | - | 686 | |||||||
414 | 3,102 | 45 | 3,561 | ||||||||
Equity securities | 453 | 2 | 12 | 467 | |||||||
Short-term investments | 1,132 | 535 | - | 1,667 | |||||||
Other investments | 31 | 195 | 1,149 | 1,375 | |||||||
Securities lending collateral | - | 1,544 | - | 1,544 | |||||||
Investments in partially-owned insurance companies | - | - | 433 | 433 | |||||||
Investment derivative instruments | 7 | - | - | 7 | |||||||
Other derivative instruments | (9) | 32 | 14 | 37 | |||||||
Total assets at fair value | $ | 3,877 | $ | 42,835 | $ | 1,904 | $ | 48,616 | |||
Liabilities: | |||||||||||
GMIB | $ | - | $ | - | $ | 559 | $ | 559 | |||
Short-term debt | - | 168 | - | 168 | |||||||
Long-term debt | - | 3,401 | - | 3,401 | |||||||
Trust preferred securities | - | 336 | - | 336 | |||||||
Total liabilities at fair value | $ | - | $ | 3,905 | $ | 559 | $ | 4,464 |
Fair value of alternative investments
Included in the Other investments in the fair value hierarchy at June 30, 2010, and December 31, 2009, are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At June 30, 2010, there were no probable or pending sales related to any of the investments measured at fair value using NAV. The following table presents, by investment category, the fair values and maximum future funding commitments related to these investments at June 30, 2010, and December 31, 2009. The table also shows the expected liquidation period from June 30, 2010.
June 30, 2010 | December 31, 2009 | |||||||||||||
Expected Liquidation Period | Fair Value | Maximum future funding commitments | Fair Value | Maximum future funding commitments | ||||||||||
(in millions of U.S. dollars) | ||||||||||||||
Financial | 5 to 9 Years | $ | 179 | $ | 123 | $ | 173 | $ | 109 | |||||
Real estate | 3 to 9 Years | 122 | 119 | 89 | 150 | |||||||||
Distressed | 6 to 9 Years | 184 | 106 | 233 | 59 | |||||||||
Mezzanine | 6 to 9 Years | 102 | 123 | 102 | 75 | |||||||||
Traditional | 3 to 8 Years | 317 | 273 | 243 | 300 | |||||||||
Vintage | 1 to 3 Years | 32 | 4 | 31 | 2 | |||||||||
Investment funds | Not Applicable | 320 | - | 310 | - | |||||||||
$ | 1,256 | $ | 748 | $ | 1,181 | $ | 695 | |||||||
Included in all categories in the above table except for Investment Funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Included in the "Expected Liquidation Period" column above is the range in years over which ACE expects the majority of underlying assets in the respective categories to be liquidated. Further, for all categories except for Investment Funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Financial
Financial primarily consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world.
Real Estate
Real Estate consists of investments in private equity funds targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market.
Distressed
Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S.
Mezzanine
Mezzanine consists of investments in private equity funds targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide.
Traditional
Traditional consists of investments in private equity funds employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.
Vintage
Vintage consists of investments in private equity funds made before 2002 and where the funds' commitment periods had already expired.
Investment Funds
ACE's investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund's subscription agreement. Depending on the terms of the various subscription agreements, the Company may redeem investment fund investments monthly, quarterly, semi-annually, or annually. If the Company wishes to redeem an investment fund investment, ACE must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE's investment within several months of the notification. Notice periods for redemption of ACE's investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.
Level 3 financial instruments
The following tables present a reconciliation of the beginning and ending balances of financial instruments carried or disclosed at fair value using significant unobservable inputs (Level 3) for the periods indicated.
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in OCI | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
June 30, 2010 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 21 | $ | - | $ | 1 | $ | - | $ | 6 | $ | 28 | $ | - | ||||||
Corporate securities | 133 | (1) | 3 | (14) | - | 121 | - | |||||||||||||
Mortgage-backed securities | 12 | - | - | - | - | 12 | - | |||||||||||||
States, municipalities, and political subdivisions | 2 | - | - | 1 | - | 3 | - | |||||||||||||
168 | (1) | 4 | (13) | 6 | 164 | - | ||||||||||||||
Equity securities | 13 | 1 | (1) | 3 | - | 16 | - | |||||||||||||
Other investments | 1,236 | (14) | 14 | (9) | - | 1,227 | (14) | |||||||||||||
Investments in partially-owned insurance companies | 454 | 4 | (4) | 5 | - | 459 | - | |||||||||||||
Other derivative instruments | 14 | 12 | - | (12) | - | 14 | 12 | |||||||||||||
Total assets at fair value | $ | 1,885 | $ | 2 | $ | 13 | $ | (26) | $ | 6 | $ | 1,880 | $ | (2) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 469 | $ | 301 | $ | - | $ | 6 | $ | - | $ | 776 | $ | 301 | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. | ||||||||||||||||||||
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in OCI | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
June 30, 2009 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 39 | $ | (1) | $ | 2 | $ | 7 | $ | (9) | $ | 38 | $ | (1) | ||||||
Corporate securities | 103 | (1) | 8 | (5) | (5) | 100 | (5) | |||||||||||||
Mortgage-backed securities | 85 | - | 13 | (54) | (2) | 42 | (1) | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
230 | (2) | 23 | (52) | (16) | 183 | (7) | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | - | - | - | 51 | - | 51 | - | |||||||||||||
Equity securities | 8 | - | - | - | - | 8 | - | |||||||||||||
Short-term investments | 1 | - | - | 3 | - | 4 | - | |||||||||||||
Other investments | 1,027 | 6 | 41 | 11 | (1) | 1,084 | 6 | |||||||||||||
Investments in partially-owned insurance companies | 481 | 8 | (20) | (7) | - | 462 | - | |||||||||||||
Other derivative instruments | 83 | (51) | - | 2 | - | 34 | (51) | |||||||||||||
Total assets at fair value | $ | 1,830 | $ | (39) | $ | 44 | $ | 8 | $ | (17) | $ | 1,826 | $ | (52) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 913 | $ | (284) | $ | - | $ | 5 | $ | - | $ | 634 | $ | (284) | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Six Months Ended | ||||||||||||||||||||
June 30, 2010 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 59 | $ | (1) | $ | 1 | $ | - | $ | (31) | $ | 28 | $ | - | ||||||
Corporate securities | 168 | (1) | 6 | (17) | (35) | 121 | - | |||||||||||||
Mortgage-backed securities | 21 | - | - | (9) | - | 12 | - | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
251 | (2) | 7 | (26) | (66) | 164 | - | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | 45 | - | - | - | (45) | - | - | |||||||||||||
Equity securities | 12 | 1 | - | 3 | - | 16 | - | |||||||||||||
Other investments | 1,149 | (13) | 33 | 58 | - | 1,227 | (13) | |||||||||||||
Investments in partially-owned insurance companies | 433 | 4 | 17 | 5 | - | 459 | - | |||||||||||||
Other derivative instruments | 14 | 12 | - | (12) | - | 14 | 12 | |||||||||||||
Total assets at fair value | $ | 1,904 | $ | 2 | $ | 57 | $ | 28 | $ | (111) | $ | 1,880 | $ | (1) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 559 | $ | 205 | $ | - | $ | 12 | $ | - | $ | 776 | $ | 205 | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Six Months Ended | ||||||||||||||||||||
June 30, 2009 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 45 | $ | (1) | $ | - | $ | 4 | $ | (10) | $ | 38 | $ | (1) | ||||||
Corporate securities | 117 | - | 5 | (6) | (16) | 100 | (4) | |||||||||||||
Mortgage-backed securities | 109 | (4) | 14 | (60) | (17) | 42 | (5) | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
274 | (5) | 19 | (62) | (43) | 183 | (10) | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | - | - | - | 51 | - | 51 | - | |||||||||||||
States, municipalities, and political subdivisions | 1 | - | - | (1) | - | - | - | |||||||||||||
1 | - | - | 50 | - | 51 | - | ||||||||||||||
Equity securities | 21 | - | - | 4 | (17) | 8 | - | |||||||||||||
Short-term investments | - | - | - | 4 | - | 4 | - | |||||||||||||
Other investments | 1,099 | (83) | 20 | 49 | (1) | 1,084 | (83) | |||||||||||||
Investments in partially-owned insurance companies | 435 | 8 | (17) | 36 | - | 462 | - | |||||||||||||
Other derivative instruments | 87 | (52) | - | (1) | - | 34 | (52) | |||||||||||||
Total assets at fair value | $ | 1,917 | $ | (132) | $ | 22 | $ | 80 | $ | (61) | $ | 1,826 | $ | (145) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 910 | $ | (283) | $ | - | $ | 7 | $ | - | $ | 634 | $ | (283) | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
|
9. Segment information
The Company operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.
The Insurance – North American segment comprises the operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations. ACE USA is the North American retail operating division which provides a broad array of Property & Casualty (P&C), Accident & Health (A&H), and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Westchester specializes in the North American wholesale distribution of excess and surplus P&C, environmental, professional and inland marine products in addition to crop insurance in the U.S. ACE Bermuda provides commercial insurance products on an excess basis to a global client base, covering exposures that are generally low in frequency and high in severity. ACE Private Risk Services provides personal lines coverages (such as homeowners and automobile) for high net worth individuals and families in North America. The run-off operations include Brandywine Holdings Corporation, Commercial Insurance Services, residual market workers' compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Insurance – Overseas General segment comprises ACE International, the wholesale insurance business of ACE Global Markets, and the international A&H and life business of Combined Insurance. ACE International, the ACE INA retail business serving territories outside the U.S., Bermuda, and Canada, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets, the London-based excess and surplus lines business that includes Lloyd's Syndicate 2488, offers products through its parallel distribution network via ACE European Group Limited (AEGL) and Lloyd's Syndicate 2488. ACE provides funds at Lloyd's to support underwriting by Syndicate 2488, which is managed by ACE Underwriting Agencies Limited. ACE Global Markets utilizes Syndicate 2488 to underwrite P&C business on a global basis through Lloyd's worldwide licenses. ACE Global Markets utilizes AEGL to underwrite similar classes of business through its network of U.K. and Continental Europe licenses, and in the U.S. where it is eligible to write excess & surplus business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Combined Insurance distributes a wide range of supplemental accident and health products. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which comprises ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including P&C, professional lines (directors & officers and errors & omissions), marine, energy, aviation, political risk, specialty consumer-oriented products, and A&H (principally accident and supplemental health).
The Global Reinsurance segment represents ACE's reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C insurers. The Global Reinsurance segment also includes ACE Global Markets' reinsurance operations.
The Life segment includes ACE's international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. ACE Life provides individual and group life insurance through multiple distribution channels primarily in emerging markets, including Egypt, Indonesia, Taiwan, Thailand, Vietnam, the United Arab Emirates, throughout Latin America, selectively in Europe, as well as China through a partially-owned insurance company. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, and lapse risks embedded in their books of business. ACE Life Re comprises two operations. The first is a Bermuda-based operation which provides reinsurance to primary life insurers, focusing on guarantees included in certain fixed and variable annuity products and also on more traditional mortality reinsurance protection. The second is a U.S.-based traditional life reinsurance company licensed in 49 states and the District of Columbia. It was decided in January 2010 to discontinue writing new traditional life mortality reinsurance business from the U.S.-based company. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in the U.S. and Canada.
Corporate and Other (Corporate) includes ACE Limited, ACE Group Management and Holdings Ltd., ACE INA Holdings, Inc., and intercompany eliminations. Losses and loss expenses arise in connection with the commutation of ceded reinsurance contracts that result from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to the Company's initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables present the operations by segment for the periods indicated.
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2010 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,438 | $ | 1,302 | $ | 289 | $ | 391 | $ | - | $ | 3,420 | |||||
Net premiums earned | 1,326 | 1,263 | 256 | 388 | - | 3,233 | |||||||||||
Losses and loss expenses | 924 | 644 | 103 | 129 | - | 1,800 | |||||||||||
Policy benefits | - | 1 | - | 86 | - | 87 | |||||||||||
Policy acquisition costs | 126 | 296 | 48 | 66 | - | 536 | |||||||||||
Administrative expenses | 147 | 207 | 15 | 54 | 40 | 463 | |||||||||||
Underwriting income (loss) | 129 | 115 | 90 | 53 | (40) | 347 | |||||||||||
Net investment income | 287 | 115 | 73 | 43 | - | 518 | |||||||||||
Net realized gains (losses) including OTTI | 85 | 48 | 28 | (155) | 3 | 9 | |||||||||||
Interest expense | - | - | - | - | 52 | 52 | |||||||||||
Other (income) expense | 4 | (3) | (2) | 3 | 1 | 3 | |||||||||||
Income tax expense (benefit) | 110 | 59 | 9 | 16 | (52) | 142 | |||||||||||
Net income (loss) | $ | 387 | $ | 222 | $ | 184 | $ | (78) | $ | (38) | $ | 677 |
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2009 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,454 | $ | 1,265 | $ | 329 | $ | 367 | $ | - | $ | 3,415 | |||||
Net premiums earned | 1,415 | 1,246 | 241 | 364 | - | 3,266 | |||||||||||
Losses and loss expenses | 997 | 635 | 56 | 133 | - | 1,821 | |||||||||||
Policy benefits | - | 1 | - | 77 | - | 78 | |||||||||||
Policy acquisition costs | 129 | 293 | 46 | 55 | - | 523 | |||||||||||
Administrative expenses | 147 | 190 | 14 | 64 | 39 | 454 | |||||||||||
Underwriting income (loss) | 142 | 127 | 125 | 35 | (39) | 390 | |||||||||||
Net investment income | 275 | 114 | 73 | 43 | 1 | 506 | |||||||||||
Net realized gains (losses) including OTTI | (97) | (87) | (47) | 108 | (102) | (225) | |||||||||||
Interest expense | - | - | - | - | 56 | 56 | |||||||||||
Other (income) expense | 1 | 5 | 1 | (1) | (27) | (21) | |||||||||||
Income tax expense (benefit) | 76 | 29 | 13 | 14 | (31) | 101 | |||||||||||
Net income (loss) | $ | 243 | $ | 120 | $ | 137 | $ | 173 | $ | (138) | $ | 535 |
Statement of Operations by Segment | |||||||||||||||||
For the Six Months Ended June 30, 2010 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 2,833 | $ | 2,722 | $ | 660 | $ | 776 | $ | - | $ | 6,991 | |||||
Net premiums earned | 2,696 | 2,514 | 532 | 768 | - | 6,510 | |||||||||||
Losses and loss expenses | 1,862 | 1,345 | 254 | 260 | - | 3,721 | |||||||||||
Policy benefits | - | 4 | - | 170 | - | 174 | |||||||||||
Policy acquisition costs | 282 | 579 | 102 | 127 | - | 1,090 | |||||||||||
Administrative expenses | 295 | 409 | 27 | 112 | 80 | 923 | |||||||||||
Underwriting income (loss) | 257 | 177 | 149 | 99 | (80) | 602 | |||||||||||
Net investment income | 565 | 229 | 142 | 86 | - | 1,022 | |||||||||||
Net realized gains (losses) including OTTI | 165 | 70 | 59 | (112) | (5) | 177 | |||||||||||
Interest expense | - | - | - | - | 104 | 104 | |||||||||||
Other (income) expense | (1) | (1) | (6) | 6 | 1 | (1) | |||||||||||
Income tax expense (benefit) | 214 | 73 | 19 | 30 | (70) | 266 | |||||||||||
Net income (loss) | $ | 774 | $ | 404 | $ | 337 | $ | 37 | $ | (120) | $ | 1,432 |
Statement of Operations by Segment | |||||||||||||||||
For the Six Months Ended June 30, 2009 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 2,846 | $ | 2,592 | $ | 688 | $ | 713 | $ | - | $ | 6,839 | |||||
Net premiums earned | 2,852 | 2,430 | 479 | 699 | - | 6,460 | |||||||||||
Losses and loss expenses | 2,001 | 1,248 | 143 | 245 | - | 3,637 | |||||||||||
Policy benefits | - | 3 | - | 174 | - | 177 | |||||||||||
Policy acquisition costs | 252 | 553 | 97 | 102 | - | 1,004 | |||||||||||
Administrative expenses | 287 | 365 | 26 | 122 | 74 | 874 | |||||||||||
Underwriting income (loss) | 312 | 261 | 213 | 56 | (74) | 768 | |||||||||||
Net investment income | 538 | 234 | 145 | 89 | 2 | 1,008 | |||||||||||
Net realized gains (losses) including OTTI | (217) | (80) | (36) | 117 | (130) | (346) | |||||||||||
Interest expense | - | - | - | - | 109 | 109 | |||||||||||
Other (income) expense | 5 | 9 | 1 | 1 | (23) | (7) | |||||||||||
Income tax expense (benefit) | 172 | 75 | 29 | 20 | (70) | 226 | |||||||||||
Net income (loss) | $ | 456 | $ | 331 | $ | 292 | $ | 241 | $ | (218) | $ | 1,102 | |||||
Underwriting assets are reviewed in total by management for purpose of decision-making. Other than goodwill, the Company does not allocate assets to its segments.
The following table presents the net premiums earned for each segment by product for the periods indicated.
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Three Months Ended June 30, 2010 | |||||||||||
Insurance – North American | $ | 355 | $ | 895 | $ | 76 | $ | 1,326 | |||
Insurance – Overseas General | 424 | 349 | 490 | 1,263 | |||||||
Global Reinsurance | 120 | 136 | - | 256 | |||||||
Life | - | - | 388 | 388 | |||||||
$ | 899 | $ | 1,380 | $ | 954 | $ | 3,233 | ||||
For the Three Months Ended June 30, 2009 | |||||||||||
Insurance – North American | $ | 448 | $ | 902 | $ | 65 | $ | 1,415 | |||
Insurance – Overseas General | 422 | 357 | 467 | 1,246 | |||||||
Global Reinsurance | 128 | 113 | - | 241 | |||||||
Life | - | - | 364 | 364 | |||||||
$ | 998 | $ | 1,372 | $ | 896 | $ | 3,266 | ||||
For the Six Months Ended June 30, 2010 | |||||||||||
Insurance – North American | $ | 713 | $ | 1,839 | $ | 144 | $ | 2,696 | |||
Insurance – Overseas General | 844 | 694 | 976 | 2,514 | |||||||
Global Reinsurance | 258 | 274 | - | 532 | |||||||
Life | - | - | 768 | 768 | |||||||
$ | 1,815 | $ | 2,807 | $ | 1,888 | $ | 6,510 | ||||
For the Six Months Ended June 30, 2009 | |||||||||||
Insurance – North American | $ | 865 | $ | 1,862 | $ | 125 | $ | 2,852 | |||
Insurance – Overseas General | 842 | 672 | 916 | 2,430 | |||||||
Global Reinsurance | 274 | 205 | - | 479 | |||||||
Life | - | - | 699 | 699 | |||||||
$ | 1,981 | $ | 2,739 | $ | 1,740 | $ | 6,460 |
|
11. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at June 30, 2010, and December 31, 2009, and for the three and six months ended June 30, 2010 and 2009, for ACE Limited (the Parent Guarantor) and its "Subsidiary Issuer", ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor's investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.
Condensed Consolidating Balance Sheet at | ||||||||||||||
June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments(2) | ACE Limited Consolidated | ||||||||||
Assets | ||||||||||||||
Investments | $ | 50 | $ | 24,967 | $ | 23,532 | $ | - | $ | 48,549 | ||||
Cash | 30 | 378 | 260 | - | 668 | |||||||||
Insurance and reinsurance balances receivable | - | 3,311 | 647 | - | 3,958 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 16,797 | (3,665) | - | 13,132 | |||||||||
Reinsurance recoverable on policy benefits | - | 674 | (383) | - | 291 | |||||||||
Value of business acquired | - | 668 | - | - | 668 | |||||||||
Goodwill and other intangible assets | - | 3,289 | 547 | - | 3,836 | |||||||||
Investments in subsidiaries | 20,506 | - | - | (20,506) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 992 | (544) | 544 | (992) | - | |||||||||
Other assets | 6 | 7,678 | 1,374 | - | 9,058 | |||||||||
Total assets | $ | 21,584 | $ | 57,218 | $ | 22,856 | $ | (21,498) | $ | 80,160 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 29,849 | $ | 7,213 | $ | - | $ | 37,062 | ||||
Unearned premiums | - | 5,700 | 1,136 | - | 6,836 | |||||||||
Future policy benefits | - | 2,424 | 610 | - | 3,034 | |||||||||
Short-term debt | - | 147 | - | - | 147 | |||||||||
Long-term debt | - | 3,158 | - | - | 3,158 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 174 | 6,634 | 1,396 | - | 8,204 | |||||||||
Total liabilities | 174 | 48,221 | 10,355 | - | 58,750 | |||||||||
Total shareholders' equity | 21,410 | 8,997 | 12,501 | (21,498) | 21,410 | |||||||||
Total liabilities and shareholders' equity | $ | 21,584 | $ | 57,218 | $ | 22,856 | $ | (21,498) | $ | 80,160 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Balance Sheet at | ||||||||||||||
December 31, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments(2) | ACE Limited Consolidated | ||||||||||
Assets | ||||||||||||||
Investments | $ | 51 | $ | 24,125 | $ | 22,339 | $ | - | $ | 46,515 | ||||
Cash | (1) | 400 | 270 | - | 669 | |||||||||
Insurance and reinsurance balances receivable | - | 3,043 | 628 | - | 3,671 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 17,173 | (3,578) | - | 13,595 | |||||||||
Reinsurance recoverable on policy benefits | - | 681 | (383) | - | 298 | |||||||||
Value of business acquired | - | 748 | - | - | 748 | |||||||||
Goodwill and other intangible assets | - | 3,377 | 554 | - | 3,931 | |||||||||
Investments in subsidiaries | 18,714 | - | - | (18,714) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 1,062 | (669) | 669 | (1,062) | - | |||||||||
Other assets | 18 | 7,158 | 1,377 | - | 8,553 | |||||||||
Total assets | $ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776) | $ | 77,980 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 30,038 | $ | 7,745 | $ | - | $ | 37,783 | ||||
Unearned premiums | - | 4,944 | 1,123 | - | 6,067 | |||||||||
Future policy benefits | - | 2,383 | 625 | - | 3,008 | |||||||||
Short-term debt | - | 161 | - | - | 161 | |||||||||
Long-term debt | - | 3,158 | - | - | 3,158 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 177 | 6,613 | 1,037 | - | 7,827 | |||||||||
Total liabilities | 177 | 47,606 | 10,530 | - | 58,313 | |||||||||
Total shareholders' equity | 19,667 | 8,430 | 11,346 | (19,776) | 19,667 | |||||||||
Total liabilities and shareholders' equity | $ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776) | $ | 77,980 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Three Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 1,993 | $ | 1,427 | $ | - | $ | 3,420 | ||||
Net premiums earned | - | 1,894 | 1,339 | - | 3,233 | |||||||||
Net investment income | - | 253 | 265 | - | 518 | |||||||||
Equity in earnings of subsidiaries | 648 | - | - | (648) | - | |||||||||
Net realized gains (losses) including OTTI | 12 | 63 | (66) | - | 9 | |||||||||
Losses and loss expenses | - | 1,147 | 653 | - | 1,800 | |||||||||
Policy benefits | - | 33 | 54 | - | 87 | |||||||||
Policy acquisition costs and administrative expenses | 16 | 583 | 410 | (10) | 999 | |||||||||
Interest expense | (10) | 61 | (9) | 10 | 52 | |||||||||
Other (income) expense | (26) | 19 | 10 | - | 3 | |||||||||
Income tax expense | 3 | 107 | 32 | - | 142 | |||||||||
Net income | $ | 677 | $ | 260 | $ | 388 | $ | (648) | $ | 677 |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Three Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 1,764 | $ | 1,651 | $ | - | $ | 3,415 | ||||
Net premiums earned | - | 1,726 | 1,540 | - | 3,266 | |||||||||
Net investment income | - | 246 | 260 | - | 506 | |||||||||
Equity in earnings of subsidiaries | 587 | - | - | (587) | - | |||||||||
Net realized gains (losses) including OTTI | (50) | (37) | (138) | - | (225) | |||||||||
Losses and loss expenses | - | 1,073 | 748 | - | 1,821 | |||||||||
Policy benefits | - | 20 | 58 | - | 78 | |||||||||
Policy acquisition costs and administrative expenses | 16 | 530 | 438 | (7) | 977 | |||||||||
Interest expense | (10) | 64 | (8) | 10 | 56 | |||||||||
Other (income) expense | - | (2) | (19) | - | (21) | |||||||||
Income tax expense (benefit) | (4) | 70 | 35 | - | 101 | |||||||||
Net income | $ | 535 | $ | 180 | $ | 410 | $ | (590) | $ | 535 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 4,220 | $ | 2,771 | $ | - | $ | 6,991 | ||||
Net premiums earned | - | 3,850 | 2,660 | - | 6,510 | |||||||||
Net investment income | - | 507 | 515 | - | 1,022 | |||||||||
Equity in earnings of subsidiaries | 1,383 | - | - | (1,383) | - | |||||||||
Net realized gains (losses) including OTTI | 11 | 73 | 93 | - | 177 | |||||||||
Losses and loss expenses | - | 2,463 | 1,258 | - | 3,721 | |||||||||
Policy benefits | - | 66 | 108 | - | 174 | |||||||||
Policy acquisition costs and administrative expenses | 32 | 1,144 | 854 | (17) | 2,013 | |||||||||
Interest expense | (19) | 121 | (17) | 19 | 104 | |||||||||
Other (income) expense | (54) | 38 | 15 | - | (1) | |||||||||
Income tax expense | 3 | 203 | 60 | - | 266 | |||||||||
Net income | $ | 1,432 | $ | 395 | $ | 990 | $ | (1,385) | $ | 1,432 | ||||
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 3,845 | $ | 2,994 | $ | - | $ | 6,839 | ||||
Net premiums earned | - | 3,590 | 2,870 | - | 6,460 | |||||||||
Net investment income | - | 492 | 516 | - | 1,008 | |||||||||
Equity in earnings of subsidiaries | 1,156 | - | - | (1,156) | - | |||||||||
Net realized gains (losses) including OTTI | (53) | (116) | (177) | - | (346) | |||||||||
Losses and loss expenses | - | 2,241 | 1,396 | - | 3,637 | |||||||||
Policy benefits | - | 42 | 135 | - | 177 | |||||||||
Policy acquisition costs and administrative expenses | 26 | 1,029 | 838 | (15) | 1,878 | |||||||||
Interest expense | (21) | 128 | (17) | 19 | 109 | |||||||||
Other (income) expense | - | 5 | (12) | - | (7) | |||||||||
Income tax expense (benefit) | (4) | 172 | 58 | - | 226 | |||||||||
Net income | $ | 1,102 | $ | 349 | $ | 811 | $ | (1,160) | $ | 1,102 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Cash Flows | ||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net cash flows from operating activities | $ | 25 | $ | 677 | $ | 989 | - | $ | 1,691 | |||||
Cash flows from (used for) investing activities | ||||||||||||||
Purchases of fixed maturities available for sale | - | (8,133) | (9,210) | - | (17,343) | |||||||||
Purchases of fixed maturities held to maturity | - | (323) | (1) | - | (324) | |||||||||
Purchases of equity securities | - | (28) | (10) | - | (38) | |||||||||
Sales of fixed maturities available for sale | 2 | 6,491 | 7,057 | - | 13,550 | |||||||||
Sales of equity securities | - | 2 | 309 | - | 311 | |||||||||
Maturities and redemptions of fixed maturities available for sale | - | 926 | 850 | - | 1,776 | |||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 461 | 109 | - | 570 | |||||||||
Net derivative instruments settlements | (1) | (3) | 135 | - | 131 | |||||||||
Advances (to) from affiliates | 196 | - | (196) | - | - | |||||||||
Other | - | (80) | (20) | - | (100) | |||||||||
Net cash flows from (used for) investing activities | 197 | (687) | (977) | - | (1,467) | |||||||||
Cash flows from (used for) financing activities | ||||||||||||||
Dividends paid on Common Shares | (210) | - | - | - | (210) | |||||||||
Proceeds from exercise of options for Common Shares | 14 | - | - | - | 14 | |||||||||
Proceeds from Common Shares issued under ESPP | 5 | - | - | - | 5 | |||||||||
Advances (to) from affiliates | - | 3 | (3) | - | - | |||||||||
Net cash flows from (used for) financing activities | (191) | 3 | (3) | - | (191) | |||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | (15) | (19) | - | (34) | |||||||||
Net increase (decrease) in cash | 31 | (22) | (10) | - | (1) | |||||||||
Cash - beginning of period | (1) | 400 | 270 | - | 669 | |||||||||
Cash - end of period | $ | 30 | $ | 378 | $ | 260 | - | $ | 668 | |||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
Condensed Consolidating Statement of Cash Flows | ||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net cash flows from (used for) operating activities | $ | (50) | $ | 730 | $ | 642 | - | $ | 1,322 | |||||
Cash flows from (used for) investing activities | ||||||||||||||
Purchases of fixed maturities available for sale | - | (10,445) | (12,739) | - | (23,184) | |||||||||
Purchases of fixed maturities held to maturity | - | (184) | - | - | (184) | |||||||||
Purchases of equity securities | - | (180) | (129) | - | (309) | |||||||||
Sales of fixed maturities available for sale | 69 | 8,381 | 10,781 | - | 19,231 | |||||||||
Sales of fixed maturities held to maturity | - | - | 1 | - | 1 | |||||||||
Sales of equity securities | - | 495 | 579 | - | 1,074 | |||||||||
Maturities and redemptions of fixed maturities available for sale | - | 757 | 870 | - | 1,627 | |||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 163 | 57 | - | 220 | |||||||||
Net derivative instruments settlements | - | - | 5 | 5 | ||||||||||
Advances (to) from affiliates | 118 | - | (118) | - | ||||||||||
Other | 2 | (94) | (4) | - | (96) | |||||||||
Net cash flows from (used for) investing activities | 189 | (1,107) | (697) | - | (1,615) | |||||||||
Cash flows from (used for) financing activities | ||||||||||||||
Dividends paid on Common Shares | (179) | - | - | - | (179) | |||||||||
Proceeds from exercise of options for Common Shares | 3 | - | - | - | 3 | |||||||||
Proceeds from Common Shares issued under ESPP | 11 | - | - | - | 11 | |||||||||
Net repayment of short-term debt | - | (250) | - | (250) | ||||||||||
Net proceeds from issuance of long-term debt | - | 500 | - | 500 | ||||||||||
Advances (to) from affiliates | - | 1 | (1) | - | - | |||||||||
Net cash flows from (used for) financing activities | (165) | 251 | (1) | - | 85 | |||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | (8) | 3 | - | (5) | |||||||||
Net decrease in cash | (26) | (134) | (53) | - | (213) | |||||||||
Cash - beginning of period | (52) | 442 | 477 | - | 867 | |||||||||
Cash - end of period | $ | (78) | $ | 308 | $ | 424 | - | $ | 654 | |||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
|
June 30, 2010 | ||||||||||||||
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 | $ | 3,401 | $ | 140 | $ | - | $ | 3,541 | $ | - | ||||
Foreign | 10,878 | 413 | (87) | 11,204 | (28) | |||||||||
Corporate securities | 14,123 | 784 | (132) | 14,775 | (36) | |||||||||
Mortgage-backed securities | 10,405 | 421 | (235) | 10,591 | (229) | |||||||||
States, municipalities, and political subdivisions | 1,397 | 56 | (10) | 1,443 | - | |||||||||
$ | 40,204 | $ | 1,814 | $ | (464) | $ | 41,554 | $ | (293) | |||||
Held to maturity | ||||||||||||||
U.S. Treasury and agency | $ | 925 | $ | 39 | $ | - | $ | 964 | $ | - | ||||
Foreign | 21 | - | - | 21 | - | |||||||||
Corporate securities | 301 | 13 | - | 314 | - | |||||||||
Mortgage-backed securities | 1,277 | 64 | (6) | 1,335 | - | |||||||||
States, municipalities, and political subdivisions | 698 | 8 | (1) | 705 | - | |||||||||
$ | 3,222 | $ | 124 | $ | (7) | $ | 3,339 | $ | - |
December 31, 2009 | ||||||||||||||
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 | $ | 3,680 | $ | 48 | $ | (19) | $ | 3,709 | $ | - | ||||
Foreign | 10,960 | 345 | (160) | 11,145 | (37) | |||||||||
Corporate securities | 12,707 | 658 | (150) | 13,215 | (41) | |||||||||
Mortgage-backed securities | 10,058 | 239 | (455) | 9,842 | (227) | |||||||||
States, municipalities, and political subdivisions | 1,580 | 52 | (18) | 1,614 | - | |||||||||
$ | 38,985 | $ | 1,342 | $ | (802) | $ | 39,525 | $ | (305) | |||||
Held to maturity | ||||||||||||||
U.S. Treasury and agency | $ | 1,026 | $ | 33 | $ | (2) | $ | 1,057 | $ | - | ||||
Foreign | 26 | 1 | - | 27 | - | |||||||||
Corporate securities | 313 | 10 | (1) | 322 | - | |||||||||
Mortgage-backed securities | 1,440 | 39 | (10) | 1,469 | - | |||||||||
States, municipalities, and political subdivisions | 676 | 11 | (1) | 686 | - | |||||||||
$ | 3,481 | $ | 94 | $ | (14) | $ | 3,561 | $ | - |
June 30 | December 31 | ||||||||||
2010 | 2009 | ||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
(in millions of U.S. dollars) | |||||||||||
Available for sale; maturity period | |||||||||||
Due in 1 year or less | $ | 1,525 | $ | 1,606 | $ | 1,354 | $ | 1,352 | |||
Due after 1 year through 5 years | 13,976 | 14,430 | 14,457 | 14,905 | |||||||
Due after 5 years through 10 years | 11,222 | 11,827 | 9,642 | 10,067 | |||||||
Due after 10 years | 3,076 | 3,100 | 3,474 | 3,359 | |||||||
29,799 | 30,963 | 28,927 | 29,683 | ||||||||
Mortgage-backed securities | 10,405 | 10,591 | 10,058 | 9,842 | |||||||
$ | 40,204 | $ | 41,554 | $ | 38,985 | $ | 39,525 | ||||
Held to maturity; maturity period | |||||||||||
Due in 1 year or less | $ | 591 | $ | 599 | $ | 755 | $ | 766 | |||
Due after 1 year through 5 years | 1,255 | 1,304 | 1,096 | 1,129 | |||||||
Due after 5 years through 10 years | 15 | 16 | 108 | 115 | |||||||
Due after 10 years | 84 | 85 | 82 | 82 | |||||||
1,945 | 2,004 | 2,041 | 2,092 | ||||||||
Mortgage-backed securities | 1,277 | 1,335 | 1,440 | 1,469 | |||||||
$ | 3,222 | $ | 3,339 | $ | 3,481 | $ | 3,561 |
June 30 | December 31 | ||||
2010 | 2009 | ||||
(in millions of U.S. dollars) | |||||
Cost | $ | 200 | $ | 398 | |
Gross unrealized appreciation | 16 | 70 | |||
Gross unrealized depreciation | (2) | (1) | |||
Fair value | $ | 214 | $ | 467 |
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 | 4.8% | 1.1% | ||
B | 12.9% | 3.4% | ||
Caa-C | 53.6% | 13.8% |
Range of Significant Assumptions Used | ||||||
Sector(1) | Vintage | Default Rate(2) | Loss Severity Rate(2) | |||
Prime | 2003 and prior | 11% | 22% | |||
2004 | 21-42% | 37-48% | ||||
2005 | 9-44% | 45-55% | ||||
2006-2007 | 13-73% | 40-63% | ||||
ALT-A | 2003 and prior | 26% | 39% | |||
2004 | 33% | 45% | ||||
2005 | 9-51% | 48-63% | ||||
2006-2007 | 32-70% | 59-66% | ||||
Option ARM | 2003 and prior | 28% | 29% | |||
2004 | 56% | 45% | ||||
2005 | 68-85% | 57-64% | ||||
2006-2007 | 73-81% | 65-66% | ||||
Sub-prime | 2003 and prior | 57% | 65% | |||
2004 | 62% | 64% | ||||
2005 | 73% | 74% | ||||
2006-2007 | 58-85% | 55-82% |
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
Fixed maturities: | |||||||||||
OTTI on fixed maturities, gross | $ | (18) | $ | (281) | $ | (68) | (369) | ||||
OTTI on fixed maturities recognized in OCI (pre-tax) | 13 | 191 | 45 | 191 | |||||||
OTTI on fixed maturities, net | (5) | (90) | (23) | (178) | |||||||
Gross realized gains excluding OTTI | 128 | 179 | 296 | 330 | |||||||
Gross realized losses excluding OTTI | (46) | (160) | (115) | (271) | |||||||
Total fixed maturities | 77 | (71) | 158 | (119) | |||||||
Equity securities: | |||||||||||
OTTI on equity securities | - | (1) | - | (26) | |||||||
Gross realized gains excluding OTTI | 32 | 61 | 77 | 65 | |||||||
Gross realized losses excluding OTTI | - | (141) | - | (220) | |||||||
Total equity securities | 32 | (81) | 77 | (181) | |||||||
OTTI on other investments | (13) | (23) | (13) | (102) | |||||||
Foreign exchange gains (losses) | 61 | (56) | 52 | (24) | |||||||
Investment and embedded derivative instruments | 5 | (21) | 24 | 34 | |||||||
Fair value adjustments on insurance derivative | (301) | 284 | (205) | 283 | |||||||
S&P put options and futures | 143 | (181) | 84 | (156) | |||||||
Other derivative instruments | 4 | (39) | (5) | (66) | |||||||
Other | 1 | (37) | 5 | (15) | |||||||
Net realized gains (losses) | $ | 9 | $ | (225) | $ | 177 | $ | (346) |
Three Months Ended | Six Months | |||||||
June 30 | Ended | |||||||
2010 | 2009 | June 30, 2010 | ||||||
(in millions of U.S. Dollars) | ||||||||
Balance of credit losses related to securities still held-beginning of period | $ | 163 | $ | 130 | $ | 174 | ||
Additions where no OTTI was previously recorded | 5 | 54 | 22 | |||||
Additions where an OTTI was previously recorded | - | 6 | 1 | |||||
Reductions reflecting amounts previously recorded in OCI but subsequently reflected in net income | - | (2) | - | |||||
Reductions for securities sold during the period | (31) | - | (60) | |||||
Balance of credit losses related to securities still held-end of period | $ | 137 | $ | 188 | $ | 137 | ||
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
June 30, 2010 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | - | $ | - | $ | 7 | $ | (0.1) | $ | 7 | $ | (0.1) | |||||
Foreign | 1,556 | (36.1) | 395 | (50.8) | 1,951 | (86.9) | |||||||||||
Corporate securities | 1,926 | (42.3) | 480 | (89.9) | 2,406 | (132.2) | |||||||||||
Mortgage-backed securities | 184 | (5.0) | 1,141 | (235.7) | 1,325 | (240.7) | |||||||||||
States, municipalities, and political subdivisions | 308 | (9.4) | 26 | (2.0) | 334 | (11.4) | |||||||||||
Total fixed maturities | 3,974 | (92.8) | 2,049 | (378.5) | 6,023 | (471.3) | |||||||||||
Equity securities | 17 | (1.6) | 1 | (0.3) | 18 | (1.9) | |||||||||||
Total | $ | 3,991 | $ | (94.4) | $ | 2,050 | $ | (378.8) | $ | 6,041 | $ | (473.2) |
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
December 31, 2009 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 1,952 | $ | (19.4) | $ | 21 | $ | (1.1) | $ | 1,973 | $ | (20.5) | |||||
Foreign | 2,568 | (124.0) | 363 | (36.4) | 2,931 | (160.4) | |||||||||||
Corporate securities | 1,222 | (52.3) | 865 | (99.1) | 2,087 | (151.4) | |||||||||||
Mortgage-backed securities | 1,731 | (54.8) | 1,704 | (409.7) | 3,435 | (464.5) | |||||||||||
States, municipalities, and political subdivisions | 455 | (13.9) | 60 | (5.0) | 515 | (18.9) | |||||||||||
Total fixed maturities | 7,928 | (264.4) | 3,013 | (551.3) | 10,941 | (815.7) | |||||||||||
Equity securities | 111 | (1.3) | - | 0.0 | 111 | (1.3) | |||||||||||
Other investments | 81 | (16.4) | - | 0.0 | 81 | (16.4) | |||||||||||
Total | $ | 8,120 | $ | (282.1) | $ | 3,013 | $ | (551.3) | $ | 11,133 | $ | (833.4) |
June 30 | December 31 | |||||||
2010 | 2009 | |||||||
(in millions of U.S. dollars) | ||||||||
Trust funds | $ | 8,226 | $ | 8,402 | ||||
Deposits with non-U.S. regulatory authorities | 2,450 | 2,475 | ||||||
Deposits with U.S. regulatory authorities | 1,366 | 1,199 | ||||||
Other pledged assets | 232 | 245 | ||||||
$ | 12,274 | $ | 12,321 |
|
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
GMDB | |||||||||||
Net premiums earned | $ | 27 | $ | 27 | $ | 56 | $ | 50 | |||
Policy benefits | $ | 22 | $ | 21 | $ | 46 | $ | 65 | |||
GMIB | |||||||||||
Net premiums earned | $ | 40 | $ | 39 | $ | 81 | $ | 79 | |||
Policy benefits | 6 | 6 | 13 | 8 | |||||||
Realized gains (losses) | (301) | 284 | (205) | 283 | |||||||
Gain (loss) recognized in income | $ | (267) | $ | 317 | $ | (137) | $ | 354 | |||
Net cash received (disbursed) | $ | 40 | $ | 38 | $ | 80 | $ | 78 | |||
Net (increase) decrease in liability | $ | (307) | $ | 279 | $ | (217) | $ | 276 |
|
June 30, 2010 | December 31, 2009 | |||||||||
Consolidated Balance Sheet Location | Fair Value | Notional Value/ Payment Provision | Fair Value | Notional Value/ Payment Provision | ||||||
(in millions of U.S. dollars) | ||||||||||
Investment and embedded derivative instruments | ||||||||||
Foreign currency forward contracts | AP | $ | 3 | $ | 715 | $ | 6 | $ | 393 | |
Futures contracts on money market instruments | AP | 8 | 4,143 | 4 | 4,711 | |||||
Futures contracts on notes and bonds | AP | (2) | 819 | (2) | 500 | |||||
Options on money market instruments | AP | - | 1,024 | - | 200 | |||||
Options on notes and bonds futures | AP | 1 | 20 | (1) | 305 | |||||
Convertible bonds | FM AFS | 345 | 825 | 354 | 725 | |||||
TBAs | FM AFS | 48 | 45 | 11 | 10 | |||||
$ | 403 | $ | 7,591 | $ | 372 | $ | 6,844 | |||
Other derivative instruments | ||||||||||
Futures contracts on equities | AP | $ | 38 | $ | 934 | $ | (9) | $ | 960 | |
Options on equity market indices | AP | 74 | 250 | 56 | 250 | |||||
Interest rate swaps | AP | (33) | 500 | (24) | 500 | |||||
Credit default swaps | AP | 14 | 350 | 2 | 350 | |||||
Other | AP | - | 17 | 12 | 37 | |||||
$ | 93 | $ | 2,051 | $ | 37 | $ | 2,097 | |||
GMIB(1) | AP/FPB | $ | (776) | $ | 1,092 | $ | (559) | $ | 683 |
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
(in millions of U.S. dollars) | |||||||||||
Investment and embedded derivative instruments | |||||||||||
Foreign currency forward contracts | $ | 23 | $ | (35) | $ | 36 | $ | (14) | |||
All other futures contracts and options | 2 | (18) | 10 | (4) | |||||||
Convertible bonds | (20) | 38 | (22) | 57 | |||||||
TBAs | - | (6) | - | (5) | |||||||
$ | 5 | $ | (21) | $ | 24 | $ | 34 | ||||
GMIB and other derivative instruments | |||||||||||
GMIB | $ | (301) | $ | 284 | $ | (205) | $ | 283 | |||
Futures contracts on equities | 117 | (89) | 66 | (102) | |||||||
Options on equity market indices | 26 | (92) | 18 | (54) | |||||||
Interest rate swaps | (8) | 10 | (17) | (15) | |||||||
Credit default swaps | 11 | (49) | 11 | (52) | |||||||
Other | 1 | - | 1 | 1 | |||||||
$ | (154) | $ | 64 | $ | (126) | $ | 61 | ||||
$ | (149) | $ | 43 | $ | (102) | $ | 95 |
|
Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
June 30, 2010 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,766 | $ | 1,775 | $ | - | $ | 3,541 | |||
Foreign | 250 | 10,926 | 28 | 11,204 | |||||||
Corporate securities | 76 | 14,578 | 121 | 14,775 | |||||||
Mortgage-backed securities | 23 | 10,556 | 12 | 10,591 | |||||||
States, municipalities, and political subdivisions | - | 1,440 | 3 | 1,443 | |||||||
2,115 | 39,275 | 164 | 41,554 | ||||||||
Fixed maturities held to maturity | |||||||||||
U.S. Treasury and agency | 384 | 580 | - | 964 | |||||||
Foreign | - | 21 | - | 21 | |||||||
Corporate securities | - | 314 | - | 314 | |||||||
Mortgage-backed securities | - | 1,335 | - | 1,335 | |||||||
States, municipalities, and political subdivisions | - | 705 | - | 705 | |||||||
384 | 2,955 | - | 3,339 | ||||||||
Equity securities | 188 | 10 | 16 | 214 | |||||||
Short-term investments | 1,150 | 947 | - | 2,097 | |||||||
Other investments | 32 | 203 | 1,227 | 1,462 | |||||||
Securities lending collateral | - | 1,429 | - | 1,429 | |||||||
Investments in partially-owned insurance companies | - | - | 459 | 459 | |||||||
Investment derivative instruments | 11 | (1) | - | 10 | |||||||
Other derivative instruments | 38 | 41 | 14 | 93 | |||||||
Total assets at fair value | $ | 3,918 | $ | 44,859 | $ | 1,880 | $ | 50,657 | |||
Liabilities: | |||||||||||
GMIB | $ | - | $ | - | $ | 776 | $ | 776 | |||
Short-term debt | - | 152 | - | 152 | |||||||
Long-term debt | - | 3,467 | - | 3,467 | |||||||
Trust preferred securities | - | 357 | - | 357 | |||||||
Total liabilities at fair value | $ | - | $ | 3,976 | $ | 776 | $ | 4,752 |
Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
December 31, 2009 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,611 | $ | 2,098 | $ | - | $ | 3,709 | |||
Foreign | 207 | 10,879 | 59 | 11,145 | |||||||
Corporate securities | 31 | 13,016 | 168 | 13,215 | |||||||
Mortgage-backed securities | - | 9,821 | 21 | 9,842 | |||||||
States, municipalities, and political subdivisions | - | 1,611 | 3 | 1,614 | |||||||
1,849 | 37,425 | 251 | 39,525 | ||||||||
Fixed maturities held to maturity | |||||||||||
U.S. Treasury and agency | 414 | 643 | - | 1,057 | |||||||
Foreign | - | 27 | - | 27 | |||||||
Corporate securities | - | 322 | - | 322 | |||||||
Mortgage-backed securities | - | 1,424 | 45 | 1,469 | |||||||
States, municipalities, and political subdivisions | - | 686 | - | 686 | |||||||
414 | 3,102 | 45 | 3,561 | ||||||||
Equity securities | 453 | 2 | 12 | 467 | |||||||
Short-term investments | 1,132 | 535 | - | 1,667 | |||||||
Other investments | 31 | 195 | 1,149 | 1,375 | |||||||
Securities lending collateral | - | 1,544 | - | 1,544 | |||||||
Investments in partially-owned insurance companies | - | - | 433 | 433 | |||||||
Investment derivative instruments | 7 | - | - | 7 | |||||||
Other derivative instruments | (9) | 32 | 14 | 37 | |||||||
Total assets at fair value | $ | 3,877 | $ | 42,835 | $ | 1,904 | $ | 48,616 | |||
Liabilities: | |||||||||||
GMIB | $ | - | $ | - | $ | 559 | $ | 559 | |||
Short-term debt | - | 168 | - | 168 | |||||||
Long-term debt | - | 3,401 | - | 3,401 | |||||||
Trust preferred securities | - | 336 | - | 336 | |||||||
Total liabilities at fair value | $ | - | $ | 3,905 | $ | 559 | $ | 4,464 |
June 30, 2010 | December 31, 2009 | |||||||||||||
Expected Liquidation Period | Fair Value | Maximum future funding commitments | Fair Value | Maximum future funding commitments | ||||||||||
(in millions of U.S. dollars) | ||||||||||||||
Financial | 5 to 9 Years | $ | 179 | $ | 123 | $ | 173 | $ | 109 | |||||
Real estate | 3 to 9 Years | 122 | 119 | 89 | 150 | |||||||||
Distressed | 6 to 9 Years | 184 | 106 | 233 | 59 | |||||||||
Mezzanine | 6 to 9 Years | 102 | 123 | 102 | 75 | |||||||||
Traditional | 3 to 8 Years | 317 | 273 | 243 | 300 | |||||||||
Vintage | 1 to 3 Years | 32 | 4 | 31 | 2 | |||||||||
Investment funds | Not Applicable | 320 | - | 310 | - | |||||||||
$ | 1,256 | $ | 748 | $ | 1,181 | $ | 695 | |||||||
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in OCI | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
June 30, 2010 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 21 | $ | - | $ | 1 | $ | - | $ | 6 | $ | 28 | $ | - | ||||||
Corporate securities | 133 | (1) | 3 | (14) | - | 121 | - | |||||||||||||
Mortgage-backed securities | 12 | - | - | - | - | 12 | - | |||||||||||||
States, municipalities, and political subdivisions | 2 | - | - | 1 | - | 3 | - | |||||||||||||
168 | (1) | 4 | (13) | 6 | 164 | - | ||||||||||||||
Equity securities | 13 | 1 | (1) | 3 | - | 16 | - | |||||||||||||
Other investments | 1,236 | (14) | 14 | (9) | - | 1,227 | (14) | |||||||||||||
Investments in partially-owned insurance companies | 454 | 4 | (4) | 5 | - | 459 | - | |||||||||||||
Other derivative instruments | 14 | 12 | - | (12) | - | 14 | 12 | |||||||||||||
Total assets at fair value | $ | 1,885 | $ | 2 | $ | 13 | $ | (26) | $ | 6 | $ | 1,880 | $ | (2) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 469 | $ | 301 | $ | - | $ | 6 | $ | - | $ | 776 | $ | 301 | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. | ||||||||||||||||||||
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in OCI | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
June 30, 2009 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 39 | $ | (1) | $ | 2 | $ | 7 | $ | (9) | $ | 38 | $ | (1) | ||||||
Corporate securities | 103 | (1) | 8 | (5) | (5) | 100 | (5) | |||||||||||||
Mortgage-backed securities | 85 | - | 13 | (54) | (2) | 42 | (1) | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
230 | (2) | 23 | (52) | (16) | 183 | (7) | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | - | - | - | 51 | - | 51 | - | |||||||||||||
Equity securities | 8 | - | - | - | - | 8 | - | |||||||||||||
Short-term investments | 1 | - | - | 3 | - | 4 | - | |||||||||||||
Other investments | 1,027 | 6 | 41 | 11 | (1) | 1,084 | 6 | |||||||||||||
Investments in partially-owned insurance companies | 481 | 8 | (20) | (7) | - | 462 | - | |||||||||||||
Other derivative instruments | 83 | (51) | - | 2 | - | 34 | (51) | |||||||||||||
Total assets at fair value | $ | 1,830 | $ | (39) | $ | 44 | $ | 8 | $ | (17) | $ | 1,826 | $ | (52) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 913 | $ | (284) | $ | - | $ | 5 | $ | - | $ | 634 | $ | (284) | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Six Months Ended | ||||||||||||||||||||
June 30, 2010 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 59 | $ | (1) | $ | 1 | $ | - | $ | (31) | $ | 28 | $ | - | ||||||
Corporate securities | 168 | (1) | 6 | (17) | (35) | 121 | - | |||||||||||||
Mortgage-backed securities | 21 | - | - | (9) | - | 12 | - | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
251 | (2) | 7 | (26) | (66) | 164 | - | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | 45 | - | - | - | (45) | - | - | |||||||||||||
Equity securities | 12 | 1 | - | 3 | - | 16 | - | |||||||||||||
Other investments | 1,149 | (13) | 33 | 58 | - | 1,227 | (13) | |||||||||||||
Investments in partially-owned insurance companies | 433 | 4 | 17 | 5 | - | 459 | - | |||||||||||||
Other derivative instruments | 14 | 12 | - | (12) | - | 14 | 12 | |||||||||||||
Total assets at fair value | $ | 1,904 | $ | 2 | $ | 57 | $ | 28 | $ | (111) | $ | 1,880 | $ | (1) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 559 | $ | 205 | $ | - | $ | 12 | $ | - | $ | 776 | $ | 205 | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
Balance-Beginning of Period | Net Realized Gains/ Losses | Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income | Purchases, Sales, Issuances, and Settlements, Net | Transfers Into (Out of) Level 3 | Balance-End of Period | Net Realized Gains/Losses Attributable to Changes in Fair Value(1) | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||||||||
Six Months Ended | ||||||||||||||||||||
June 30, 2009 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Fixed maturities available for sale | ||||||||||||||||||||
Foreign | $ | 45 | $ | (1) | $ | - | $ | 4 | $ | (10) | $ | 38 | $ | (1) | ||||||
Corporate securities | 117 | - | 5 | (6) | (16) | 100 | (4) | |||||||||||||
Mortgage-backed securities | 109 | (4) | 14 | (60) | (17) | 42 | (5) | |||||||||||||
States, municipalities, and political subdivisions | 3 | - | - | - | - | 3 | - | |||||||||||||
274 | (5) | 19 | (62) | (43) | 183 | (10) | ||||||||||||||
Fixed maturities held to maturity | ||||||||||||||||||||
Mortgage-backed securities | - | - | - | 51 | - | 51 | - | |||||||||||||
States, municipalities, and political subdivisions | 1 | - | - | (1) | - | - | - | |||||||||||||
1 | - | - | 50 | - | 51 | - | ||||||||||||||
Equity securities | 21 | - | - | 4 | (17) | 8 | - | |||||||||||||
Short-term investments | - | - | - | 4 | - | 4 | - | |||||||||||||
Other investments | 1,099 | (83) | 20 | 49 | (1) | 1,084 | (83) | |||||||||||||
Investments in partially-owned insurance companies | 435 | 8 | (17) | 36 | - | 462 | - | |||||||||||||
Other derivative instruments | 87 | (52) | - | (1) | - | 34 | (52) | |||||||||||||
Total assets at fair value | $ | 1,917 | $ | (132) | $ | 22 | $ | 80 | $ | (61) | $ | 1,826 | $ | (145) | ||||||
Liabilities: | ||||||||||||||||||||
GMIB | $ | 910 | $ | (283) | $ | - | $ | 7 | $ | - | $ | 634 | $ | (283) | ||||||
(1)Relates only to financial instruments still held at the balance sheet date. |
|
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2010 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,438 | $ | 1,302 | $ | 289 | $ | 391 | $ | - | $ | 3,420 | |||||
Net premiums earned | 1,326 | 1,263 | 256 | 388 | - | 3,233 | |||||||||||
Losses and loss expenses | 924 | 644 | 103 | 129 | - | 1,800 | |||||||||||
Policy benefits | - | 1 | - | 86 | - | 87 | |||||||||||
Policy acquisition costs | 126 | 296 | 48 | 66 | - | 536 | |||||||||||
Administrative expenses | 147 | 207 | 15 | 54 | 40 | 463 | |||||||||||
Underwriting income (loss) | 129 | 115 | 90 | 53 | (40) | 347 | |||||||||||
Net investment income | 287 | 115 | 73 | 43 | - | 518 | |||||||||||
Net realized gains (losses) including OTTI | 85 | 48 | 28 | (155) | 3 | 9 | |||||||||||
Interest expense | - | - | - | - | 52 | 52 | |||||||||||
Other (income) expense | 4 | (3) | (2) | 3 | 1 | 3 | |||||||||||
Income tax expense (benefit) | 110 | 59 | 9 | 16 | (52) | 142 | |||||||||||
Net income (loss) | $ | 387 | $ | 222 | $ | 184 | $ | (78) | $ | (38) | $ | 677 |
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2009 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,454 | $ | 1,265 | $ | 329 | $ | 367 | $ | - | $ | 3,415 | |||||
Net premiums earned | 1,415 | 1,246 | 241 | 364 | - | 3,266 | |||||||||||
Losses and loss expenses | 997 | 635 | 56 | 133 | - | 1,821 | |||||||||||
Policy benefits | - | 1 | - | 77 | - | 78 | |||||||||||
Policy acquisition costs | 129 | 293 | 46 | 55 | - | 523 | |||||||||||
Administrative expenses | 147 | 190 | 14 | 64 | 39 | 454 | |||||||||||
Underwriting income (loss) | 142 | 127 | 125 | 35 | (39) | 390 | |||||||||||
Net investment income | 275 | 114 | 73 | 43 | 1 | 506 | |||||||||||
Net realized gains (losses) including OTTI | (97) | (87) | (47) | 108 | (102) | (225) | |||||||||||
Interest expense | - | - | - | - | 56 | 56 | |||||||||||
Other (income) expense | 1 | 5 | 1 | (1) | (27) | (21) | |||||||||||
Income tax expense (benefit) | 76 | 29 | 13 | 14 | (31) | 101 | |||||||||||
Net income (loss) | $ | 243 | $ | 120 | $ | 137 | $ | 173 | $ | (138) | $ | 535 |
Statement of Operations by Segment | |||||||||||||||||
For the Six Months Ended June 30, 2010 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 2,833 | $ | 2,722 | $ | 660 | $ | 776 | $ | - | $ | 6,991 | |||||
Net premiums earned | 2,696 | 2,514 | 532 | 768 | - | 6,510 | |||||||||||
Losses and loss expenses | 1,862 | 1,345 | 254 | 260 | - | 3,721 | |||||||||||
Policy benefits | - | 4 | - | 170 | - | 174 | |||||||||||
Policy acquisition costs | 282 | 579 | 102 | 127 | - | 1,090 | |||||||||||
Administrative expenses | 295 | 409 | 27 | 112 | 80 | 923 | |||||||||||
Underwriting income (loss) | 257 | 177 | 149 | 99 | (80) | 602 | |||||||||||
Net investment income | 565 | 229 | 142 | 86 | - | 1,022 | |||||||||||
Net realized gains (losses) including OTTI | 165 | 70 | 59 | (112) | (5) | 177 | |||||||||||
Interest expense | - | - | - | - | 104 | 104 | |||||||||||
Other (income) expense | (1) | (1) | (6) | 6 | 1 | (1) | |||||||||||
Income tax expense (benefit) | 214 | 73 | 19 | 30 | (70) | 266 | |||||||||||
Net income (loss) | $ | 774 | $ | 404 | $ | 337 | $ | 37 | $ | (120) | $ | 1,432 |
Statement of Operations by Segment | |||||||||||||||||
For the Six Months Ended June 30, 2009 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 2,846 | $ | 2,592 | $ | 688 | $ | 713 | $ | - | $ | 6,839 | |||||
Net premiums earned | 2,852 | 2,430 | 479 | 699 | - | 6,460 | |||||||||||
Losses and loss expenses | 2,001 | 1,248 | 143 | 245 | - | 3,637 | |||||||||||
Policy benefits | - | 3 | - | 174 | - | 177 | |||||||||||
Policy acquisition costs | 252 | 553 | 97 | 102 | - | 1,004 | |||||||||||
Administrative expenses | 287 | 365 | 26 | 122 | 74 | 874 | |||||||||||
Underwriting income (loss) | 312 | 261 | 213 | 56 | (74) | 768 | |||||||||||
Net investment income | 538 | 234 | 145 | 89 | 2 | 1,008 | |||||||||||
Net realized gains (losses) including OTTI | (217) | (80) | (36) | 117 | (130) | (346) | |||||||||||
Interest expense | - | - | - | - | 109 | 109 | |||||||||||
Other (income) expense | 5 | 9 | 1 | 1 | (23) | (7) | |||||||||||
Income tax expense (benefit) | 172 | 75 | 29 | 20 | (70) | 226 | |||||||||||
Net income (loss) | $ | 456 | $ | 331 | $ | 292 | $ | 241 | $ | (218) | $ | 1,102 | |||||
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Three Months Ended June 30, 2010 | |||||||||||
Insurance – North American | $ | 355 | $ | 895 | $ | 76 | $ | 1,326 | |||
Insurance – Overseas General | 424 | 349 | 490 | 1,263 | |||||||
Global Reinsurance | 120 | 136 | - | 256 | |||||||
Life | - | - | 388 | 388 | |||||||
$ | 899 | $ | 1,380 | $ | 954 | $ | 3,233 | ||||
For the Three Months Ended June 30, 2009 | |||||||||||
Insurance – North American | $ | 448 | $ | 902 | $ | 65 | $ | 1,415 | |||
Insurance – Overseas General | 422 | 357 | 467 | 1,246 | |||||||
Global Reinsurance | 128 | 113 | - | 241 | |||||||
Life | - | - | 364 | 364 | |||||||
$ | 998 | $ | 1,372 | $ | 896 | $ | 3,266 | ||||
For the Six Months Ended June 30, 2010 | |||||||||||
Insurance – North American | $ | 713 | $ | 1,839 | $ | 144 | $ | 2,696 | |||
Insurance – Overseas General | 844 | 694 | 976 | 2,514 | |||||||
Global Reinsurance | 258 | 274 | - | 532 | |||||||
Life | - | - | 768 | 768 | |||||||
$ | 1,815 | $ | 2,807 | $ | 1,888 | $ | 6,510 | ||||
For the Six Months Ended June 30, 2009 | |||||||||||
Insurance – North American | $ | 865 | $ | 1,862 | $ | 125 | $ | 2,852 | |||
Insurance – Overseas General | 842 | 672 | 916 | 2,430 | |||||||
Global Reinsurance | 274 | 205 | - | 479 | |||||||
Life | - | - | 699 | 699 | |||||||
$ | 1,981 | $ | 2,739 | $ | 1,740 | $ | 6,460 |
|
Condensed Consolidating Balance Sheet at | ||||||||||||||
June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments(2) | ACE Limited Consolidated | ||||||||||
Assets | ||||||||||||||
Investments | $ | 50 | $ | 24,967 | $ | 23,532 | $ | - | $ | 48,549 | ||||
Cash | 30 | 378 | 260 | - | 668 | |||||||||
Insurance and reinsurance balances receivable | - | 3,311 | 647 | - | 3,958 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 16,797 | (3,665) | - | 13,132 | |||||||||
Reinsurance recoverable on policy benefits | - | 674 | (383) | - | 291 | |||||||||
Value of business acquired | - | 668 | - | - | 668 | |||||||||
Goodwill and other intangible assets | - | 3,289 | 547 | - | 3,836 | |||||||||
Investments in subsidiaries | 20,506 | - | - | (20,506) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 992 | (544) | 544 | (992) | - | |||||||||
Other assets | 6 | 7,678 | 1,374 | - | 9,058 | |||||||||
Total assets | $ | 21,584 | $ | 57,218 | $ | 22,856 | $ | (21,498) | $ | 80,160 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 29,849 | $ | 7,213 | $ | - | $ | 37,062 | ||||
Unearned premiums | - | 5,700 | 1,136 | - | 6,836 | |||||||||
Future policy benefits | - | 2,424 | 610 | - | 3,034 | |||||||||
Short-term debt | - | 147 | - | - | 147 | |||||||||
Long-term debt | - | 3,158 | - | - | 3,158 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 174 | 6,634 | 1,396 | - | 8,204 | |||||||||
Total liabilities | 174 | 48,221 | 10,355 | - | 58,750 | |||||||||
Total shareholders' equity | 21,410 | 8,997 | 12,501 | (21,498) | 21,410 | |||||||||
Total liabilities and shareholders' equity | $ | 21,584 | $ | 57,218 | $ | 22,856 | $ | (21,498) | $ | 80,160 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Balance Sheet at | ||||||||||||||
December 31, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments(2) | ACE Limited Consolidated | ||||||||||
Assets | ||||||||||||||
Investments | $ | 51 | $ | 24,125 | $ | 22,339 | $ | - | $ | 46,515 | ||||
Cash | (1) | 400 | 270 | - | 669 | |||||||||
Insurance and reinsurance balances receivable | - | 3,043 | 628 | - | 3,671 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 17,173 | (3,578) | - | 13,595 | |||||||||
Reinsurance recoverable on policy benefits | - | 681 | (383) | - | 298 | |||||||||
Value of business acquired | - | 748 | - | - | 748 | |||||||||
Goodwill and other intangible assets | - | 3,377 | 554 | - | 3,931 | |||||||||
Investments in subsidiaries | 18,714 | - | - | (18,714) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 1,062 | (669) | 669 | (1,062) | - | |||||||||
Other assets | 18 | 7,158 | 1,377 | - | 8,553 | |||||||||
Total assets | $ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776) | $ | 77,980 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 30,038 | $ | 7,745 | $ | - | $ | 37,783 | ||||
Unearned premiums | - | 4,944 | 1,123 | - | 6,067 | |||||||||
Future policy benefits | - | 2,383 | 625 | - | 3,008 | |||||||||
Short-term debt | - | 161 | - | - | 161 | |||||||||
Long-term debt | - | 3,158 | - | - | 3,158 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 177 | 6,613 | 1,037 | - | 7,827 | |||||||||
Total liabilities | 177 | 47,606 | 10,530 | - | 58,313 | |||||||||
Total shareholders' equity | 19,667 | 8,430 | 11,346 | (19,776) | 19,667 | |||||||||
Total liabilities and shareholders' equity | $ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776) | $ | 77,980 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Three Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 1,993 | $ | 1,427 | $ | - | $ | 3,420 | ||||
Net premiums earned | - | 1,894 | 1,339 | - | 3,233 | |||||||||
Net investment income | - | 253 | 265 | - | 518 | |||||||||
Equity in earnings of subsidiaries | 648 | - | - | (648) | - | |||||||||
Net realized gains (losses) including OTTI | 12 | 63 | (66) | - | 9 | |||||||||
Losses and loss expenses | - | 1,147 | 653 | - | 1,800 | |||||||||
Policy benefits | - | 33 | 54 | - | 87 | |||||||||
Policy acquisition costs and administrative expenses | 16 | 583 | 410 | (10) | 999 | |||||||||
Interest expense | (10) | 61 | (9) | 10 | 52 | |||||||||
Other (income) expense | (26) | 19 | 10 | - | 3 | |||||||||
Income tax expense | 3 | 107 | 32 | - | 142 | |||||||||
Net income | $ | 677 | $ | 260 | $ | 388 | $ | (648) | $ | 677 |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Three Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations(1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 1,764 | $ | 1,651 | $ | - | $ | 3,415 | ||||
Net premiums earned | - | 1,726 | 1,540 | - | 3,266 | |||||||||
Net investment income | - | 246 | 260 | - | 506 | |||||||||
Equity in earnings of subsidiaries | 587 | - | - | (587) | - | |||||||||
Net realized gains (losses) including OTTI | (50) | (37) | (138) | - | (225) | |||||||||
Losses and loss expenses | - | 1,073 | 748 | - | 1,821 | |||||||||
Policy benefits | - | 20 | 58 | - | 78 | |||||||||
Policy acquisition costs and administrative expenses | 16 | 530 | 438 | (7) | 977 | |||||||||
Interest expense | (10) | 64 | (8) | 10 | 56 | |||||||||
Other (income) expense | - | (2) | (19) | - | (21) | |||||||||
Income tax expense (benefit) | (4) | 70 | 35 | - | 101 | |||||||||
Net income | $ | 535 | $ | 180 | $ | 410 | $ | (590) | $ | 535 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 4,220 | $ | 2,771 | $ | - | $ | 6,991 | ||||
Net premiums earned | - | 3,850 | 2,660 | - | 6,510 | |||||||||
Net investment income | - | 507 | 515 | - | 1,022 | |||||||||
Equity in earnings of subsidiaries | 1,383 | - | - | (1,383) | - | |||||||||
Net realized gains (losses) including OTTI | 11 | 73 | 93 | - | 177 | |||||||||
Losses and loss expenses | - | 2,463 | 1,258 | - | 3,721 | |||||||||
Policy benefits | - | 66 | 108 | - | 174 | |||||||||
Policy acquisition costs and administrative expenses | 32 | 1,144 | 854 | (17) | 2,013 | |||||||||
Interest expense | (19) | 121 | (17) | 19 | 104 | |||||||||
Other (income) expense | (54) | 38 | 15 | - | (1) | |||||||||
Income tax expense | 3 | 203 | 60 | - | 266 | |||||||||
Net income | $ | 1,432 | $ | 395 | $ | 990 | $ | (1,385) | $ | 1,432 | ||||
Condensed Consolidating Statement of Operations | ||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings, Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net premiums written | $ | - | $ | 3,845 | $ | 2,994 | $ | - | $ | 6,839 | ||||
Net premiums earned | - | 3,590 | 2,870 | - | 6,460 | |||||||||
Net investment income | - | 492 | 516 | - | 1,008 | |||||||||
Equity in earnings of subsidiaries | 1,156 | - | - | (1,156) | - | |||||||||
Net realized gains (losses) including OTTI | (53) | (116) | (177) | - | (346) | |||||||||
Losses and loss expenses | - | 2,241 | 1,396 | - | 3,637 | |||||||||
Policy benefits | - | 42 | 135 | - | 177 | |||||||||
Policy acquisition costs and administrative expenses | 26 | 1,029 | 838 | (15) | 1,878 | |||||||||
Interest expense | (21) | 128 | (17) | 19 | 109 | |||||||||
Other (income) expense | - | 5 | (12) | - | (7) | |||||||||
Income tax expense (benefit) | (4) | 172 | 58 | - | 226 | |||||||||
Net income | $ | 1,102 | $ | 349 | $ | 811 | $ | (1,160) | $ | 1,102 | ||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. | ||||||||||||||
(2) Includes ACE Limited parent company eliminations. |
Condensed Consolidating Statement of Cash Flows | ||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net cash flows from operating activities | $ | 25 | $ | 677 | $ | 989 | - | $ | 1,691 | |||||
Cash flows from (used for) investing activities | ||||||||||||||
Purchases of fixed maturities available for sale | - | (8,133) | (9,210) | - | (17,343) | |||||||||
Purchases of fixed maturities held to maturity | - | (323) | (1) | - | (324) | |||||||||
Purchases of equity securities | - | (28) | (10) | - | (38) | |||||||||
Sales of fixed maturities available for sale | 2 | 6,491 | 7,057 | - | 13,550 | |||||||||
Sales of equity securities | - | 2 | 309 | - | 311 | |||||||||
Maturities and redemptions of fixed maturities available for sale | - | 926 | 850 | - | 1,776 | |||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 461 | 109 | - | 570 | |||||||||
Net derivative instruments settlements | (1) | (3) | 135 | - | 131 | |||||||||
Advances (to) from affiliates | 196 | - | (196) | - | - | |||||||||
Other | - | (80) | (20) | - | (100) | |||||||||
Net cash flows from (used for) investing activities | 197 | (687) | (977) | - | (1,467) | |||||||||
Cash flows from (used for) financing activities | ||||||||||||||
Dividends paid on Common Shares | (210) | - | - | - | (210) | |||||||||
Proceeds from exercise of options for Common Shares | 14 | - | - | - | 14 | |||||||||
Proceeds from Common Shares issued under ESPP | 5 | - | - | - | 5 | |||||||||
Advances (to) from affiliates | - | 3 | (3) | - | - | |||||||||
Net cash flows from (used for) financing activities | (191) | 3 | (3) | - | (191) | |||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | (15) | (19) | - | (34) | |||||||||
Net increase (decrease) in cash | 31 | (22) | (10) | - | (1) | |||||||||
Cash - beginning of period | (1) | 400 | 270 | - | 669 | |||||||||
Cash - end of period | $ | 30 | $ | 378 | $ | 260 | - | $ | 668 | |||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
Condensed Consolidating Statement of Cash Flows | ||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||
(in millions of U.S. dollars) | ||||||||||||||
ACE Limited (Parent Guarantor) | ACE INA Holdings Inc. (Subsidiary Issuer) | Other ACE Limited Subsidiaries and Eliminations (1) | Consolidating Adjustments (2) | ACE Limited Consolidated | ||||||||||
Net cash flows from (used for) operating activities | $ | (50) | $ | 730 | $ | 642 | - | $ | 1,322 | |||||
Cash flows from (used for) investing activities | ||||||||||||||
Purchases of fixed maturities available for sale | - | (10,445) | (12,739) | - | (23,184) | |||||||||
Purchases of fixed maturities held to maturity | - | (184) | - | - | (184) | |||||||||
Purchases of equity securities | - | (180) | (129) | - | (309) | |||||||||
Sales of fixed maturities available for sale | 69 | 8,381 | 10,781 | - | 19,231 | |||||||||
Sales of fixed maturities held to maturity | - | - | 1 | - | 1 | |||||||||
Sales of equity securities | - | 495 | 579 | - | 1,074 | |||||||||
Maturities and redemptions of fixed maturities available for sale | - | 757 | 870 | - | 1,627 | |||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 163 | 57 | - | 220 | |||||||||
Net derivative instruments settlements | - | - | 5 | 5 | ||||||||||
Advances (to) from affiliates | 118 | - | (118) | - | ||||||||||
Other | 2 | (94) | (4) | - | (96) | |||||||||
Net cash flows from (used for) investing activities | 189 | (1,107) | (697) | - | (1,615) | |||||||||
Cash flows from (used for) financing activities | ||||||||||||||
Dividends paid on Common Shares | (179) | - | - | - | (179) | |||||||||
Proceeds from exercise of options for Common Shares | 3 | - | - | - | 3 | |||||||||
Proceeds from Common Shares issued under ESPP | 11 | - | - | - | 11 | |||||||||
Net repayment of short-term debt | - | (250) | - | (250) | ||||||||||
Net proceeds from issuance of long-term debt | - | 500 | - | 500 | ||||||||||
Advances (to) from affiliates | - | 1 | (1) | - | - | |||||||||
Net cash flows from (used for) financing activities | (165) | 251 | (1) | - | 85 | |||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | (8) | 3 | - | (5) | |||||||||
Net decrease in cash | (26) | (134) | (53) | - | (213) | |||||||||
Cash - beginning of period | (52) | 442 | 477 | - | 867 | |||||||||
Cash - end of period | $ | (78) | $ | 308 | $ | 424 | - | $ | 654 | |||||
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
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