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1. General
ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited and its subsidiaries (collectively, ACE, we, us, or our) provide 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.
The interim unaudited consolidated financial statements, which include the accounts of ACE 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
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2. Accounting guidance not yet adopted
Accounting for costs associated with acquiring or renewing insurance contracts
In October 2010, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. This guidance is effective for interim and annual reporting periods beginning on January 1, 2012, and may be applied prospectively or retrospectively. The amount of acquisition costs we will defer under the new guidance will be less than the amount deferred under our current accounting practice. We are in the process of assessing the impact that this guidance will have on our financial condition and results of operations.
Fair value measurements
In May 2011, the FASB issued new guidance on fair value measurements to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. The guidance is not necessarily intended to result in a significant change in the application of the current requirements. Instead it is intended to clarify the intended application of existing fair value measurement requirements. It also changes certain principles or requirements for measuring fair value and disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011. We are in the process of assessing the impact this amendment will have on our financial statements.
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3. Acquisitions
ACE acquired New York Life's Korea operations on February 1, 2011 and New York Life's Hong Kong operations on April 1, 2011 for approximately $425 million in cash. These acquired businesses, now operating under our Life segment, expand our presence in the North Asia market and complement our life insurance business established in that region. These acquisitions generated approximately $123 million of goodwill, none of which is expected to be deductible for income tax purposes, and approximately $207 million of intangible assets. The most significant intangible asset is the value of business acquired (VOBA). VOBA represents the fair value of the future profits of the in-force long duration contracts and is amortized in relation to the premium or profit emergence of the underlying contracts, depending on the nature of the product, in a manner similar to deferred acquisition costs.
Prior year acquisitions
On December 28, 2010, ACE acquired all the outstanding common stock of Rain and Hail Insurance Service, Inc. (Rain and Hail) not previously owned by ACE for approximately $1.1 billion in cash. Rain and Hail has served America's farmers since 1919, providing comprehensive multiple peril crop and crop/hail insurance protection to customers in the U.S. and Canada. This acquisition is consistent with ACE's strategy to expand its specialty lines business and provides further diversification of ACE's global product mix. The acquisition of Rain and Hail generated $129 million of goodwill, none of which is expected to be deductible for income tax purposes, and $523 million of other intangible assets. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – North American segment.
On December 1, 2010, ACE acquired Jerneh Insurance Berhad (Jerneh), a general insurance company in Malaysia, for approximately $218 million in cash. The acquisitions of Rain and Hail and Jerneh were financed with cash on hand and the use of reverse repurchase agreements of $1 billion.
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4. Investments
a) Fixed maturities
The following tables present the fair value and amortized cost of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI:
June 30, 2011 | |||||||||||||||
Amortized Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Fair Value | OTTI Recognized in AOCI | |||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Available for sale | |||||||||||||||
U.S. Treasury and agency | $ | 2,423 | $ | 80 | $ | (8) | $ | 2,495 | $ | - | |||||
Foreign | 12,341 | 389 | (51) | 12,679 | (12) | ||||||||||
Corporate securities | 13,853 | 723 | (63) | 14,513 | (14) | ||||||||||
Mortgage-backed securities | 9,932 | 259 | (180) | 10,011 | (191) | ||||||||||
States, municipalities, and political | 1,313 | 36 | (9) | 1,340 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 39,862 | $ | 1,487 | $ | (311) | $ | 41,038 | $ | (217) | ||||||
Held to maturity | |||||||||||||||
U.S. Treasury and agency | $ | 1,067 | $ | 30 | $ | (5) | $ | 1,092 | $ | - | |||||
Foreign | 1,051 | 1 | (24) | 1,028 | - | ||||||||||
Corporate securities | 2,311 | 15 | (34) | 2,292 | - | ||||||||||
Mortgage-backed securities | 3,414 | 69 | (11) | 3,472 | - | ||||||||||
States, municipalities, and political | 1,190 | 10 | (6) | 1,194 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 9,033 | $ | 125 | $ | (80) | $ | 9,078 | $ | - |
December 31, 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 | $ | 2,904 | $ | 74 | $ | (15) | $ | 2,963 | $ | - | |||||
Foreign | 10,926 | 340 | (80) | 11,186 | (28) | ||||||||||
Corporate securities | 12,902 | 754 | (69) | 13,587 | (29) | ||||||||||
Mortgage-backed securities | 8,508 | 213 | (205) | 8,516 | (228) | ||||||||||
States, municipalities, and political | 1,302 | 15 | (30) | 1,287 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 36,542 | $ | 1,396 | $ | (399) | $ | 37,539 | $ | (285) | ||||||
Held to maturity | |||||||||||||||
U.S. Treasury and agency | $ | 1,105 | $ | 32 | $ | (10) | $ | 1,127 | $ | - | |||||
Foreign | 1,049 | 1 | (37) | 1,013 | - | ||||||||||
Corporate securities | 2,361 | 12 | (60) | 2,313 | - | ||||||||||
Mortgage-backed securities | 3,811 | 62 | (27) | 3,846 | - | ||||||||||
States, municipalities, and political | 1,175 | 5 | (18) | 1,162 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 9,501 | $ | 112 | $ | (152) | $ | 9,461 | $ | - |
As discussed in Note 4 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above 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 consolidated statement of shareholders' equity. For the three and six months ended June 30, 2011, $25 million and $8 million, respectively, of net unrealized depreciation related to such securities is included in OCI. 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, 2011 and December 31, 2010, AOCI includes net unrealized depreciation of $109 million and $99 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
Mortgage-backed securities issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 81 percent and 79 percent of the total mortgage-backed securities at June 30, 2011 and December 31, 2010, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and nongovernment mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.
The following table presents fixed maturities by contractual maturity. 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 | ||||||||||
2011 | 2010 | ||||||||||
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 | $ | 2,046 | $ | 2,074 | $ | 1,846 | $ | 1,985 | |||
Due after 1 year through 5 years | 12,962 | 13,446 | 13,094 | 13,444 | |||||||
Due after 5 years through 10 years | 11,468 | 11,972 | 10,276 | 10,782 | |||||||
Due after 10 years | 3,454 | 3,535 | 2,818 | 2,812 | |||||||
29,930 | 31,027 | 28,034 | 29,023 | ||||||||
Mortgage-backed securities | 9,932 | 10,011 | 8,508 | 8,516 | |||||||
$ | 39,862 | $ | 41,038 | $ | 36,542 | $ | 37,539 | ||||
Held to maturity; maturity period | |||||||||||
Due in 1 year or less | $ | 310 | $ | 312 | $ | 400 | $ | 404 | |||
Due after 1 year through 5 years | 2,127 | 2,163 | 1,983 | 2,010 | |||||||
Due after 5 years through 10 years | 2,512 | 2,468 | 2,613 | 2,524 | |||||||
Due after 10 years | 670 | 663 | 694 | 677 | |||||||
5,619 | 5,606 | 5,690 | 5,615 | ||||||||
Mortgage-backed securities | 3,414 | 3,472 | 3,811 | 3,846 | |||||||
$ | 9,033 | $ | 9,078 | $ | 9,501 | $ | 9,461 |
b) Equity securities
The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities:
June 30 | December 31 | ||||
2011 | 2010 | ||||
(in millions of U.S. dollars) | |||||
Cost | $ | 549 | $ | 666 | |
Gross unrealized appreciation | 37 | 28 | |||
Gross unrealized depreciation | (4) | (2) | |||
Fair value | $ | 582 | $ | 692 |
c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an OTTI related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.
Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.
For all non-fixed maturities, OTTI is evaluated based on the following:
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.
We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security's amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. We develop these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody's Investors Service (Moody's) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate.
There were no credit losses recognized in net income for corporate securities in 2011. For the three and six months ended June 30, 2010, credit losses recognized in net income for corporate securities were nil and $1 million, respectively.
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.
Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2011 were $2 million and $3 million, respectively. Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2010 were $5 million and $22 million, respectively.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused management to conclude the decline in fair value of certain investments was “other-than-temporary”:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Fixed maturities: | |||||||||||||||
OTTI on fixed maturities, gross | $ | (6) | $ | (18) | $ | (11) | $ | (68) | |||||||
OTTI on fixed maturities recognized in OCI (pre-tax) | 1 | 13 | 2 | 45 | |||||||||||
OTTI on fixed maturities, net | (5) | (5) | (9) | (23) | |||||||||||
Gross realized gains excluding OTTI | 108 | 128 | 217 | 296 | |||||||||||
Gross realized losses excluding OTTI | (29) | (46) | (85) | (115) | |||||||||||
Total fixed maturities | 74 | 77 | 123 | 158 | |||||||||||
Equity securities: | |||||||||||||||
Gross realized gains excluding OTTI | 4 | 32 | 12 | 77 | |||||||||||
Gross realized losses excluding OTTI | - | - | (1) | - | |||||||||||
Total equity securities | 4 | 32 | 11 | 77 | |||||||||||
OTTI on other investments | (3) | (13) | (3) | (13) | |||||||||||
Foreign exchange gains (losses) | (30) | 61 | (109) | 52 | |||||||||||
Investment and embedded derivative instruments | (48) | 5 | (68) | 24 | |||||||||||
Fair value adjustments on insurance derivative | (70) | (301) | 1 | (205) | |||||||||||
S&P put options and futures | 3 | 143 | (68) | 84 | |||||||||||
Other derivative instruments | (2) | 4 | (3) | (5) | |||||||||||
Other | (1) | 1 | (2) | 5 | |||||||||||
Net realized gains (losses) | $ | (73) | $ | 9 | $ | (118) | $ | 177 |
The following table presents a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Balance of credit losses related to securities still held- beginning of period | $ | 96 | $ | 163 | $ | 137 | $ | 174 | |||||||
Additions where no OTTI was previously recorded | 2 | 5 | 2 | 22 | |||||||||||
Additions where an OTTI was previously recorded | - | - | 1 | 1 | |||||||||||
Reductions for securities sold during the period | (4) | (31) | (46) | (60) | |||||||||||
Balance of credit losses related to securities still held- end of period | $ | 94 | $ | 137 | $ | 94 | $ | 137 |
d) Gross unrealized loss
At June 30, 2011, there were 4,348 fixed maturities out of a total of 21,493 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $8 million. Fixed maturities in an unrealized loss position at June 30, 2011, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.
The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
June 30, 2011 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 551 | $ | (13.3) | $ | - | $ | - | $ | 551 | $ | (13.3) | |||||
Foreign | 3,136 | (60.7) | 264 | (14.1) | 3,400 | (74.8) | |||||||||||
Corporate securities | 3,709 | (73.2) | 152 | (23.9) | 3,861 | (97.1) | |||||||||||
Mortgage-backed securities | 2,638 | (35.1) | 825 | (155.4) | 3,463 | (190.5) | |||||||||||
States, municipalities, and political subdivisions | 663 | (10.8) | 62 | (4.6) | 725 | (15.4) | |||||||||||
Total fixed maturities | 10,697 | (193.1) | 1,303 | (198.0) | 12,000 | (391.1) | |||||||||||
Equity securities | 44 | (3.3) | 1 | (0.4) | 45 | (3.7) | |||||||||||
Other investments | 19 | (1.0) | - | - | 19 | (1.0) | |||||||||||
Total | $ | 10,760 | $ | (197.4) | $ | 1,304 | $ | (198.4) | $ | 12,064 | $ | (395.8) |
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
December 31, 2010 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 864 | $ | (24.6) | $ | - | $ | - | $ | 864 | $ | (24.6) | |||||
Foreign | 4,409 | (79.0) | 312 | (37.6) | 4,721 | (116.6) | |||||||||||
Corporate securities | 3,553 | (85.1) | 273 | (43.9) | 3,826 | (129.0) | |||||||||||
Mortgage-backed securities | 3,904 | (67.3) | 1,031 | (165.1) | 4,935 | (232.4) | |||||||||||
States, municipalities, and political subdivisions | 1,115 | (36.2) | 79 | (11.9) | 1,194 | (48.1) | |||||||||||
Total fixed maturities | 13,845 | (292.2) | 1,695 | (258.5) | 15,540 | (550.7) | |||||||||||
Equity securities | 45 | (1.9) | 1 | (0.3) | 46 | (2.2) | |||||||||||
Other investments | 66 | (8.7) | - | - | 66 | (8.7) | |||||||||||
Total | $ | 13,956 | $ | (302.8) | $ | 1,696 | $ | (258.8) | $ | 15,652 | $ | (561.6) |
e) Restricted assets
ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at June 30, 2011 and December 31, 2010, are fixed maturities and short-term investments totaling $12.8 billion and $12.0 billion, respectively, and cash of $97 million and $104 million, respectively.
The following table presents the components of restricted assets:
June 30 | December 31 | |||||||
2011 | 2010 | |||||||
(in millions of U.S. dollars) | ||||||||
Trust funds | $ | 9,143 | $ | 8,200 | ||||
Deposits with U.S. regulatory authorities | 1,254 | 1,384 | ||||||
Deposits with non-U.S. regulatory authorities | 2,264 | 2,289 | ||||||
Other pledged assets | 273 | 190 | ||||||
$ | 12,934 | $ | 12,063 |
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5. Fair value measurements
a) Fair value hierarchy
Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines 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. The three levels of the hierarchy are as follows:
We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.
We use one or more pricing services to obtain fair value measurements for the majority of the investment securities we hold. Based on management's understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP. The following is a description of the valuation techniques and inputs used to determine fair value for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
Fixed maturities
We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use 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 may 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 used 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 dependent 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. Equity securities for which pricing is unobservable are classified within Level 3.
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.
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 NAV was used 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 ACE for deferred compensation plans as well as other portfolios, and included in Other investments, are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.
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 other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE's obligation to return the collateral plus interest.
Investment derivative instruments
Actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts are classified within Level 1 as fair values are based on quoted market prices.
Guaranteed living benefits
The liability for Guaranteed Living Benefits (GLB) arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of Guaranteed Minimum Income Benefits (GMIB) and Guaranteed Minimum Accumulation Benefits (GMAB) associated with variable annuity contracts. For GLB 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 most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodologies to determine rates applied to each treaty are 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. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the GMIB contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values) by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.
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. In general ACE assumes that GMIB annuitization rates will be higher for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values). In addition, we also assume that GMIB annuitization rates are higher in the first year immediately following the waiting period (the first year the policies are eligible to annuitize using the GMIB) in comparison to all subsequent years. We do not yet have a robust set of annuitization experience because most of our clients' policyholders are not yet eligible to annuitize using the GMIB. However, for certain clients there are several years of annuitization experience. For these clients the annuitization function reflects the actual experience and has a maximum annuitization rate per annum of 8 percent (a higher maximum applies in the first year a policy is eligible to annuitize using the GMIB - it is over 13 percent). For most clients, there is no currently observable relevant annuitization behavior data and so we use a weighted-average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize using the GMIB). The GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.
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 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 our first and second quarter 2011 review, no changes were made to actuarial or behavior assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $0.3 million and $6.3 million for the three and six months ended June 30, 2011, respectively.
We view 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, GLB reinsurance is classified within Level 3.
Other derivative instruments
We maintain 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 Guaranteed Minimum Death Benefits (GMDB) and GLB reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the 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. Our position in credit default swaps is typically included within Level 3.
The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
June 30, 2011 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,245 | $ | 1,250 | $ | - | $ | 2,495 | |||
Foreign | 207 | 12,445 | 27 | 12,679 | |||||||
Corporate securities | 43 | 14,328 | 142 | 14,513 | |||||||
Mortgage-backed securities | - | 9,977 | 34 | 10,011 | |||||||
States, municipalities, and political subdivisions | - | 1,339 | 1 | 1,340 | |||||||
1,495 | 39,339 | 204 | 41,038 | ||||||||
Equity securities | 567 | 5 | 10 | 582 | |||||||
Short-term investments | 1,266 | 1,114 | - | 2,380 | |||||||
Other investments | 239 | 237 | 1,680 | 2,156 | |||||||
Securities lending collateral | - | 1,593 | - | 1,593 | |||||||
Investment derivative instruments | 3 | - | - | 3 | |||||||
Other derivative instruments | (37) | 41 | 4 | 8 | |||||||
Total assets measured at fair value | $ | 3,533 | $ | 42,329 | $ | 1,898 | $ | 47,760 | |||
Liabilities: | |||||||||||
GLB(1) | $ | - | $ | - | $ | 524 | $ | 524 | |||
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. |
Level 1 | Level 2 | Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
December 31, 2010 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,564 | $ | 1,399 | $ | - | $ | 2,963 | |||
Foreign | 187 | 10,973 | 26 | 11,186 | |||||||
Corporate securities | 31 | 13,441 | 115 | 13,587 | |||||||
Mortgage-backed securities | - | 8,477 | 39 | 8,516 | |||||||
States, municipalities, and political subdivisions | - | 1,285 | 2 | 1,287 | |||||||
1,782 | 35,575 | 182 | 37,539 | ||||||||
Equity securities | 676 | 3 | 13 | 692 | |||||||
Short-term investments | 903 | 1,080 | - | 1,983 | |||||||
Other investments | 39 | 221 | 1,432 | 1,692 | |||||||
Securities lending collateral | - | 1,495 | - | 1,495 | |||||||
Investment derivative instruments | 11 | - | - | 11 | |||||||
Other derivative instruments | (25) | 46 | 4 | 25 | |||||||
Total assets measured at fair value | $ | 3,386 | $ | 38,420 | $ | 1,631 | $ | 43,437 | |||
Liabilities: | |||||||||||
GLB(1) | $ | - | $ | - | $ | 507 | $ | 507 | |||
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. |
There were no significant gross transfers between Level 1 and Level 2 during the three and six months ended June 30, 2011 and 2010.
Fair value of alternative investments
Included in Other investments in the fair value hierarchy at June 30, 2011 and December 31, 2010 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At June 30, 2011 and December 31, 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 value and maximum future funding commitments related to these investments. The table also shows the expected liquidation period from June 30, 2011.
June 30, 2011 | December 31, 2010 | |||||||||||||
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 | $ | 207 | $ | 163 | $ | 192 | $ | 151 | |||||
Real estate | 3 to 9 Years | 261 | 89 | 168 | 92 | |||||||||
Distressed | 6 to 9 Years | 221 | 219 | 243 | 43 | |||||||||
Mezzanine | 6 to 9 Years | 126 | 299 | 135 | 173 | |||||||||
Traditional | 3 to 8 Years | 457 | 410 | 376 | 291 | |||||||||
Vintage | 1 to 3 Years | 27 | 6 | 27 | 3 | |||||||||
Investment funds | Not Applicable | 338 | - | 329 | - | |||||||||
$ | 1,637 | $ | 1,186 | $ | 1,470 | $ | 753 | |||||||
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 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, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If ACE wishes to redeem an investment fund investment, it 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 the 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 measured at fair value using significant unobservable inputs (Level 3):
Three Months Ended June 30, 2011 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance- Beginning of Period | $ | 26 | $ | 113 | $ | 81 | $ | 1 | $ | 10 | $ | 1,564 | $ | 4 | $ | 449 | |
Transfers into Level 3 | 5 | 29 | 3 | - | - | - | - | - | |||||||||
Transfers out of Level 3 | (6) | - | (35) | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | - | - | - | - | - | 9 | - | - | |||||||||
Net Realized Gains/Losses | 1 | (1) | - | - | 2 | (3) | - | 75 | |||||||||
Purchases | 5 | 3 | - | - | 2 | 243 | - | - | |||||||||
Issuances | - | - | - | - | - | - | - | - | |||||||||
Sales | (2) | (1) | (12) | - | (4) | (55) | - | - | |||||||||
Settlements | (2) | (1) | (3) | - | - | (78) | - | - | |||||||||
Balance-End of Period | $ | 27 | $ | 142 | $ | 34 | $ | 1 | $ | 10 | $ | 1,680 | $ | 4 | $ | 524 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (3) | $ | - | $ | 75 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. | |||||||||||||||||
Three Months Ended June 30, 2010 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance-Beginning of Period | $ | 21 | $ | 133 | $ | 12 | $ | 2 | $ | 13 | $ | 1,236 | $ | 14 | $ | 347 | |
Transfers into (Out of) Level 3 | 6 | - | - | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | 1 | 3 | - | - | (1) | 14 | - | - | |||||||||
Net Realized Gains/Losses | - | (1) | - | - | 1 | (14) | 12 | 301 | |||||||||
Purchases, Sales, Issuances, and Settlements, Net | - | (14) | - | 1 | 3 | (9) | (12) | ||||||||||
Balance- End of Period | $ | 28 | $ | 121 | $ | 12 | $ | 3 | $ | 16 | $ | 1,227 | $ | 14 | $ | 648 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (14) | $ | 12 | $ | 301 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $776 million at June 30, 2010, and $469 million at March 31, 2010, which includes a fair value derivative adjustment of $648 million and $347 million, respectively. |
Six Months Ended June 30, 2011 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance-Beginning of Period | $ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | 507 | ||
Transfers into Level 3 | 9 | 34 | 4 | - | - | - | - | - | |||||||||
Transfers out of Level 3 | (7) | (4) | (35) | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | (1) | 1 | - | - | (1) | 51 | - | - | |||||||||
Net Realized Gains/Losses | 1 | (2) | - | - | 4 | (3) | 1 | 17 | |||||||||
Purchases | 5 | 22 | 46 | - | 2 | 333 | - | - | |||||||||
Sales | (3) | (20) | (15) | - | (8) | (55) | - | - | |||||||||
Settlements | (3) | (4) | (5) | (1) | - | (78) | (1) | - | |||||||||
Balance-End of Period | $ | 27 | $ | 142 | $ | 34 | $ | 1 | $ | 10 | $ | 1,680 | $ | 4 | $ | 524 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (3) | $ | 1 | $ | 17 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. | |||||||||||||||||
Six Months Ended June 30, 2010 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance- Beginning of Period | $ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | |
Transfers into (Out of) Level 3 | (31) | (35) | - | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | 1 | 6 | - | - | - | 33 | - | - | |||||||||
Net Realized Gains/Losses | (1) | (1) | - | - | 1 | (13) | 12 | 205 | |||||||||
Purchases, Sales, Issuances, and Settlements, Net | - | (17) | (9) | - | 3 | 58 | (12) | ||||||||||
Balance- End of Period | $ | 28 | $ | 121 | $ | 12 | $ | 3 | $ | 16 | $ | 1,227 | $ | 14 | $ | 648 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (13) | $ | 12 | $ | 205 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits. The liability for GLB reinsurance was $776 million at June 30, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $648 million and $443 million, respectively. |
b) Financial instruments disclosed, but not carried, at fair value
ACE uses various financial instruments in the normal course of its business. Our insurance contracts are excluded from fair value of financial instruments accounting guidance, and therefore excluded from the discussion below.
The carrying values of cash, other assets, other liabilities, and other financial instruments not included below approximated their fair values.
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies are based on ACE's share of the net assets based on the financial statements provided by those companies.
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 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.
The following table presents carrying values and fair values of financial instruments not measured at fair value:
June 30, 2011 | December 31, 2010 | ||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||
(in millions of U.S. dollars) | |||||||||
Assets: | |||||||||
Fixed maturities held to maturity | |||||||||
U.S. Treasury and agency | $ | 1,067 | $ | 1,092 | $ | 1,105 | $ | 1,127 | |
Foreign | 1,051 | 1,028 | 1,049 | 1,013 | |||||
Corporate securities | 2,311 | 2,292 | 2,361 | 2,313 | |||||
Mortgage-backed securities | 3,414 | 3,472 | 3,811 | 3,846 | |||||
States, municipalities, and political subdivisions | 1,190 | 1,194 | 1,175 | 1,162 | |||||
Total assets | 9,033 | 9,078 | 9,501 | 9,461 | |||||
Liabilities: | |||||||||
Short-term debt | 1,400 | 1,400 | 1,300 | 1,300 | |||||
Long-term debt | 3,360 | 3,719 | 3,358 | 3,846 | |||||
Trust preferred securities | 309 | 385 | 309 | 376 | |||||
Total liabilities | $ | 5,069 | $ | 5,504 | $ | 4,967 | $ | 5,522 |
|
6. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The following table presents income and expenses relating to GMDB and GLB reinsurance. GLBs include GMIBs as well as some GMABs originating in Japan.
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||
(in millions of U.S. dollars) | |||||||||||
GMDB | |||||||||||
Net premiums earned | $ | 25 | $ | 27 | $ | 51 | $ | 56 | |||
Policy benefits and other reserve adjustments | $ | 21 | $ | 22 | $ | 43 | $ | 46 | |||
GLB | |||||||||||
Net premiums earned | $ | 41 | $ | 40 | $ | 82 | $ | 81 | |||
Policy benefits and other reserve adjustments | 6 | 6 | 12 | 13 | |||||||
Net realized gains (losses) | (75) | (301) | (17) | (205) | |||||||
Gain (loss) recognized in income | $ | (40) | $ | (267) | $ | 53 | $ | (137) | |||
Net cash received | $ | 40 | $ | 40 | $ | 81 | $ | 80 | |||
Net increase in liability | $ | (80) | $ | (307) | $ | (28) | $ | (217) |
At June 30, 2011, reported liabilities for GMDB and GLB reinsurance were $181 million and $676 million, respectively, compared with $185 million and $648 million, respectively, at December 31, 2010. The reported liability for GLB reinsurance of $676 million at June 30, 2011, and $648 million at December 31, 2010, includes a fair value derivative adjustment of $524 million and $507 million, respectively. Included in Net realized gains (losses) in the table above are gains (losses) related to foreign exchange and other fair value derivative adjustments. Reported liabilities for both GMDB and GLB 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.
a) GMDB reinsurance
At June 30, 2011 and December 31, 2010, the net amount at risk from GMDB reinsurance programs was $3.1 billion and $2.9 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, 2011, if all of the cedants' policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable, taking into account all appropriate claims limits, would be approximately $1.5 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.
b) GLB reinsurance
At June 30, 2011 and December 31, 2010, the net amount at risk from GLB reinsurance programs was $789 million and $719 million, respectively. For GLB 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 67 years.
|
7. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
ACE 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, we purchase TBAs as part of our investing activities. These securities are included within the fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering GLBs, ACE assumes the risk of GLBs, including GMIB and GMAB, 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 GMAB risk is triggered if, at contract maturity, the contract holder's account value is less than a guaranteed minimum value. The GLB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GLBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). ACE also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity exposure in the GMDB and GLB blocks of business.
In relation to certain debt issuances, ACE, from time to time, 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. At June 30, 2011 and December 31, 2010, ACE had no in force interest rate swaps, having exited such positions upon the repayment of related debt issuances during the fourth quarter of 2010.
ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverables.
All derivative instruments are carried 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 designated 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 our derivative instruments:
June 30, 2011 | December 31, 2010 | |||||||||
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 | $ | 1 | $ | 753 | $ | 3 | $ | 729 | |
Futures contracts on money market instruments | AP | 2 | 10,098 | 3 | 4,297 | |||||
Futures contracts on notes and bonds | AP | - | 1,158 | 5 | 676 | |||||
Options on money market instruments | AP | - | 528 | - | 1 | |||||
Convertible bonds | FM AFS | 398 | 367 | 416 | 382 | |||||
TBAs | FM AFS | 123 | 117 | 101 | 98 | |||||
$ | 524 | $ | 13,021 | $ | 528 | $ | 6,183 | |||
Other derivative instruments | ||||||||||
Futures contracts on equities | AP | $ | (37) | $ | 1,110 | $ | (25) | $ | 1,069 | |
Options on equity market indices | AP | 41 | 250 | 46 | 250 | |||||
Credit default swaps | AP | 4 | 350 | 4 | 350 | |||||
Other | AP | - | 6 | - | 17 | |||||
$ | 8 | $ | 1,716 | $ | 25 | $ | 1,686 | |||
GLB(1) | AP/FPB | $ | (676) | $ | 789 | $ | (648) | $ | 719 |
(1) Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 6 for additional information. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.
The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations:
Three Months Ended | Six Months Ended | |||||||||||||
June 30 | June 30 | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||
(in millions of U.S. dollars) | ||||||||||||||
Investment and embedded derivative instruments | ||||||||||||||
Foreign currency forward contracts | $ | (3) | $ | 23 | $ | (18) | $ | 36 | ||||||
All other futures contracts and options | (24) | 2 | (27) | 10 | ||||||||||
Convertible bonds | (21) | (20) | (22) | (22) | ||||||||||
TBAs | - | - | (1) | - | ||||||||||
$ | (48) | $ | 5 | $ | (68) | $ | 24 | |||||||
GLB and other derivative instruments | ||||||||||||||
GLB | $ | (75) | $ | (301) | $ | (17) | $ | (205) | ||||||
Futures contracts on equities | - | 117 | (63) | 66 | ||||||||||
Options on equity market indices | 3 | 26 | (5) | 18 | ||||||||||
Interest rate swaps | - | (8) | - | (17) | ||||||||||
Credit default swaps | (2) | 11 | (3) | 11 | ||||||||||
Other | - | 1 | - | 1 | ||||||||||
$ | (74) | $ | (154) | $ | (88) | $ | (126) | |||||||
$ | (122) | $ | (149) | $ | (156) | $ | (102) |
Derivative instrument objectives
(i) Foreign currency exposure management
A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. ACE 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 GLB 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 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 GLB 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 creditworthiness 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 our 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. Interest rate swaps are also employed 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. We have purchased a credit default swap to mitigate our global credit risk exposure to one of our 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. ACE purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) TBA
By acquiring a TBA, a commitment is made to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the position is accounted for as a derivative in the consolidated financial statements. ACE purchases TBAs both for their total return and for the flexibility they provide related to our mortgage-backed security strategy.
(v) GLB
Under the GLB program, as the assuming entity, ACE is obligated to provide coverage until the expiration or maturity 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. We may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (e.g., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (e.g., increased annuitization or decreased lapse rates) although we expect the business to be profitable. We believe this presentation provides the most meaningful disclosure of changes in the underlying risk within the GLB 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 $1,299 million. In connection with these investments, we have commitments that may require funding of up to $1,186 million over the next several years.
c) Taxation
In 2010, ACE reached final settlement with the Internal Revenue Service (IRS) Appeals Division regarding its federal tax returns for 2002, 2003, and 2004. As a result of the settlement, the amount of unrecognized tax benefits was reduced by approximately $21 million. Additionally, in June 2010, the IRS completed its field examination of ACE's federal tax returns for 2005, 2006, and 2007 and has proposed several adjustments principally involving transfer pricing and other insurance-related matters. In July 2010, we filed a written protest with the IRS, and the case is currently being reviewed by the IRS Appeals Division. The IRS commenced its field examination of ACE's federal tax returns for 2008 and 2009 during January 2011. While it is reasonably possible that a significant change in the unrecognized tax benefits could occur in the next 12 months, we believe that the outcome of the appeal and the current examination will not have a material impact on our financial condition or results of operations. With few exceptions, our significant U.K. subsidiaries remain subject to examination for tax years 2007 and later.
d) Legal proceedings
(i) Claims and other litigation
ACE'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 ACE's subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in ACE's loss and loss expense reserves. In addition to claims litigation, ACE 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
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, they 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 brokers and insurers. 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. In 2007, the Court granted defendants' motions to dismiss plaintiffs' antitrust and RICO claims with prejudice. The Court also declined to exercise supplemental jurisdiction over plaintiffs' state law claims and dismissed those claims without prejudice. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit. On August 16, 2010, the Third Circuit affirmed, in part, and vacated, in part, the District Court's previous dismissals with instructions for further briefing at the District Court on remand. Defendants renewed their motions consistent with the Third Circuit's instructions. On June 28, 2011, the District Court administratively terminated defendants' motions without prejudice to re-file after adjudication of issues related to a proposed class settlement involving a number of other parties. The Court set September 14, 2011 for a fairness hearing on the proposed settlement, but did not indicate when it would finally resolve all issues such that ACE may re-file its motions to dismiss.
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages and the Court has not decided defendants' renewed motions to dismiss. The Court has also not determined if this case may proceed as a class action and has, therefore, not determined the size or scope of any class. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.
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 (“tag-along cases”). All proceedings in these tag-along cases are currently stayed.
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in any of the tag-along cases. The proceedings in the tag-along cases were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, motions to dismiss. Also, the scope of the tag-along cases, in large part, will be affected by the outcome of the MDL Court's decision on defendants' renewed motions to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from these litigations.
In addition to the related federal cases, there are two pending state cases with allegations similar to those in the consolidated federal actions described above:
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in this case. The proceedings were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, a motion to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.
In January 2011, plaintiff submitted an expert report in which it claims that ACE should be liable for $11.3 million in overcharges to Ohio public entities; plaintiffs may claim that this amount should be trebled pursuant to Ohio antitrust law. Plaintiff also seeks to impose a $10.3 million penalty on ACE related to ACE's sales of private insurance in Ohio. ACE believes that these claims are without merit and continues to defend them vigorously.
In all of the lawsuits described above, except where specifically noted, 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.
|
10. Segment information
ACE 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.
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:
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2011 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,735 | $ | 1,477 | $ | 282 | $ | 459 | $ | - | $ | 3,953 | |||||
Net premiums earned | 1,604 | 1,447 | 254 | 452 | - | 3,757 | |||||||||||
Losses and loss expenses | 1,233 | 733 | 112 | 147 | 1 | 2,226 | |||||||||||
Policy benefits | - | - | - | 108 | - | 108 | |||||||||||
Policy acquisition costs | 143 | 348 | 47 | 66 | - | 604 | |||||||||||
Administrative expenses | 147 | 242 | 14 | 72 | 40 | 515 | |||||||||||
Underwriting income (loss) | 81 | 124 | 81 | 59 | (41) | 304 | |||||||||||
Net investment income | 300 | 138 | 71 | 59 | 1 | 569 | |||||||||||
Net realized gains (losses) including OTTI | 21 | (10) | (14) | (68) | (2) | (73) | |||||||||||
Interest expense | 3 | 1 | 1 | 3 | 54 | 62 | |||||||||||
Other (income) expense | 3 | (5) | 1 | 8 | 2 | 9 | |||||||||||
Income tax expense (benefit) | 95 | 40 | 8 | 14 | (35) | 122 | |||||||||||
Net income (loss) | $ | 301 | $ | 216 | $ | 128 | $ | 25 | $ | (63) | $ | 607 |
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 Six Months Ended June 30, 2011 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 3,020 | $ | 2,914 | $ | 597 | $ | 868 | $ | - | $ | 7,399 | |||||
Net premiums earned | 2,950 | 2,751 | 514 | 851 | - | 7,066 | |||||||||||
Losses and loss expenses | 2,227 | 1,595 | 391 | 275 | 1 | 4,489 | |||||||||||
Policy benefits | - | - | - | 199 | - | 199 | |||||||||||
Policy acquisition costs | 279 | 660 | 93 | 127 | - | 1,159 | |||||||||||
Administrative expenses | 295 | 466 | 26 | 140 | 82 | 1,009 | |||||||||||
Underwriting income (loss) | 149 | 30 | 4 | 110 | (83) | 210 | |||||||||||
Net investment income | 595 | 269 | 143 | 105 | 1 | 1,113 | |||||||||||
Net realized gains (losses) including OTTI | 10 | (19) | (27) | (81) | (1) | (118) | |||||||||||
Interest expense | 7 | 2 | 1 | 6 | 109 | 125 | |||||||||||
Other (income) expense | (13) | (7) | (5) | 13 | 7 | (5) | |||||||||||
Income tax expense (benefit) | 184 | 59 | 18 | 27 | (69) | 219 | |||||||||||
Net income (loss) | $ | 576 | $ | 226 | $ | 106 | $ | 88 | $ | (130) | $ | 866 |
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 | |||||
Underwriting assets are reviewed in total by management for purpose of decision-making. Other than goodwill, ACE does not allocate assets to its segments.
The following table presents the net premiums earned for each segment by product:
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Three Months Ended June 30, 2011 | |||||||||||
Insurance – North American | $ | 657 | $ | 865 | $ | 82 | $ | 1,604 | |||
Insurance – Overseas General | 533 | 348 | 566 | 1,447 | |||||||
Global Reinsurance | 115 | 139 | - | 254 | |||||||
Life | - | - | 452 | 452 | |||||||
$ | 1,305 | $ | 1,352 | $ | 1,100 | $ | 3,757 | ||||
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 | ||||
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Six Months Ended June 30, 2011 | |||||||||||
Insurance – North American | $ | 1,035 | $ | 1,755 | $ | 160 | $ | 2,950 | |||
Insurance – Overseas General | 964 | 690 | 1,097 | 2,751 | |||||||
Global Reinsurance | 227 | 287 | - | 514 | |||||||
Life | - | - | 851 | 851 | |||||||
$ | 2,226 | $ | 2,732 | $ | 2,108 | $ | 7,066 | ||||
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 |
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12. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at June 30, 2011 and December 31, 2010, and for the three and six months ended June 30, 2011 and 2010, for ACE Limited (the Parent Guarantor) and ACE INA Holdings Inc. (the Subsidiary Issuer). 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 financial information of the Subsidiary Issuer is presented on a consolidated basis and consists principally of the net assets, results of operations, and cash flows of operating insurance company subsidiaries.
Condensed Consolidating Balance Sheet at | ||||||||||||||
June 30, 2011 | ||||||||||||||
(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 | $ | 40 | $ | 29,095 | $ | 26,054 | $ | - | $ | 55,189 | ||||
Cash | (185) | 664 | 354 | - | 833 | |||||||||
Insurance and reinsurance balances receivable | - | 4,329 | 594 | - | 4,923 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 17,722 | (4,347) | - | 13,375 | |||||||||
Reinsurance recoverable on policy benefits | - | 941 | (691) | - | 250 | |||||||||
Value of business acquired | - | 796 | - | - | 796 | |||||||||
Goodwill and other intangible assets | - | 4,301 | 557 | - | 4,858 | |||||||||
Investments in subsidiaries | 23,590 | - | - | (23,590) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 853 | - | - | (853) | - | |||||||||
Other assets | 6 | 7,471 | 1,553 | - | 9,030 | |||||||||
Total assets | $ | 24,304 | $ | 65,319 | $ | 24,074 | $ | (24,443) | $ | 89,254 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 31,820 | $ | 7,131 | $ | - | $ | 38,951 | ||||
Unearned premiums | - | 5,820 | 1,093 | - | 6,913 | |||||||||
Future policy benefits | - | 3,767 | 617 | - | 4,384 | |||||||||
Due to subsidiaries and affiliates, net | - | 907 | (907) | - | - | |||||||||
Short-term debt | - | 1,000 | 400 | - | 1,400 | |||||||||
Long-term debt | - | 3,360 | - | - | 3,360 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 191 | 8,060 | 1,573 | - | 9,824 | |||||||||
Total liabilities | 191 | 55,043 | 9,907 | - | 65,141 | |||||||||
Total shareholders' equity | 24,113 | 10,276 | 14,167 | (24,443) | 24,113 | |||||||||
Total liabilities and shareholders' equity | $ | 24,304 | $ | 65,319 | $ | 24,074 | $ | (24,443) | $ | 89,254 | ||||
(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, 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 | $ | 47 | $ | 26,718 | $ | 24,642 | $ | - | $ | 51,407 | ||||
Cash | 308 | 573 | (109) | - | 772 | |||||||||
Insurance and reinsurance balances receivable | - | 3,710 | 523 | - | 4,233 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 16,877 | (4,006) | - | 12,871 | |||||||||
Reinsurance recoverable on policy benefits | - | 959 | (678) | - | 281 | |||||||||
Value of business acquired | - | 634 | - | - | 634 | |||||||||
Goodwill and other intangible assets | - | 4,113 | 551 | - | 4,664 | |||||||||
Investments in subsidiaries | 22,529 | - | - | (22,529) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 564 | (555) | 555 | (564) | - | |||||||||
Other assets | 14 | 7,045 | 1,434 | - | 8,493 | |||||||||
Total assets | $ | 23,462 | $ | 60,074 | $ | 22,912 | $ | (23,093) | $ | 83,355 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 30,430 | $ | 6,961 | $ | - | $ | 37,391 | ||||
Unearned premiums | - | 5,379 | 951 | - | 6,330 | |||||||||
Future policy benefits | - | 2,495 | 611 | - | 3,106 | |||||||||
Short-term debt | 300 | 1,000 | - | - | 1,300 | |||||||||
Long-term debt | - | 3,358 | - | - | 3,358 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 188 | 7,394 | 1,005 | - | 8,587 | |||||||||
Total liabilities | 488 | 50,365 | 9,528 | - | 60,381 | |||||||||
Total shareholders' equity | 22,974 | 9,709 | 13,384 | (23,093) | 22,974 | |||||||||
Total liabilities and shareholders' equity | $ | 23,462 | $ | 60,074 | $ | 22,912 | $ | (23,093) | $ | 83,355 | ||||
(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, 2011 | ||||||||||||||
(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 | $ | - | $ | 2,306 | $ | 1,647 | $ | - | $ | 3,953 | ||||
Net premiums earned | - | 2,225 | 1,532 | - | 3,757 | |||||||||
Net investment income | - | 282 | 287 | - | 569 | |||||||||
Equity in earnings of subsidiaries | 579 | - | - | (579) | - | |||||||||
Net realized gains (losses) including OTTI | (1) | 17 | (89) | - | (73) | |||||||||
Losses and loss expenses | - | 1,438 | 788 | - | 2,226 | |||||||||
Policy benefits | - | 59 | 49 | - | 108 | |||||||||
Policy acquisition costs and administrative expenses | 18 | 609 | 504 | (12) | 1,119 | |||||||||
Interest expense | (10) | 66 | (3) | 9 | 62 | |||||||||
Other (income) expense | (40) | 20 | 29 | - | 9 | |||||||||
Income tax expense | 3 | 110 | 9 | - | 122 | |||||||||
Net income | $ | 607 | $ | 222 | $ | 354 | $ | (576) | $ | 607 |
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 | ||||
(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, 2011 | ||||||||||||||
(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 | $ | - | $ | 4,329 | $ | 3,070 | $ | - | $ | 7,399 | ||||
Net premiums earned | - | 4,163 | 2,903 | - | 7,066 | |||||||||
Net investment income | 1 | 544 | 568 | - | 1,113 | |||||||||
Equity in earnings of subsidiaries | 827 | - | - | (827) | - | |||||||||
Net realized gains (losses) including OTTI | (2) | 4 | (120) | - | (118) | |||||||||
Losses and loss expenses | - | 2,739 | 1,750 | - | 4,489 | |||||||||
Policy benefits | - | 99 | 100 | - | 199 | |||||||||
Policy acquisition costs and administrative expenses | 36 | 1,188 | 965 | (21) | 2,168 | |||||||||
Interest expense | (18) | 133 | (8) | 18 | 125 | |||||||||
Other (income) expense | (62) | 32 | 25 | - | (5) | |||||||||
Income tax expense | 4 | 179 | 36 | - | 219 | |||||||||
Net income | $ | 866 | $ | 341 | $ | 483 | $ | (824) | $ | 866 | ||||
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 (benefit) | 3 | 203 | 60 | - | 266 | |||||||||
Net income | $ | 1,432 | $ | 395 | $ | 990 | $ | (1,385) | $ | 1,432 | ||||
(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, 2011 | |||||||||||||||||
(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 | $ | 117 | $ | 677 | $ | 1,949 | $ | (680) | $ | 2,063 | |||||||
Cash flows from (used for) investing activities | |||||||||||||||||
Purchases of fixed maturities available for sale | - | (6,330) | (7,353) | - | (13,683) | ||||||||||||
Purchases of fixed maturities held to maturity | - | (233) | (1) | - | (234) | ||||||||||||
Purchases of equity securities | - | (138) | (32) | - | (170) | ||||||||||||
Sales of fixed maturities available for sale | 8 | 5,022 | 4,955 | - | 9,985 | ||||||||||||
Sales of equity securities | - | 332 | 15 | - | 347 | ||||||||||||
Maturities and redemptions of fixed maturities available for sale | - | 847 | 911 | - | 1,758 | ||||||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 475 | 181 | - | 656 | ||||||||||||
Net derivative instruments settlements | (1) | (7) | (38) | - | (46) | ||||||||||||
Capital contribution to subsidiary | (385) | - | - | 385 | - | ||||||||||||
Advances (to) from affiliates | 283 | - | (283) | - | - | ||||||||||||
Acquisition of subsidiaries (net of cash acquired of $95) | - | (343) | (37) | - | (380) | ||||||||||||
Other | - | (449) | 317 | - | (132) | ||||||||||||
Net cash flows from (used for) investing activities | (95) | (824) | (1,365) | 385 | (1,899) | ||||||||||||
Cash flows from (used for) financing activities | |||||||||||||||||
Dividends paid on Common Shares | (223) | - | - | - | (223) | ||||||||||||
Common Shares repurchased | (68) | - | - | - | (68) | ||||||||||||
Net proceeds from issuance (repayment) of short-term debt | (300) | - | 400 | - | 100 | ||||||||||||
Proceeds from share based compensation plans | 76 | - | - | - | 76 | ||||||||||||
Advances (to) from affiliates | - | 226 | (226) | - | - | ||||||||||||
Dividends to parent company | - | - | (680) | 680 | - | ||||||||||||
Capital contribution from parent | - | - | 385 | (385) | - | ||||||||||||
Net cash flows from (used for) financing activities | (515) | 226 | (121) | 295 | (115) | ||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | 12 | - | - | 12 | ||||||||||||
Net increase (decrease) in cash | (493) | 91 | 463 | - | 61 | ||||||||||||
Cash - beginning of period | 308 | 573 | (109) | - | 772 | ||||||||||||
Cash - end of period | $ | (185) | $ | 664 | $ | 354 | $ | - | $ | 833 | |||||||
(1)Includes all other subsidiaries of ACE Limited and intercompany eliminations. | |||||||||||||||||
(2)Includes elimination of dividends paid from subsidiaries to ACE Limited and capital contribution to subsidiaries by ACE Limited. |
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 | 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 share based compensation plans | 19 | - | - | - | 19 | ||||||||||
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. |
|
June 30, 2011 | |||||||||||||||
Amortized Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Fair Value | OTTI Recognized in AOCI | |||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Available for sale | |||||||||||||||
U.S. Treasury and agency | $ | 2,423 | $ | 80 | $ | (8) | $ | 2,495 | $ | - | |||||
Foreign | 12,341 | 389 | (51) | 12,679 | (12) | ||||||||||
Corporate securities | 13,853 | 723 | (63) | 14,513 | (14) | ||||||||||
Mortgage-backed securities | 9,932 | 259 | (180) | 10,011 | (191) | ||||||||||
States, municipalities, and political | 1,313 | 36 | (9) | 1,340 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 39,862 | $ | 1,487 | $ | (311) | $ | 41,038 | $ | (217) | ||||||
Held to maturity | |||||||||||||||
U.S. Treasury and agency | $ | 1,067 | $ | 30 | $ | (5) | $ | 1,092 | $ | - | |||||
Foreign | 1,051 | 1 | (24) | 1,028 | - | ||||||||||
Corporate securities | 2,311 | 15 | (34) | 2,292 | - | ||||||||||
Mortgage-backed securities | 3,414 | 69 | (11) | 3,472 | - | ||||||||||
States, municipalities, and political | 1,190 | 10 | (6) | 1,194 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 9,033 | $ | 125 | $ | (80) | $ | 9,078 | $ | - |
December 31, 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 | $ | 2,904 | $ | 74 | $ | (15) | $ | 2,963 | $ | - | |||||
Foreign | 10,926 | 340 | (80) | 11,186 | (28) | ||||||||||
Corporate securities | 12,902 | 754 | (69) | 13,587 | (29) | ||||||||||
Mortgage-backed securities | 8,508 | 213 | (205) | 8,516 | (228) | ||||||||||
States, municipalities, and political | 1,302 | 15 | (30) | 1,287 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 36,542 | $ | 1,396 | $ | (399) | $ | 37,539 | $ | (285) | ||||||
Held to maturity | |||||||||||||||
U.S. Treasury and agency | $ | 1,105 | $ | 32 | $ | (10) | $ | 1,127 | $ | - | |||||
Foreign | 1,049 | 1 | (37) | 1,013 | - | ||||||||||
Corporate securities | 2,361 | 12 | (60) | 2,313 | - | ||||||||||
Mortgage-backed securities | 3,811 | 62 | (27) | 3,846 | - | ||||||||||
States, municipalities, and political | 1,175 | 5 | (18) | 1,162 | - | ||||||||||
subdivisions | |||||||||||||||
$ | 9,501 | $ | 112 | $ | (152) | $ | 9,461 | $ | - |
June 30 | December 31 | ||||||||||
2011 | 2010 | ||||||||||
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 | $ | 2,046 | $ | 2,074 | $ | 1,846 | $ | 1,985 | |||
Due after 1 year through 5 years | 12,962 | 13,446 | 13,094 | 13,444 | |||||||
Due after 5 years through 10 years | 11,468 | 11,972 | 10,276 | 10,782 | |||||||
Due after 10 years | 3,454 | 3,535 | 2,818 | 2,812 | |||||||
29,930 | 31,027 | 28,034 | 29,023 | ||||||||
Mortgage-backed securities | 9,932 | 10,011 | 8,508 | 8,516 | |||||||
$ | 39,862 | $ | 41,038 | $ | 36,542 | $ | 37,539 | ||||
Held to maturity; maturity period | |||||||||||
Due in 1 year or less | $ | 310 | $ | 312 | $ | 400 | $ | 404 | |||
Due after 1 year through 5 years | 2,127 | 2,163 | 1,983 | 2,010 | |||||||
Due after 5 years through 10 years | 2,512 | 2,468 | 2,613 | 2,524 | |||||||
Due after 10 years | 670 | 663 | 694 | 677 | |||||||
5,619 | 5,606 | 5,690 | 5,615 | ||||||||
Mortgage-backed securities | 3,414 | 3,472 | 3,811 | 3,846 | |||||||
$ | 9,033 | $ | 9,078 | $ | 9,501 | $ | 9,461 |
June 30 | December 31 | ||||
2011 | 2010 | ||||
(in millions of U.S. dollars) | |||||
Cost | $ | 549 | $ | 666 | |
Gross unrealized appreciation | 37 | 28 | |||
Gross unrealized depreciation | (4) | (2) | |||
Fair value | $ | 582 | $ | 692 |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Fixed maturities: | |||||||||||||||
OTTI on fixed maturities, gross | $ | (6) | $ | (18) | $ | (11) | $ | (68) | |||||||
OTTI on fixed maturities recognized in OCI (pre-tax) | 1 | 13 | 2 | 45 | |||||||||||
OTTI on fixed maturities, net | (5) | (5) | (9) | (23) | |||||||||||
Gross realized gains excluding OTTI | 108 | 128 | 217 | 296 | |||||||||||
Gross realized losses excluding OTTI | (29) | (46) | (85) | (115) | |||||||||||
Total fixed maturities | 74 | 77 | 123 | 158 | |||||||||||
Equity securities: | |||||||||||||||
Gross realized gains excluding OTTI | 4 | 32 | 12 | 77 | |||||||||||
Gross realized losses excluding OTTI | - | - | (1) | - | |||||||||||
Total equity securities | 4 | 32 | 11 | 77 | |||||||||||
OTTI on other investments | (3) | (13) | (3) | (13) | |||||||||||
Foreign exchange gains (losses) | (30) | 61 | (109) | 52 | |||||||||||
Investment and embedded derivative instruments | (48) | 5 | (68) | 24 | |||||||||||
Fair value adjustments on insurance derivative | (70) | (301) | 1 | (205) | |||||||||||
S&P put options and futures | 3 | 143 | (68) | 84 | |||||||||||
Other derivative instruments | (2) | 4 | (3) | (5) | |||||||||||
Other | (1) | 1 | (2) | 5 | |||||||||||
Net realized gains (losses) | $ | (73) | $ | 9 | $ | (118) | $ | 177 |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
(in millions of U.S. dollars) | |||||||||||||||
Balance of credit losses related to securities still held- beginning of period | $ | 96 | $ | 163 | $ | 137 | $ | 174 | |||||||
Additions where no OTTI was previously recorded | 2 | 5 | 2 | 22 | |||||||||||
Additions where an OTTI was previously recorded | - | - | 1 | 1 | |||||||||||
Reductions for securities sold during the period | (4) | (31) | (46) | (60) | |||||||||||
Balance of credit losses related to securities still held- end of period | $ | 94 | $ | 137 | $ | 94 | $ | 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, 2011 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 551 | $ | (13.3) | $ | - | $ | - | $ | 551 | $ | (13.3) | |||||
Foreign | 3,136 | (60.7) | 264 | (14.1) | 3,400 | (74.8) | |||||||||||
Corporate securities | 3,709 | (73.2) | 152 | (23.9) | 3,861 | (97.1) | |||||||||||
Mortgage-backed securities | 2,638 | (35.1) | 825 | (155.4) | 3,463 | (190.5) | |||||||||||
States, municipalities, and political subdivisions | 663 | (10.8) | 62 | (4.6) | 725 | (15.4) | |||||||||||
Total fixed maturities | 10,697 | (193.1) | 1,303 | (198.0) | 12,000 | (391.1) | |||||||||||
Equity securities | 44 | (3.3) | 1 | (0.4) | 45 | (3.7) | |||||||||||
Other investments | 19 | (1.0) | - | - | 19 | (1.0) | |||||||||||
Total | $ | 10,760 | $ | (197.4) | $ | 1,304 | $ | (198.4) | $ | 12,064 | $ | (395.8) |
0 – 12 Months | Over 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||
December 31, 2010 | (in millions of U.S. dollars) | ||||||||||||||||
U.S. Treasury and agency | $ | 864 | $ | (24.6) | $ | - | $ | - | $ | 864 | $ | (24.6) | |||||
Foreign | 4,409 | (79.0) | 312 | (37.6) | 4,721 | (116.6) | |||||||||||
Corporate securities | 3,553 | (85.1) | 273 | (43.9) | 3,826 | (129.0) | |||||||||||
Mortgage-backed securities | 3,904 | (67.3) | 1,031 | (165.1) | 4,935 | (232.4) | |||||||||||
States, municipalities, and political subdivisions | 1,115 | (36.2) | 79 | (11.9) | 1,194 | (48.1) | |||||||||||
Total fixed maturities | 13,845 | (292.2) | 1,695 | (258.5) | 15,540 | (550.7) | |||||||||||
Equity securities | 45 | (1.9) | 1 | (0.3) | 46 | (2.2) | |||||||||||
Other investments | 66 | (8.7) | - | - | 66 | (8.7) | |||||||||||
Total | $ | 13,956 | $ | (302.8) | $ | 1,696 | $ | (258.8) | $ | 15,652 | $ | (561.6) |
June 30 | December 31 | |||||||
2011 | 2010 | |||||||
(in millions of U.S. dollars) | ||||||||
Trust funds | $ | 9,143 | $ | 8,200 | ||||
Deposits with U.S. regulatory authorities | 1,254 | 1,384 | ||||||
Deposits with non-U.S. regulatory authorities | 2,264 | 2,289 | ||||||
Other pledged assets | 273 | 190 | ||||||
$ | 12,934 | $ | 12,063 |
|
Level 1 | Level 2 | Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
June 30, 2011 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,245 | $ | 1,250 | $ | - | $ | 2,495 | |||
Foreign | 207 | 12,445 | 27 | 12,679 | |||||||
Corporate securities | 43 | 14,328 | 142 | 14,513 | |||||||
Mortgage-backed securities | - | 9,977 | 34 | 10,011 | |||||||
States, municipalities, and political subdivisions | - | 1,339 | 1 | 1,340 | |||||||
1,495 | 39,339 | 204 | 41,038 | ||||||||
Equity securities | 567 | 5 | 10 | 582 | |||||||
Short-term investments | 1,266 | 1,114 | - | 2,380 | |||||||
Other investments | 239 | 237 | 1,680 | 2,156 | |||||||
Securities lending collateral | - | 1,593 | - | 1,593 | |||||||
Investment derivative instruments | 3 | - | - | 3 | |||||||
Other derivative instruments | (37) | 41 | 4 | 8 | |||||||
Total assets measured at fair value | $ | 3,533 | $ | 42,329 | $ | 1,898 | $ | 47,760 | |||
Liabilities: | |||||||||||
GLB(1) | $ | - | $ | - | $ | 524 | $ | 524 | |||
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. |
Level 1 | Level 2 | Level 3 | Total | ||||||||
(in millions of U.S. dollars) | |||||||||||
December 31, 2010 | |||||||||||
Assets: | |||||||||||
Fixed maturities available for sale | |||||||||||
U.S. Treasury and agency | $ | 1,564 | $ | 1,399 | $ | - | $ | 2,963 | |||
Foreign | 187 | 10,973 | 26 | 11,186 | |||||||
Corporate securities | 31 | 13,441 | 115 | 13,587 | |||||||
Mortgage-backed securities | - | 8,477 | 39 | 8,516 | |||||||
States, municipalities, and political subdivisions | - | 1,285 | 2 | 1,287 | |||||||
1,782 | 35,575 | 182 | 37,539 | ||||||||
Equity securities | 676 | 3 | 13 | 692 | |||||||
Short-term investments | 903 | 1,080 | - | 1,983 | |||||||
Other investments | 39 | 221 | 1,432 | 1,692 | |||||||
Securities lending collateral | - | 1,495 | - | 1,495 | |||||||
Investment derivative instruments | 11 | - | - | 11 | |||||||
Other derivative instruments | (25) | 46 | 4 | 25 | |||||||
Total assets measured at fair value | $ | 3,386 | $ | 38,420 | $ | 1,631 | $ | 43,437 | |||
Liabilities: | |||||||||||
GLB(1) | $ | - | $ | - | $ | 507 | $ | 507 | |||
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. |
June 30, 2011 | December 31, 2010 | |||||||||||||
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 | $ | 207 | $ | 163 | $ | 192 | $ | 151 | |||||
Real estate | 3 to 9 Years | 261 | 89 | 168 | 92 | |||||||||
Distressed | 6 to 9 Years | 221 | 219 | 243 | 43 | |||||||||
Mezzanine | 6 to 9 Years | 126 | 299 | 135 | 173 | |||||||||
Traditional | 3 to 8 Years | 457 | 410 | 376 | 291 | |||||||||
Vintage | 1 to 3 Years | 27 | 6 | 27 | 3 | |||||||||
Investment funds | Not Applicable | 338 | - | 329 | - | |||||||||
$ | 1,637 | $ | 1,186 | $ | 1,470 | $ | 753 | |||||||
Three Months Ended June 30, 2011 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance- Beginning of Period | $ | 26 | $ | 113 | $ | 81 | $ | 1 | $ | 10 | $ | 1,564 | $ | 4 | $ | 449 | |
Transfers into Level 3 | 5 | 29 | 3 | - | - | - | - | - | |||||||||
Transfers out of Level 3 | (6) | - | (35) | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | - | - | - | - | - | 9 | - | - | |||||||||
Net Realized Gains/Losses | 1 | (1) | - | - | 2 | (3) | - | 75 | |||||||||
Purchases | 5 | 3 | - | - | 2 | 243 | - | - | |||||||||
Issuances | - | - | - | - | - | - | - | - | |||||||||
Sales | (2) | (1) | (12) | - | (4) | (55) | - | - | |||||||||
Settlements | (2) | (1) | (3) | - | - | (78) | - | - | |||||||||
Balance-End of Period | $ | 27 | $ | 142 | $ | 34 | $ | 1 | $ | 10 | $ | 1,680 | $ | 4 | $ | 524 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (3) | $ | - | $ | 75 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. | |||||||||||||||||
Three Months Ended June 30, 2010 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance-Beginning of Period | $ | 21 | $ | 133 | $ | 12 | $ | 2 | $ | 13 | $ | 1,236 | $ | 14 | $ | 347 | |
Transfers into (Out of) Level 3 | 6 | - | - | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | 1 | 3 | - | - | (1) | 14 | - | - | |||||||||
Net Realized Gains/Losses | - | (1) | - | - | 1 | (14) | 12 | 301 | |||||||||
Purchases, Sales, Issuances, and Settlements, Net | - | (14) | - | 1 | 3 | (9) | (12) | ||||||||||
Balance- End of Period | $ | 28 | $ | 121 | $ | 12 | $ | 3 | $ | 16 | $ | 1,227 | $ | 14 | $ | 648 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (14) | $ | 12 | $ | 301 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $776 million at June 30, 2010, and $469 million at March 31, 2010, which includes a fair value derivative adjustment of $648 million and $347 million, respectively. |
Six Months Ended June 30, 2011 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance-Beginning of Period | $ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | 507 | ||
Transfers into Level 3 | 9 | 34 | 4 | - | - | - | - | - | |||||||||
Transfers out of Level 3 | (7) | (4) | (35) | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | (1) | 1 | - | - | (1) | 51 | - | - | |||||||||
Net Realized Gains/Losses | 1 | (2) | - | - | 4 | (3) | 1 | 17 | |||||||||
Purchases | 5 | 22 | 46 | - | 2 | 333 | - | - | |||||||||
Sales | (3) | (20) | (15) | - | (8) | (55) | - | - | |||||||||
Settlements | (3) | (4) | (5) | (1) | - | (78) | (1) | - | |||||||||
Balance-End of Period | $ | 27 | $ | 142 | $ | 34 | $ | 1 | $ | 10 | $ | 1,680 | $ | 4 | $ | 524 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (3) | $ | 1 | $ | 17 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information. | |||||||||||||||||
Six Months Ended June 30, 2010 | |||||||||||||||||
Assets | Liabilities | ||||||||||||||||
Available-for-Sale Debt Securities | |||||||||||||||||
Foreign | Corporate securities | Mortgage-backed securities | States, municipalities, and political subdivisions | Equity securities | Other investments | Other derivative instruments | GLB(1) | ||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Balance- Beginning of Period | $ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | |
Transfers into (Out of) Level 3 | (31) | (35) | - | - | - | - | - | - | |||||||||
Change in Net Unrealized Gains (Losses) included in OCI | 1 | 6 | - | - | - | 33 | - | - | |||||||||
Net Realized Gains/Losses | (1) | (1) | - | - | 1 | (13) | 12 | 205 | |||||||||
Purchases, Sales, Issuances, and Settlements, Net | - | (17) | (9) | - | 3 | 58 | (12) | ||||||||||
Balance- End of Period | $ | 28 | $ | 121 | $ | 12 | $ | 3 | $ | 16 | $ | 1,227 | $ | 14 | $ | 648 | |
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (13) | $ | 12 | $ | 205 | |
(1)Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits. The liability for GLB reinsurance was $776 million at June 30, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $648 million and $443 million, respectively. |
June 30, 2011 | December 31, 2010 | ||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||
(in millions of U.S. dollars) | |||||||||
Assets: | |||||||||
Fixed maturities held to maturity | |||||||||
U.S. Treasury and agency | $ | 1,067 | $ | 1,092 | $ | 1,105 | $ | 1,127 | |
Foreign | 1,051 | 1,028 | 1,049 | 1,013 | |||||
Corporate securities | 2,311 | 2,292 | 2,361 | 2,313 | |||||
Mortgage-backed securities | 3,414 | 3,472 | 3,811 | 3,846 | |||||
States, municipalities, and political subdivisions | 1,190 | 1,194 | 1,175 | 1,162 | |||||
Total assets | 9,033 | 9,078 | 9,501 | 9,461 | |||||
Liabilities: | |||||||||
Short-term debt | 1,400 | 1,400 | 1,300 | 1,300 | |||||
Long-term debt | 3,360 | 3,719 | 3,358 | 3,846 | |||||
Trust preferred securities | 309 | 385 | 309 | 376 | |||||
Total liabilities | $ | 5,069 | $ | 5,504 | $ | 4,967 | $ | 5,522 |
|
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | ||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||
(in millions of U.S. dollars) | |||||||||||
GMDB | |||||||||||
Net premiums earned | $ | 25 | $ | 27 | $ | 51 | $ | 56 | |||
Policy benefits and other reserve adjustments | $ | 21 | $ | 22 | $ | 43 | $ | 46 | |||
GLB | |||||||||||
Net premiums earned | $ | 41 | $ | 40 | $ | 82 | $ | 81 | |||
Policy benefits and other reserve adjustments | 6 | 6 | 12 | 13 | |||||||
Net realized gains (losses) | (75) | (301) | (17) | (205) | |||||||
Gain (loss) recognized in income | $ | (40) | $ | (267) | $ | 53 | $ | (137) | |||
Net cash received | $ | 40 | $ | 40 | $ | 81 | $ | 80 | |||
Net increase in liability | $ | (80) | $ | (307) | $ | (28) | $ | (217) |
|
June 30, 2011 | December 31, 2010 | |||||||||
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 | $ | 1 | $ | 753 | $ | 3 | $ | 729 | |
Futures contracts on money market instruments | AP | 2 | 10,098 | 3 | 4,297 | |||||
Futures contracts on notes and bonds | AP | - | 1,158 | 5 | 676 | |||||
Options on money market instruments | AP | - | 528 | - | 1 | |||||
Convertible bonds | FM AFS | 398 | 367 | 416 | 382 | |||||
TBAs | FM AFS | 123 | 117 | 101 | 98 | |||||
$ | 524 | $ | 13,021 | $ | 528 | $ | 6,183 | |||
Other derivative instruments | ||||||||||
Futures contracts on equities | AP | $ | (37) | $ | 1,110 | $ | (25) | $ | 1,069 | |
Options on equity market indices | AP | 41 | 250 | 46 | 250 | |||||
Credit default swaps | AP | 4 | 350 | 4 | 350 | |||||
Other | AP | - | 6 | - | 17 | |||||
$ | 8 | $ | 1,716 | $ | 25 | $ | 1,686 | |||
GLB(1) | AP/FPB | $ | (676) | $ | 789 | $ | (648) | $ | 719 |
(1) Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 6 for additional information. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.
Three Months Ended | Six Months Ended | |||||||||||||
June 30 | June 30 | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||
(in millions of U.S. dollars) | ||||||||||||||
Investment and embedded derivative instruments | ||||||||||||||
Foreign currency forward contracts | $ | (3) | $ | 23 | $ | (18) | $ | 36 | ||||||
All other futures contracts and options | (24) | 2 | (27) | 10 | ||||||||||
Convertible bonds | (21) | (20) | (22) | (22) | ||||||||||
TBAs | - | - | (1) | - | ||||||||||
$ | (48) | $ | 5 | $ | (68) | $ | 24 | |||||||
GLB and other derivative instruments | ||||||||||||||
GLB | $ | (75) | $ | (301) | $ | (17) | $ | (205) | ||||||
Futures contracts on equities | - | 117 | (63) | 66 | ||||||||||
Options on equity market indices | 3 | 26 | (5) | 18 | ||||||||||
Interest rate swaps | - | (8) | - | (17) | ||||||||||
Credit default swaps | (2) | 11 | (3) | 11 | ||||||||||
Other | - | 1 | - | 1 | ||||||||||
$ | (74) | $ | (154) | $ | (88) | $ | (126) | |||||||
$ | (122) | $ | (149) | $ | (156) | $ | (102) |
|
Statement of Operations by Segment | |||||||||||||||||
For the Three Months Ended June 30, 2011 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 1,735 | $ | 1,477 | $ | 282 | $ | 459 | $ | - | $ | 3,953 | |||||
Net premiums earned | 1,604 | 1,447 | 254 | 452 | - | 3,757 | |||||||||||
Losses and loss expenses | 1,233 | 733 | 112 | 147 | 1 | 2,226 | |||||||||||
Policy benefits | - | - | - | 108 | - | 108 | |||||||||||
Policy acquisition costs | 143 | 348 | 47 | 66 | - | 604 | |||||||||||
Administrative expenses | 147 | 242 | 14 | 72 | 40 | 515 | |||||||||||
Underwriting income (loss) | 81 | 124 | 81 | 59 | (41) | 304 | |||||||||||
Net investment income | 300 | 138 | 71 | 59 | 1 | 569 | |||||||||||
Net realized gains (losses) including OTTI | 21 | (10) | (14) | (68) | (2) | (73) | |||||||||||
Interest expense | 3 | 1 | 1 | 3 | 54 | 62 | |||||||||||
Other (income) expense | 3 | (5) | 1 | 8 | 2 | 9 | |||||||||||
Income tax expense (benefit) | 95 | 40 | 8 | 14 | (35) | 122 | |||||||||||
Net income (loss) | $ | 301 | $ | 216 | $ | 128 | $ | 25 | $ | (63) | $ | 607 |
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 Six Months Ended June 30, 2011 | |||||||||||||||||
(in millions of U.S. dollars) | |||||||||||||||||
Insurance – North American | Insurance – Overseas General | Global Reinsurance | Life | Corporate and Other | ACE Consolidated | ||||||||||||
Net premiums written | $ | 3,020 | $ | 2,914 | $ | 597 | $ | 868 | $ | - | $ | 7,399 | |||||
Net premiums earned | 2,950 | 2,751 | 514 | 851 | - | 7,066 | |||||||||||
Losses and loss expenses | 2,227 | 1,595 | 391 | 275 | 1 | 4,489 | |||||||||||
Policy benefits | - | - | - | 199 | - | 199 | |||||||||||
Policy acquisition costs | 279 | 660 | 93 | 127 | - | 1,159 | |||||||||||
Administrative expenses | 295 | 466 | 26 | 140 | 82 | 1,009 | |||||||||||
Underwriting income (loss) | 149 | 30 | 4 | 110 | (83) | 210 | |||||||||||
Net investment income | 595 | 269 | 143 | 105 | 1 | 1,113 | |||||||||||
Net realized gains (losses) including OTTI | 10 | (19) | (27) | (81) | (1) | (118) | |||||||||||
Interest expense | 7 | 2 | 1 | 6 | 109 | 125 | |||||||||||
Other (income) expense | (13) | (7) | (5) | 13 | 7 | (5) | |||||||||||
Income tax expense (benefit) | 184 | 59 | 18 | 27 | (69) | 219 | |||||||||||
Net income (loss) | $ | 576 | $ | 226 | $ | 106 | $ | 88 | $ | (130) | $ | 866 |
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 | |||||
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Three Months Ended June 30, 2011 | |||||||||||
Insurance – North American | $ | 657 | $ | 865 | $ | 82 | $ | 1,604 | |||
Insurance – Overseas General | 533 | 348 | 566 | 1,447 | |||||||
Global Reinsurance | 115 | 139 | - | 254 | |||||||
Life | - | - | 452 | 452 | |||||||
$ | 1,305 | $ | 1,352 | $ | 1,100 | $ | 3,757 | ||||
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 | ||||
Property & All Other | Casualty | Life, Accident & Health | ACE Consolidated | ||||||||
(in millions of U.S. dollars) | |||||||||||
For the Six Months Ended June 30, 2011 | |||||||||||
Insurance – North American | $ | 1,035 | $ | 1,755 | $ | 160 | $ | 2,950 | |||
Insurance – Overseas General | 964 | 690 | 1,097 | 2,751 | |||||||
Global Reinsurance | 227 | 287 | - | 514 | |||||||
Life | - | - | 851 | 851 | |||||||
$ | 2,226 | $ | 2,732 | $ | 2,108 | $ | 7,066 | ||||
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 |
|
Condensed Consolidating Balance Sheet at | ||||||||||||||
June 30, 2011 | ||||||||||||||
(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 | $ | 40 | $ | 29,095 | $ | 26,054 | $ | - | $ | 55,189 | ||||
Cash | (185) | 664 | 354 | - | 833 | |||||||||
Insurance and reinsurance balances receivable | - | 4,329 | 594 | - | 4,923 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 17,722 | (4,347) | - | 13,375 | |||||||||
Reinsurance recoverable on policy benefits | - | 941 | (691) | - | 250 | |||||||||
Value of business acquired | - | 796 | - | - | 796 | |||||||||
Goodwill and other intangible assets | - | 4,301 | 557 | - | 4,858 | |||||||||
Investments in subsidiaries | 23,590 | - | - | (23,590) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 853 | - | - | (853) | - | |||||||||
Other assets | 6 | 7,471 | 1,553 | - | 9,030 | |||||||||
Total assets | $ | 24,304 | $ | 65,319 | $ | 24,074 | $ | (24,443) | $ | 89,254 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 31,820 | $ | 7,131 | $ | - | $ | 38,951 | ||||
Unearned premiums | - | 5,820 | 1,093 | - | 6,913 | |||||||||
Future policy benefits | - | 3,767 | 617 | - | 4,384 | |||||||||
Due to subsidiaries and affiliates, net | - | 907 | (907) | - | - | |||||||||
Short-term debt | - | 1,000 | 400 | - | 1,400 | |||||||||
Long-term debt | - | 3,360 | - | - | 3,360 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 191 | 8,060 | 1,573 | - | 9,824 | |||||||||
Total liabilities | 191 | 55,043 | 9,907 | - | 65,141 | |||||||||
Total shareholders' equity | 24,113 | 10,276 | 14,167 | (24,443) | 24,113 | |||||||||
Total liabilities and shareholders' equity | $ | 24,304 | $ | 65,319 | $ | 24,074 | $ | (24,443) | $ | 89,254 | ||||
(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, 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 | $ | 47 | $ | 26,718 | $ | 24,642 | $ | - | $ | 51,407 | ||||
Cash | 308 | 573 | (109) | - | 772 | |||||||||
Insurance and reinsurance balances receivable | - | 3,710 | 523 | - | 4,233 | |||||||||
Reinsurance recoverable on losses and loss expenses | - | 16,877 | (4,006) | - | 12,871 | |||||||||
Reinsurance recoverable on policy benefits | - | 959 | (678) | - | 281 | |||||||||
Value of business acquired | - | 634 | - | - | 634 | |||||||||
Goodwill and other intangible assets | - | 4,113 | 551 | - | 4,664 | |||||||||
Investments in subsidiaries | 22,529 | - | - | (22,529) | - | |||||||||
Due from (to) subsidiaries and affiliates, net | 564 | (555) | 555 | (564) | - | |||||||||
Other assets | 14 | 7,045 | 1,434 | - | 8,493 | |||||||||
Total assets | $ | 23,462 | $ | 60,074 | $ | 22,912 | $ | (23,093) | $ | 83,355 | ||||
Liabilities | ||||||||||||||
Unpaid losses and loss expenses | $ | - | $ | 30,430 | $ | 6,961 | $ | - | $ | 37,391 | ||||
Unearned premiums | - | 5,379 | 951 | - | 6,330 | |||||||||
Future policy benefits | - | 2,495 | 611 | - | 3,106 | |||||||||
Short-term debt | 300 | 1,000 | - | - | 1,300 | |||||||||
Long-term debt | - | 3,358 | - | - | 3,358 | |||||||||
Trust preferred securities | - | 309 | - | - | 309 | |||||||||
Other liabilities | 188 | 7,394 | 1,005 | - | 8,587 | |||||||||
Total liabilities | 488 | 50,365 | 9,528 | - | 60,381 | |||||||||
Total shareholders' equity | 22,974 | 9,709 | 13,384 | (23,093) | 22,974 | |||||||||
Total liabilities and shareholders' equity | $ | 23,462 | $ | 60,074 | $ | 22,912 | $ | (23,093) | $ | 83,355 | ||||
(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, 2011 | ||||||||||||||
(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 | $ | - | $ | 2,306 | $ | 1,647 | $ | - | $ | 3,953 | ||||
Net premiums earned | - | 2,225 | 1,532 | - | 3,757 | |||||||||
Net investment income | - | 282 | 287 | - | 569 | |||||||||
Equity in earnings of subsidiaries | 579 | - | - | (579) | - | |||||||||
Net realized gains (losses) including OTTI | (1) | 17 | (89) | - | (73) | |||||||||
Losses and loss expenses | - | 1,438 | 788 | - | 2,226 | |||||||||
Policy benefits | - | 59 | 49 | - | 108 | |||||||||
Policy acquisition costs and administrative expenses | 18 | 609 | 504 | (12) | 1,119 | |||||||||
Interest expense | (10) | 66 | (3) | 9 | 62 | |||||||||
Other (income) expense | (40) | 20 | 29 | - | 9 | |||||||||
Income tax expense | 3 | 110 | 9 | - | 122 | |||||||||
Net income | $ | 607 | $ | 222 | $ | 354 | $ | (576) | $ | 607 |
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 | ||||
(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, 2011 | ||||||||||||||
(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 | $ | - | $ | 4,329 | $ | 3,070 | $ | - | $ | 7,399 | ||||
Net premiums earned | - | 4,163 | 2,903 | - | 7,066 | |||||||||
Net investment income | 1 | 544 | 568 | - | 1,113 | |||||||||
Equity in earnings of subsidiaries | 827 | - | - | (827) | - | |||||||||
Net realized gains (losses) including OTTI | (2) | 4 | (120) | - | (118) | |||||||||
Losses and loss expenses | - | 2,739 | 1,750 | - | 4,489 | |||||||||
Policy benefits | - | 99 | 100 | - | 199 | |||||||||
Policy acquisition costs and administrative expenses | 36 | 1,188 | 965 | (21) | 2,168 | |||||||||
Interest expense | (18) | 133 | (8) | 18 | 125 | |||||||||
Other (income) expense | (62) | 32 | 25 | - | (5) | |||||||||
Income tax expense | 4 | 179 | 36 | - | 219 | |||||||||
Net income | $ | 866 | $ | 341 | $ | 483 | $ | (824) | $ | 866 | ||||
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 (benefit) | 3 | 203 | 60 | - | 266 | |||||||||
Net income | $ | 1,432 | $ | 395 | $ | 990 | $ | (1,385) | $ | 1,432 | ||||
(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, 2011 | |||||||||||||||||
(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 | $ | 117 | $ | 677 | $ | 1,949 | $ | (680) | $ | 2,063 | |||||||
Cash flows from (used for) investing activities | |||||||||||||||||
Purchases of fixed maturities available for sale | - | (6,330) | (7,353) | - | (13,683) | ||||||||||||
Purchases of fixed maturities held to maturity | - | (233) | (1) | - | (234) | ||||||||||||
Purchases of equity securities | - | (138) | (32) | - | (170) | ||||||||||||
Sales of fixed maturities available for sale | 8 | 5,022 | 4,955 | - | 9,985 | ||||||||||||
Sales of equity securities | - | 332 | 15 | - | 347 | ||||||||||||
Maturities and redemptions of fixed maturities available for sale | - | 847 | 911 | - | 1,758 | ||||||||||||
Maturities and redemptions of fixed maturities held to maturity | - | 475 | 181 | - | 656 | ||||||||||||
Net derivative instruments settlements | (1) | (7) | (38) | - | (46) | ||||||||||||
Capital contribution to subsidiary | (385) | - | - | 385 | - | ||||||||||||
Advances (to) from affiliates | 283 | - | (283) | - | - | ||||||||||||
Acquisition of subsidiaries (net of cash acquired of $95) | - | (343) | (37) | - | (380) | ||||||||||||
Other | - | (449) | 317 | - | (132) | ||||||||||||
Net cash flows from (used for) investing activities | (95) | (824) | (1,365) | 385 | (1,899) | ||||||||||||
Cash flows from (used for) financing activities | |||||||||||||||||
Dividends paid on Common Shares | (223) | - | - | - | (223) | ||||||||||||
Common Shares repurchased | (68) | - | - | - | (68) | ||||||||||||
Net proceeds from issuance (repayment) of short-term debt | (300) | - | 400 | - | 100 | ||||||||||||
Proceeds from share based compensation plans | 76 | - | - | - | 76 | ||||||||||||
Advances (to) from affiliates | - | 226 | (226) | - | - | ||||||||||||
Dividends to parent company | - | - | (680) | 680 | - | ||||||||||||
Capital contribution from parent | - | - | 385 | (385) | - | ||||||||||||
Net cash flows from (used for) financing activities | (515) | 226 | (121) | 295 | (115) | ||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents | - | 12 | - | - | 12 | ||||||||||||
Net increase (decrease) in cash | (493) | 91 | 463 | - | 61 | ||||||||||||
Cash - beginning of period | 308 | 573 | (109) | - | 772 | ||||||||||||
Cash - end of period | $ | (185) | $ | 664 | $ | 354 | $ | - | $ | 833 | |||||||
(1)Includes all other subsidiaries of ACE Limited and intercompany eliminations. | |||||||||||||||||
(2)Includes elimination of dividends paid from subsidiaries to ACE Limited and capital contribution to subsidiaries by ACE Limited. |
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 | 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 share based compensation plans | 19 | - | - | - | 19 | ||||||||||
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. |
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