ACE LTD, 10-K filed on 2/28/2013
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Feb. 14, 2013
Jun. 29, 2012
Document Documentand Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ACE 
 
 
Entity Registrant Name
ACE Ltd 
 
 
Entity Central Index Key
0000896159 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
339,318,053 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 25 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturities available for sale, at fair value (amortized cost - $44,666 and $40,450) (includes hybrid financial instruments of $309 and $357)
$ 47,306 
$ 41,967 
Fixed maturities held to maturity, at amortized cost (fair value - $7,633 and $8,605)
7,270 
8,447 
Equity securities, at fair value (cost - $707 and $671)
744 
647 
Short-term investments, at fair value and amortized cost
2,228 
2,301 
Other investments (cost - $2,465 and $2,112)
2,716 
2,314 
Total investments
60,264 
55,676 
Cash
615 1 2
614 
Securities lending collateral
1,791 
1,375 
Accrued investment income
552 
547 
Insurance and reinsurance balances receivable
4,147 
4,387 
Reinsurance recoverable on losses and loss expenses
12,078 
12,389 
Reinsurance recoverable on policy benefits
241 
249 
Deferred policy acquisition costs
1,873 
1,548 
Value of business acquired
614 
676 
Goodwill and other intangible assets
4,975 
4,799 
Prepaid reinsurance premiums
1,617 
1,541 
Deferred tax assets
453 
673 
Investments in partially-owned insurance companies (cost - $451 and $345)
454 
352 
Other assets
2,871 
2,495 
Total assets
92,545 
87,321 
Liabilities
 
 
Unpaid losses and loss expenses
37,946 
37,477 
Unearned premiums
6,864 
6,334 
Future policy benefits
4,470 
4,274 
Insurance and reinsurance balances payable
3,472 
3,542 
Securities lending payable
1,795 
1,385 
Accounts payable, accrued expenses, and other liabilities
5,377 
4,898 
Income taxes payable
20 
159 
Short-term debt
1,401 
1,251 
Long-term debt
3,360 
3,360 
Trust preferred securities
309 
309 
Total liabilities
65,014 
62,989 
Shareholders' equity
 
 
Common Shares (CHF 28.89 and CHF 30.27 par value; 342,832,412 shares issued; 340,321,534 and 336,927,276 shares outstanding)
9,591 
10,095 
Common Shares in treasury (2,510,878 and 5,905,136 shares)
(159)
(327)
Additional paid-in capital
5,179 
5,326 
Retained earnings
10,033 
7,327 
Accumulated other comprehensive income (AOCI)
2,887 
1,911 
Total shareholders' equity
27,531 
24,332 
Total liabilities and shareholders' equity
$ 92,545 
$ 87,321 
Consolidated Balance Sheets (Parenthetical)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2012
USD ($)
Dec. 31, 2012
CHF
Dec. 31, 2011
USD ($)
Dec. 31, 2011
CHF
Statement of Financial Position [Abstract]
 
 
 
 
Fixed maturities available for sale, at amortized cost
$ 44,666 
 
$ 40,450 
 
Fixed maturities available for sale, hybrid financial instruments
309 
 
357 
 
Fixed maturities held to maturity, at amortized cost
7,633 
 
8,605 
 
Equity securities, at cost
707 
 
671 
 
Other investments, cost
2,465 
 
2,112 
 
Investments in partially-owned insurance companies, cost
$ 451 
 
$ 345 
 
Common Shares, par value
 
 28.89 
 
 30.27 
Common Shares, shares issued
342,832,412 
342,832,412 
342,832,412 
342,832,412 
Common Shares, shares outstanding
340,321,534 
340,321,534 
336,927,276 
336,927,276 
Common Shares in treasury, shares
2,510,878 
2,510,878 
5,905,136 
5,905,136 
Consolidated Statements Of Operations and Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenues
 
 
 
Net premiums written
$ 16,075 
$ 15,372 
$ 13,708 
Change in unearned premiums
(398)
15 
(204)
Net premiums earned
15,677 
15,387 
13,504 
Net investment income
2,181 
2,242 
2,070 
Net realized gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses gross
(38)
(65)
(128)
Portion of OTTI losses recognized in other comprehensive income (OCI)
15 
69 
Net OTTI losses recognized in income
(37)
(50)
(59)
Net realized gains (losses) excluding OTTI losses
115 
(745)
491 
Total net realized gains (losses)
78 
(795)
432 
Total revenues
17,936 
16,834 
16,006 
Expenses
 
 
 
Losses and loss expenses
9,653 
9,520 
7,579 
Policy benefits
521 
401 
357 
Policy acquisition costs
2,446 
2,472 
2,345 
Administrative expenses
2,096 
2,068 
1,873 
Interest expense
250 
250 
224 
Other (income) expense
(6)
81 
(10)
Total expenses
14,960 
14,792 
12,368 
Income before income tax
2,976 
2,042 
3,638 
Income tax expense
270 
502 
553 
Net income (loss)
2,706 
1,540 
3,085 
Other comprehensive income (loss)
 
 
 
Unrealized appreciation
1,350 
646 
1,526 
Reclassification adjustment for net realized gains included in net income
(234)
(173)
(632)
Other comprehensive income (loss)
1,116 
473 
894 
Change in:
 
 
 
Cumulative translation adjustment
116 
(5)
(7)
Pension liability
(35)
11 
Other comprehensive income, before income tax
1,197 
476 
898 
Income tax expense related to OCI items
(221)
(159)
(127)
Other comprehensive income (loss)
976 
317 
771 
Comprehensive income
$ 3,682 
$ 1,857 
$ 3,856 
Earnings per share
 
 
 
Basic earnings per share (US$ per share)
$ 7.96 
$ 4.55 
$ 9.08 
Diluted earnings per share (US$ per share)
$ 7.89 
$ 4.52 
$ 9.04 
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Shares
Common Shares in Treasury
Additional Paid-in Capital
Retained Earnings
Deferred Compensation Obligation
Accumulated Other Comprehensive Income
Net unrealized appreciation on investments
Cumulative Translation Adjustment
Accumulated Defined Benefit Plans Adjustment [Member]
Common Shares Issued To Employee Trust
Balance - beginning of year at Dec. 31, 2009 (Scenario, Previously Reported)
 
 
 
 
$ 2,818 
 
 
 
 
 
 
Cumulative effect of adjustment resulting from adoption of new accounting guidance (Restatement Adjustment)
 
 
 
 
(116)
 
 
 
 
 
 
Balance - beginning of year at Dec. 31, 2009
 
10,503 
(3)
5,526 
2,702 
 
657 
240 
(74)
(2)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
71 
 
(64)
 
 
 
 
 
 
 
Exercise of stock options
 
30 
 
23 
 
 
 
 
 
 
 
Dividends declared on Common Shares-par value reduction
 
(443)
 
 
 
 
 
 
 
 
 
Common shares repurchased
 
 
(303)
 
 
 
 
 
 
 
 
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans
 
 
(24)
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
139 
 
 
 
 
 
 
 
Tax (expense) benefit on share-based compensation expense
 
 
 
(1)
 
 
 
 
 
 
 
Net income
3,085 
 
 
 
3,085 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
   
   
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
   
 
 
 
 
 
 
Decrease to obligation
 
 
 
 
 
   
 
 
 
 
 
Change in year, net of income tax expense of $(198), $(157) and $(152)
 
 
 
 
 
 
 
742 
 
 
 
Change in year, net of income tax benefit (expense) of $(35), $1, and $29
 
 
 
 
 
 
 
 
22 
 
 
Change in year, net of income tax benefit of $12, $(3) and $(4)
 
 
 
 
 
 
 
 
 
 
Movement In Common Shares Issued To Employee Trust
   
 
 
 
 
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2010 (Scenario, Previously Reported)
 
 
 
 
   
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2010
22,835 
10,161 
(330)
5,623 
5,787 
1,594 
1,399 
262 
(67)
(2)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
   
 
(104)
 
 
 
 
 
 
 
Exercise of stock options
 
47 
 
16 
 
 
 
 
 
 
 
Dividends declared on Common Shares-par value reduction
 
(113)
 
 
 
 
 
 
 
 
 
Common shares repurchased
 
 
(132)
 
 
 
 
 
 
 
 
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans
 
 
135 
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
139 
 
 
 
 
 
 
 
Tax (expense) benefit on share-based compensation expense
 
 
 
 
 
 
 
 
 
 
Net income
1,540 
 
 
 
1,540 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(354)
354 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(354)
 
 
 
 
 
 
Decrease to obligation
 
 
 
 
 
(2)
 
 
 
 
 
Change in year, net of income tax expense of $(198), $(157) and $(152)
 
 
 
 
 
 
 
316 
 
 
 
Change in year, net of income tax benefit (expense) of $(35), $1, and $29
 
 
 
 
 
 
 
 
(4)
 
 
Change in year, net of income tax benefit of $12, $(3) and $(4)
 
 
 
 
 
 
 
 
 
 
Movement In Common Shares Issued To Employee Trust
 
 
 
 
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2011 (Scenario, Previously Reported)
 
 
 
 
   
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2011
24,332 
10,095 
(327)
5,326 
7,327 
   
1,911 
1,715 
258 
(62)
   
Cumulative effect of adjustment resulting from adoption of new accounting guidance (Restatement Adjustment)
 
 
 
 
   
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
   
 
(93)
 
 
 
 
 
 
 
Exercise of stock options
 
   
 
(7)
 
 
 
 
 
 
 
Dividends declared on Common Shares-par value reduction
 
(504)
 
 
 
 
 
 
 
 
 
Common shares repurchased
 
 
(7)
 
 
 
 
 
 
 
 
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans
 
 
175 
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
135 
 
 
 
 
 
 
 
Tax (expense) benefit on share-based compensation expense
 
 
 
18 
 
 
 
 
 
 
 
Net income
2,706 
 
 
 
2,706 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(200)
200 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(200)
 
 
 
 
 
 
Decrease to obligation
 
 
 
 
 
   
 
 
 
 
 
Change in year, net of income tax expense of $(198), $(157) and $(152)
 
 
 
 
 
 
 
918 
 
 
 
Change in year, net of income tax benefit (expense) of $(35), $1, and $29
 
 
 
 
 
 
 
 
81 
 
 
Change in year, net of income tax benefit of $12, $(3) and $(4)
 
 
 
 
 
 
 
 
 
(23)
 
Movement In Common Shares Issued To Employee Trust
   
 
 
 
 
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2012
$ 27,531 
$ 9,591 
$ (159)
$ 5,179 
$ 10,033 
    
$ 2,887 
$ 2,633 
$ 339 
$ (85)
    
Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Net unrealized appreciation on investments
 
 
 
Net unrealized appreciation on investments, Change in year, income tax (expense) benefit
$ (198)
$ (157)
$ (152)
Cumulative Translation Adjustment
 
 
 
Cumulative translation adjustment, Change in year, income tax(expense) benefit
(35)
29 
Accumulated Defined Benefit Plans Adjustment [Member]
 
 
 
Pension liability adjustment, Change in year, income tax (expense) benefit
$ 12 
$ (3)
$ (4)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities
 
 
 
Net income
$ 2,706 
$ 1,540 
$ 3,085 
Adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Net realized (gains) losses
(78)
795 
(432)
Amortization of premiums/discounts on fixed maturities
220 
152 
145 
Deferred income taxes
(7)
15 
110 
Unpaid losses and loss expenses
203 
43 
(360)
Unearned premiums
522 
262 
Future policy benefits
158 
78 
48 
Insurance and reinsurance balances payable
(151)
216 
(172)
Accounts payable, accrued expenses, and other liabilities
(42)
39 
130 
Income taxes payable
(167)
39 
10 
Insurance and reinsurance balances receivable
335 
(217)
50 
Reinsurance recoverable on losses and loss expenses
372 
531 
626 
Reinsurance recoverable on policy benefits
52 
25 
49 
Deferred policy acquisition costs
(340)
(122)
(170)
Prepaid reinsurance premiums
(123)
(34)
(13)
Other
335 
361 
178 
Net cash flows from operating activities
3,995 
3,470 
3,546 
Cash flows from investing activities
 
 
 
Purchases of fixed maturities available for sale
(23,455)
(23,823)
(29,985)
Purchases of to be announced mortgage-backed securities
(389)
(755)
(1,271)
Purchases of fixed maturities held to maturity
(388)
(340)
(616)
Purchases of equity securities
(135)
(309)
(794)
Sales of fixed maturities available for sale
14,321 
17,176 
23,096 
Sales of to be announced mortgage-backed securities
448 
795 
1,183 
Sales of equity securities
119 
376 
774 
Maturities and redemptions of fixed maturities available for sale
5,523 
3,720 
3,660 
Maturities and redemptions of fixed maturities held to maturity
1,451 
1,279 
1,353 
Net derivative instruments settlements
(281)
(67)
(109)
Acquisition of subsidiaries (net of cash acquired of $8, $91 and $80)
(98)
(606)
(1,139)
Other
(555)
(482)
(333)
Net cash flows from (used for) investing activities
(3,439)
(3,036)
(4,181)
Cash flows from financing activities
 
 
 
Dividends paid on Common Shares
(815)
(459)
(435)
Common Shares repurchased
(11)
(195)
(235)
Proceeds from issuance of short-term debt
2,933 
5,238 
1,300 
Repayment of short-term debt
(2,783)
(5,288)
(159)
Proceeds from issuances of long-term debt
   
   
699 
Repayments of Long-term Debt
   
   
(500)
Proceeds from share-based compensation plans
126 
139 
62 
Net cash flows from (used for) financing activities
(550)
(565)
732 
Effect of foreign currency rate changes on cash and cash equivalents
(5)
(27)
Net increase (decrease) in cash
(158)
103 
Cash - beginning of period
614 
772 1 2
669 1
Cash - end of period
615 3 4
614 
772 1 2
Supplemental cash flow information
 
 
 
Taxes paid
438 
460 
434 
Interest paid
$ 240 
$ 234 
$ 204 
Consolidated Statements Of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Cash Flows [Abstract]
 
 
 
Acquisition of subsidiaries, cash acquired
$ 8 
$ 91 
$ 80 
Summary of significant accounting policies
Summary of significant accounting policies
Summary of significant accounting policies

a) Basis of presentation
ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 15 for additional information.

The accompanying consolidated financial statements, which include the accounts of ACE Limited and its subsidiaries (collectively, ACE, we, us, or our), 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.

Effective January 1, 2012, we retrospectively adopted new accounting guidance for costs associated with acquiring or renewing insurance contracts. Prior year amounts contained in this report have been adjusted to reflect this adoption. Refer to Note 1 s) below for additional information.
  
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Amounts included in the consolidated financial statements reflect our best estimates and assumptions; actual amounts could differ materially from these estimates. ACE's principal estimates include:
unpaid loss and loss expense reserves, including long-tail asbestos and environmental (A&E) reserves;
future policy benefits reserves;
the valuation of value of business acquired (VOBA) and amortization of deferred policy acquisition costs and VOBA;
reinsurance recoverable, including a provision for uncollectible reinsurance;
the assessment of risk transfer for certain structured insurance and reinsurance contracts;
the valuation of the investment portfolio and assessment of OTTI;
the valuation of deferred tax assets;
the valuation of derivative instruments related to guaranteed living benefits (GLB); and
the valuation of goodwill.

b) Premiums
Premiums are generally recognized as written upon inception of the policy. For multi-year policies for which premiums written are payable in annual installments, only the current annual premium is included as written at policy inception due to the ability of the insured/reinsured to commute or cancel coverage within the term of the policy. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term.

For property and casualty (P&C) insurance and reinsurance products, premiums written are primarily earned on a pro-rata basis over the terms of the policies to which they relate. Unearned premiums represent the portion of premiums written applicable to the unexpired portion of the policies in force. For retrospectively-rated policies, written premiums are adjusted to reflect expected ultimate premiums consistent with changes to reported losses, or other measures of exposure as stated in the policy, and earned over the coverage period of the policy. For retrospectively-rated multi-year policies, the amount of premiums recognized in the current period is computed, using a with-and-without method, as the difference between the ceding enterprise's total contract costs before and after the experience under the contract at the reporting date. Accordingly, for retrospectively-rated multi-year policies, additional premiums are generally written and earned when losses are incurred.

Mandatory reinstatement premiums assessed on reinsurance policies are earned in the period of the loss event that gave rise to the reinstatement premiums.  All remaining unearned premiums are recognized over the remaining coverage period. 

Premiums from long duration contracts such as certain traditional term life, whole life, endowment, and long duration personal accident and health (A&H) policies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such income to result in the recognition of profit over the life of the contracts.

Retroactive loss portfolio transfer (LPT) contracts in which the insured loss events occurred prior to the inception of the contract are evaluated to determine whether they meet the established criteria for reinsurance accounting. If reinsurance accounting is appropriate, written premiums are fully earned and corresponding losses and loss expenses recognized at the inception of the contract. The contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting the established criteria for reinsurance accounting are recorded using the deposit method as described below in Note 1 k).

Reinsurance premiums assumed are based on information provided by ceding companies supplemented by our own estimates of premium when we have not received ceding company reports. The information used in establishing these estimates is reviewed and adjustments are recorded in the period in which they are determined. These premiums are earned over the coverage terms of the related reinsurance contracts and range from one to three years.

c) Deferred policy acquisition costs and value of business acquired
Policy acquisition costs consist of commissions, premium taxes, and certain underwriting costs related directly to the successful acquisition of new or renewal insurance contracts. A VOBA intangible asset is established upon the acquisition of blocks of long duration contracts and represents the present value of estimated net cash flows for the contracts in force at the time of the acquisition. Acquisition costs and VOBA, collectively policy acquisition costs, are deferred and amortized. This amortization is recorded in Policy acquisition costs in the consolidated statements of operations. Policy acquisition costs on P&C contracts are generally amortized ratably over the period in which premiums are earned. Policy acquisition costs on traditional long-duration contracts are amortized over the estimated life of the contracts, generally in proportion to premium revenue recognized. For non-traditional long- duration contracts, we amortize policy acquisition costs over the expected life of the contracts in proportion to estimates of expected gross profits.  The effect of changes in estimates of expected gross profits is reflected in the period that the estimates are revised. Policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. Unrecoverable costs are expensed in the period identified.

Advertising costs are expensed as incurred except for direct-response campaigns that qualify for cost deferral, principally related to A&H business produced by the Insurance – Overseas General segment, which are deferred and recognized as a component of policy acquisition costs. For individual direct-response marketing campaigns that we can demonstrate have specifically resulted in incremental sales to customers and such sales have probable future economic benefits, incremental costs directly related to the marketing campaigns are capitalized. Deferred marketing costs are reviewed regularly for recoverability from future income, including investment income, and amortized in proportion to premium revenue recognized, primarily over a ten-year period, the expected economic future benefit period. The expected future benefit period is evaluated periodically based on historical results and adjusted prospectively. The amount of deferred marketing costs reported in Deferred policy acquisition costs in the consolidated balance sheets was $274 million and $236 million at December 31, 2012 and 2011, respectively. The amortization expense for deferred marketing costs was $156 million, $128 million, and $115 million for the years ended December 31, 2012, 2011, and 2010, respectively.

d) Reinsurance
ACE assumes and cedes reinsurance with other insurance companies to provide greater diversification of business and minimize the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve ACE of its primary obligation to its policyholders.

For both ceded and assumed reinsurance, risk transfer requirements must be met in order to account for a contract as reinsurance, principally resulting in the recognition of cash flows under the contract as premiums and losses. To meet risk transfer requirements, a reinsurance contract must include insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. To assess risk transfer for certain contracts, ACE generally develops expected discounted cash flow analyses at contract inception. Deposit accounting is used for contracts that do not meet risk transfer requirements. Deposit accounting requires that consideration received or paid be recorded in the balance sheet as opposed to recording premiums written or losses incurred in the statement of operations. Non-refundable fees on deposit contracts are earned based on the terms of the contract. Refer to Note 1 k).

Reinsurance recoverable includes the balances due from reinsurance companies for paid and unpaid losses and loss expenses and policy benefits that will be recovered from reinsurers, based on contracts in force. The method for determining the reinsurance recoverable on unpaid losses and loss expenses incurred but not reported (IBNR) involves actuarial estimates consistent with those used to establish the associated liability for unpaid losses and loss expenses as well as a determination of ACE's ability to cede unpaid losses and loss expenses.

Reinsurance recoverable is presented net of a provision for uncollectible reinsurance determined based upon a review of the financial condition of reinsurers and other factors. The provision for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that will ultimately be unrecoverable due to reinsurer insolvency, a contractual dispute, or any other reason. The valuation of this provision includes several judgments including certain aspects of the allocation of reinsurance recoverable on IBNR claims by reinsurer and a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to determine the portion of a reinsurer's balance deemed uncollectible. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in an ACE-only beneficiary trust, letters of credit, and liabilities held with the same legal entity for which ACE believes there is a contractual right of offset. The determination of the default factor is principally based on the financial strength rating of the reinsurer. Default factors require considerable judgment and are determined using the current financial strength rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. The more significant considerations include, but are not necessarily limited to, the following:
For reinsurers that maintain a financial strength rating from a major rating agency, and for which recoverable balances are considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), the financial rating is based on a published source and the default factor is based on published default statistics of a major rating agency applicable to the reinsurer's particular rating class. When a recoverable is expected to be paid in a brief period of time by a highly rated reinsurer, such as certain property catastrophe claims, a default factor may not be applied;
For balances recoverable from reinsurers that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, or peer company, we determine a rating equivalent based on an analysis of the reinsurer that considers an assessment of the creditworthiness of the particular entity, industry benchmarks, or other factors as considered appropriate. We then apply the applicable default factor for that rating class. For balances recoverable from unrated reinsurers for which the ceded reserve is below a certain threshold, we generally apply a default factor of 34 percent, consistent with published statistics of a major rating agency;
For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, we establish a default factor and resulting provision for uncollectible reinsurance based on reinsurer-specific facts and circumstances. Upon initial notification of an insolvency, we generally recognize an expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for uncollectible reinsurance. When regulatory action is taken on a reinsurer, we generally recognize a default factor by estimating an expected recovery on all balances outstanding, net of collateral. When sufficient credible information becomes available, we adjust the provision for uncollectible reinsurance by establishing a default factor pursuant to information received; and
For other recoverables, management determines the provision for uncollectible reinsurance based on the specific facts and circumstances.

The methods used to determine the reinsurance recoverable balance and related provision for uncollectible reinsurance are regularly reviewed and updated and any resulting adjustments are reflected in earnings in the period identified.

Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired coverage terms of the reinsurance contracts in force.

The value of reinsurance business assumed of $32 million and $35 million at December 31, 2012 and 2011, respectively, included in Other assets in the accompanying consolidated balance sheets, represents the excess of estimated ultimate value of the liabilities assumed under retroactive reinsurance contracts over consideration received. The value of reinsurance business assumed is amortized and recorded to losses and loss expenses based on the payment pattern of the losses assumed and ranges between 7 and 40 years. The unamortized value is reviewed regularly to determine if it is recoverable based upon the terms of the contract, estimated losses and loss expenses, and anticipated investment income. Unrecoverable amounts are expensed in the period identified.

e) Investments
Fixed maturities are classified as either available for sale or held to maturity. The available for sale portfolio is reported at fair value. The held to maturity portfolio includes securities for which we have the ability and intent to hold to maturity or redemption and is reported at amortized cost. Equity securities are classified as available for sale and are recorded at fair value. Short-term investments comprise securities due to mature within one year of the date of purchase and are recorded at fair value which typically approximates cost. Short-term investments include certain cash and cash equivalents, which are part of investment portfolios under the management of external investment managers.

Other investments principally comprise life insurance policies, policy loans, trading securities, other direct equity investments, investment funds, and limited partnerships.

Life insurance policies are carried at policy cash surrender value.
Policy loans are carried at outstanding balance.
Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in net income.
Other investments over which ACE can exercise significant influence are accounted for using the equity method.
All other investments over which ACE cannot exercise significant influence are carried at fair value with changes in fair value recognized through OCI. For these investments, investment income and realized gains are recognized as related distributions are received.
Partially-owned investment companies comprise entities in which we hold an ownership interest in excess of three percent. These investments as well as ACE's investments in investment funds where our ownership interest is in excess of three percent are accounted for under the equity method because ACE exerts significant influence. These investments apply investment company accounting to determine operating results, and ACE retains the investment company accounting in applying the equity method. This means that investment income, realized gains or losses, and unrealized gains or losses are included in the portion of equity earnings reflected in Other (income) expense.

Investments in partially-owned insurance companies primarily represent direct investments in which ACE has significant influence and, as such, meet the requirements for equity accounting. We report our share of the net income or loss of the partially-owned insurance companies in Other (income) expense. Investments in partially-owned insurance companies over which ACE does not exert significant influence are carried at fair value.

Realized gains or losses on sales of investments are determined on a first-in, first-out basis. Unrealized appreciation (depreciation) on investments is included as a separate component of AOCI in shareholders' equity. We regularly review our investments for OTTI. Refer to Note 3 for additional information.

With respect to securities where the decline in value is determined to be temporary and the security's value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are the result of changing or unforeseen facts and circumstances (i.e., arising from a large insured loss such as a catastrophe), deterioration of the creditworthiness of the issuer or its industry, or changes in regulatory requirements. We believe that subsequent decisions to sell such securities are consistent with the classification of the majority of the portfolio as available for sale.

We use derivative instruments including futures, options, swaps, and foreign currency forward contracts for the purpose of managing certain investment portfolio risks and exposures. Refer to Note 10 for additional information. Derivatives are reported at fair value and recorded in the accompanying consolidated balance sheets in Accounts payable, accrued expenses, and other liabilities with changes in fair value included in Net realized gains (losses) in the consolidated statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in the investment portfolio.

Net investment income includes interest and dividend income and amortization of fixed maturity market premiums and discounts and is net of investment management and custody fees. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized prospectively. Prepayment fees or call premiums that are only payable when a security is called prior to its maturity are earned when received and reflected in Net investment income. 

ACE participates in a securities lending program operated by a third party banking institution whereby certain assets are loaned to qualified borrowers and from which we earn an incremental return. Borrowers provide collateral, in the form of either cash or approved securities, of 102 percent of the fair value of the loaned securities.  Each security loan is deemed to be an overnight transaction.  Cash collateral is invested in a collateral pool which is managed by the banking institution.  The collateral pool is subject to written investment guidelines with key objectives which include the safeguard of principal and adequate liquidity to meet anticipated redemptions. The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair value of the loaned securities changes. The collateral is held by the third party banking institution, and the collateral can only be accessed in the event that the institution borrowing the securities is in default under the lending agreement. As a result of these restrictions, we consider our securities lending activities to be non-cash investing and financing activities. An indemnification agreement with the lending agent protects us in the event a borrower becomes insolvent or fails to return any of the securities on loan. The fair value of the securities on loan is included in fixed maturities and equity securities. The securities lending collateral is reported as a separate line in total assets with a related liability reflecting our obligation to return the collateral plus interest.

Similar to securities lending arrangements, securities sold under reverse repurchase agreements, whereby ACE sells securities and repurchases them at a future date for a predetermined price, are accounted for as collateralized investments and borrowings and are recorded at the contractual repurchase amounts plus accrued interest. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The fair value of the underlying securities is included in fixed maturities and equity securities. In contrast to securities lending programs, the use of cash received is not restricted. We report the obligation to return the cash as Short-term debt in the consolidated balance sheets.

Refer to Note 4 for a discussion on the determination of fair value for ACE's various investment securities.

f) Cash
Cash includes cash on hand and deposits with an original maturity of three months or less at time of purchase. Cash held by external money managers is included in Short-term investments.

We have agreements with a third party bank provider which implemented two international multi-currency notional cash pooling programs. In each program, participating ACE entities establish deposit accounts in different currencies with the bank provider and each day the credit or debit balances in every account are notionally translated into a single currency (U.S. dollars) and then notionally pooled. The bank extends overdraft credit to any participating ACE entity as needed, provided that the overall notionally-pooled balance of all accounts in each pool at the end of each day is at least zero. Actual cash balances are not physically converted and are not commingled between legal entities. Any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $300 million in the aggregate). Our syndicated letter of credit facility allows for same day drawings to fund a net pool overdraft should participating ACE entities withdraw contributed funds from the pool.

g) Goodwill and other intangible assets
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. Goodwill is assigned at acquisition to the applicable reporting unit of the acquired entities giving rise to the goodwill. Goodwill impairment tests are performed annually, or more frequently if circumstances indicate a possible impairment.  For goodwill impairment testing, we use a qualitative assessment to determine whether it is more likely than not (i.e., more than a 50 percent probability) that the fair value of a reporting unit is greater than its carrying amount. If our assessment indicates less than a 50 percent probability that fair value exceeds carrying value, we quantitatively estimate a reporting unit's fair value using a consistently applied combination of the following models: an earnings multiple, a book value multiple, a discounted cash flow, or an allocated market capitalization model. The earnings and book value models apply multiples of comparable publicly traded companies to forecasted earnings or book value of each reporting unit and consider current market transactions. The discounted cash flow model applies a discount to estimated cash flows including a terminal value calculation. The market capitalization model allocates market capitalization to each reporting unit. Where appropriate, we consider the impact of a control premium. Goodwill recorded in connection with investments in partially-owned insurance companies is recorded in Investments in partially-owned insurance companies and is also measured for impairment annually.

Indefinite lived intangible assets are not subject to amortization. Finite lived intangible assets are amortized over their useful lives, generally ranging from 4 to 20 years. The amortization of finite lived intangible assets is reported in Other (income) expense in the consolidated statements of operations. The carrying amounts of intangible assets are regularly reviewed for indicators of impairment. Impairment is recognized if the carrying amount is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value.

h) Unpaid losses and loss expenses
A liability is established for the estimated unpaid losses and loss expenses under the terms of, and with respect to, ACE's policies and agreements. These amounts include provision for both reported claims (case reserves) and IBNR claims. The methods of determining such estimates and establishing the resulting liability are reviewed regularly and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses materially greater or less than recorded amounts.

Except for net loss and loss expense reserves of $58 million net of discount, held at December 31, 2012, representing certain structured settlements for which the timing and amount of future claim payments are reliably determinable and $47 million net of discount of certain reserves for unsettled claims that are discounted in statutory filings, ACE does not discount its P&C loss reserves. This compares with reserves of $59 million for certain structured settlements and $35 million of certain reserves for unsettled claims at December 31, 2011. Structured settlements represent contracts purchased from life insurance companies primarily to settle workers' compensation claims, where payments to the claimant by the life insurance company are expected to be made in the form of an annuity. ACE retains the liability to the claimant in the event that the life insurance company fails to pay. At December 31, 2012, the gross liability for the amount due to claimants was $640 million net of discount and reinsurance recoverables for amounts due from the life insurance companies was $582 million net of discount. For structured settlement contracts where payments are guaranteed regardless of claimant life expectancy, the amounts recoverable from the life insurance companies at December 31, 2012 are included in Other assets in the consolidated balance sheets, as they do not meet the requirements for reinsurance accounting.

Included in unpaid losses and loss expenses are liabilities for asbestos and environmental (A&E) claims and expenses. These unpaid losses and loss expenses are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to changes in the legal environment, including specific settlements that may be used as precedents to settle future claims. However, ACE does not anticipate future changes in laws and regulations in setting its A&E reserve levels.

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premiums from previous accident years. With respect to crop business, prior to the December 2010 acquisition of Rain and Hail Insurance Service, Inc. (Rain and Hail), reports relating to the previous crop year(s) were normally received in subsequent calendar years and this typically resulted in adjustments to the previously reported premiums, losses and loss expenses, and profit share commission.  Following the acquisition, such information is available before the close of the calendar year.

For purposes of analysis and disclosure, management views prior period development to be changes in the nominal value of loss estimates from period to period, net of premium and profit commission adjustments on loss sensitive contracts. Prior period development excludes changes in loss estimates that do not arise from the emergence of claims, such as those related to uncollectible reinsurance, interest, unallocated loss adjustment expenses, or foreign currency. Accordingly, specific items excluded from prior period development include the following: gains/losses related to foreign currency remeasurement; losses recognized from the early termination or commutation of reinsurance agreements that principally relate to the time value of money; changes in the value of reinsurance business assumed reflected in losses incurred but principally related to the time value of money; and losses that arise from changes in estimates of earned premiums from prior accident years. Except for foreign currency remeasurement, which is disclosed separately, these items are included in current year losses.

i) Future policy benefits
The valuation of long duration contract reserves requires management to make estimates and assumptions regarding expenses, mortality, persistency, and investment yields. Such estimates are primarily based on historical experience and information provided by ceding companies and include a margin for adverse deviation. Interest rates used in calculating reserves range from less than 1.0 percent to 4.5 percent and less than 1.0 percent to 6.0 percent at December 31, 2012 and 2011, respectively. Actual results could differ materially from these estimates. Management monitors actual experience, and where circumstances warrant, will revise assumptions and the related reserve estimates. Revisions are recorded in the period they are determined.

Certain of our long duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets are classified as trading securities and reported in Other investments and the offsetting liabilities are reported in Future policy benefits in the consolidated balance sheets. Changes in the fair value of separate account assets that do not quality for separate account reporting under GAAP are reported in Other income (expense) and the offsetting movements in the liabilities are included in Policy benefits in the consolidated statements of operations.

j) Assumed reinsurance programs involving minimum benefit guarantees under annuity contracts
ACE reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States and Japan. Each reinsurance treaty covers variable annuities written during a limited period, typically not exceeding two years. We generally receive a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of either the underlying accumulated account values or the underlying accumulated guaranteed values. Depending on an annuitant's age, the accumulation phase can last many years. To limit our exposure under these programs, all reinsurance treaties include aggregate claim limits and many include an aggregate deductible.

The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDB), principally cover shortfalls between accumulated account value at the time of an annuitant's death and either i) an annuitant's total deposits; ii) an annuitant's total deposits plus a minimum annual return; or iii) the highest accumulated account value attained at any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Liabilities for GMDBs are based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the present value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected premiums during the contract period.  

Under reinsurance programs covering GLBs, we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (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. Our GLB reinsurance product meets the definition of a derivative for accounting purposes and is carried at fair value with changes in fair value recognized in income and classified as described below. As the assuming entity, we are obligated to provide coverage until the earlier of the expiration of the underlying guaranteed benefit or the treaty expiration date. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as 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 (i.e., declining interest rates and/or declining equity markets) and changes in policyholder behavior (i.e., 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. Refer to Note 5 c) for additional information.

k) Deposit assets and liabilities
Deposit assets arise from ceded reinsurance contracts purchased that do not transfer significant underwriting or timing risk. Under deposit accounting, consideration received or paid, excluding non-refundable fees, is recorded as a deposit asset or liability in the balance sheet as opposed to recording premiums and losses in the statement of operations. Interest income on deposits, representing the consideration received or to be received in excess of cash payments related to the deposit contract, is earned based on an effective yield calculation. The calculation of the effective yield is based on the amount and timing of actual cash flows at the balance sheet date and the estimated amount and timing of future cash flows. The effective yield is recalculated periodically to reflect revised estimates of cash flows. When a change in the actual or estimated cash flows occurs, the resulting change to the carrying amount of the deposit asset is reported as income or expense. Deposit assets of $138 million and $133 million at December 31, 2012 and 2011, respectively, are reflected in Other assets in the consolidated balance sheets and the accretion of deposit assets related to interest pursuant to the effective yield calculation is reflected in Net investment income in the consolidated statements of operations.

Non-refundable fees are earned based on contract terms. Non-refundable fees paid but unearned are reflected in Other assets in the consolidated balance sheets and earned fees are reflected in Other (income) expense in the consolidated statements of operations.

Deposit liabilities include reinsurance deposit liabilities of $283 million and $318 million and contract holder deposit funds of $548 million and $345 million at December 31, 2012 and 2011, respectively. Deposit liabilities are reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets. The reinsurance deposit liabilities arise from contracts sold for which there is not a significant transfer of risk. At contract inception, the deposit liability equals net cash received. An accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the contract term. The deposit accretion rate is the rate of return required to fund expected future payment obligations. We periodically reassess the estimated ultimate liability and related expected rate of return. Changes to the amount of the deposit liability are generally reflected through Interest expense to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.

Contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract and are sold with a guaranteed rate of return. The liability equals accumulated policy account values, which consist of the deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period.

l) Foreign currency remeasurement and translation
The functional currency for each of our foreign operations is generally the currency of the local operating environment. Transactions in currencies other than a foreign operation's functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in Net realized gains (losses) in the consolidated statements of operations. Functional currency assets and liabilities are translated into the reporting currency, U.S. dollars, using period end rates of exchange and the related translation adjustments are recorded as a separate component of AOCI. Functional statement of operations amounts expressed in functional currencies are translated using average exchange rates. Gains and losses resulting from foreign currency transactions are recorded in Net realized gains (losses) in the consolidated statements of operations.

m) Administrative expenses
Administrative expenses generally include all operating costs other than policy acquisition costs. The Insurance – North American segment manages and uses an in-house third-party claims administrator, ESIS Inc. (ESIS).  ESIS performs claims management and risk control services for domestic and international organizations that self-insure P&C exposures as well as internal P&C exposures.  The net operating results of ESIS are included within Administrative expenses in the consolidated statements of operations and were $23 million, $21 million, and $85 million for the years ended December 31, 2012, 2011, and 2010, respectively.

n) Income taxes
Income taxes have been recorded related to those operations subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of our assets and liabilities. Refer to Note 8 for additional information. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. The valuation allowance assessment considers tax planning strategies, where applicable.

We recognize uncertain tax positions deemed more likely than not of being sustained upon examination.  Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

o) Earnings per share
Basic earnings per share is calculated using the weighted-average shares outstanding including participating securities with non-forfeitable rights to dividends such as unvested restricted stock. All potentially dilutive securities including stock options are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the weighted-average shares outstanding is increased to include all potentially dilutive securities. Basic and diluted earnings per share are calculated by dividing net income available to common shareholders by the applicable weighted-average number of shares outstanding during the year.

p) Cash flow information
Premiums received and losses paid associated with the GLB reinsurance products, which as discussed previously meet the definition of a derivative instrument for accounting purposes, are included within cash flows from operating activities in the consolidated statement of cash flows.  Cash flows, such as settlements and collateral requirements, associated with GLB and all other derivative instruments are included on a net basis within cash flows from investing activities in the consolidated statement of cash flows. Purchases, sales, and maturities of short-term investments are recorded net for purposes of the consolidated statements of cash flows and are classified with cash flows related to fixed maturities.

q) Derivatives
ACE recognizes all derivatives at fair value in the consolidated balance sheets and participates in derivative instruments in two principal ways:

(i) To sell protection to customers as an insurance or reinsurance contract that meets the definition of a derivative for accounting purposes. For 2012 and 2011, the reinsurance of GLBs was our primary product falling into this category; and
(ii) To mitigate financial risks, principally arising from investment holdings, products sold, or assets and liabilities held in foreign currencies. For these instruments, changes in assets or liabilities measured at fair value are recorded as realized gains or losses in the consolidated statement of operations.

We did not designate any derivatives as accounting hedges during 2012, 2011, or 2010.

r) Share-based compensation
ACE measures and records compensation cost for all share-based payment awards at grant-date fair value. Compensation costs are recognized for share-based payment awards with only service conditions that have graded vesting schedules on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Refer to Note 12 for additional information.

s) New accounting pronouncements
Adopted in 2012
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. Under the new guidance, the definition of acquisition costs was modified 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. We adopted this guidance retrospectively effective January 1, 2012 and reduced Retained earnings as of January 1, 2010 by $116 million which represents the cumulative effect of adjustment resulting from adoption of new accounting guidance. We adjusted prior year amounts contained in this report to reflect the effect of adjustment from adoption of new accounting guidance including reducing Deferred policy acquisition costs and Retained earnings by $213 million and $181 million, respectively, as of December 31, 2011. The reduction to Deferred policy acquisition costs is primarily due to lower deferrals associated with unsuccessful efforts. We also reduced Net income by $45 million, or $0.13 per share, and $23 million, or $0.07 per share, for the years ended December 31, 2011 and 2010, respectively.

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 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. We adopted this guidance prospectively effective January 1, 2012. The application of this guidance resulted in additional fair value measurements disclosures only and did not impact our financial condition or results of operations. 

Adopted in 2011
Testing goodwill for impairment
In September 2011, the FASB issued new accounting guidance which eliminates the requirement to calculate the fair value of reporting units at least annually and replaces it with an optional qualitative assessment. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  We adopted this guidance on October 1, 2011. The application of the new guidance resulted in a change in the procedures for assessing goodwill impairment, and did not impact our financial condition or results of operations.
Acquisitions
Acquisitions
Acquisitions

On June 13, 2012, we announced that we and our local partner had signed a definitive agreement to acquire PT Asuransi Jaya Proteksi (JaPro), one of Indonesia's leading general insurers. On September 18, 2012, we acquired 80 percent of JaPro and on January 3, 2013 our local partner acquired the remaining 20 percent. The total purchase price for 100 percent of the company was approximately $107 million in cash. The information needed to complete the purchase price allocation is preliminary and will be adjusted as further information becomes available during the measurement period. JaPro operates in our Insurance – Overseas General segment.

On September 12, 2012, we announced that we reached a definitive agreement to acquire Fianzas Monterrey, a leading surety lines company in Mexico offering administrative performance bonds primarily to clients in the construction and industrial sectors, for approximately $285 million in cash. This transaction, which is subject to regulatory approvals and other customary closing conditions, is expected to be completed in the first half of 2013.

On October 18, 2012, we announced that we reached a definitive agreement to acquire ABA Seguros, a property and casualty insurer in Mexico that provides automobile, homeowners, and small business coverages. We expect to pay approximately $865 million in cash for this transaction, subject to adjustment for dividends paid between signing and closing. This transaction, which is subject to regulatory approvals and other customary closing conditions, is expected to be completed in the first half of 2013.
Prior year acquisitions
We 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 $450 million in cash. These acquired businesses operate in our Life segment, expand our presence in the North Asia market and complement our life insurance business established in that region. In 2012, we finalized purchase price allocations resulting in $91 million of goodwill, none of which is expected to be deductible for income tax purposes, and $163 million of intangible assets. The most significant intangible asset is VOBA.
We acquired Penn Millers Holding Corporation (PMHC) on November 30, 2011 for approximately $107 million in cash. PMHC’s primary insurance subsidiary, Penn Millers Insurance Company (Penn Millers), is a well-established underwriter in the agribusiness market since 1887. PMHC operates in our Insurance – North American segment.
We acquired Rio Guayas Compania de Seguros y Reaseguros (Rio Guayas), a general insurance company in Ecuador on December 28, 2011 for approximately $65 million in cash. Rio Guayas sells a range of insurance products, including automobile, life, property, and A&H. The acquisition of Rio Guayas expands our capabilities in terms of geography, products, and distribution. Rio Guayas operates in our Insurance – Overseas General segment.

On December 28, 2010, we acquired all the outstanding common stock of Rain and Hail Insurance Service, Inc. (Rain and Hail) not previously owned by us 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 our strategy to expand our specialty lines business and provides further diversification of our global product mix.

Prior to the consummation of this business combination, our 20.1 percent ownership in Rain and Hail was recorded in Investments in partially-owned insurance companies in the consolidated balance sheets. In accordance with GAAP, at the date of the business combination, we were deemed to have disposed of our 20.1 percent ownership interest and recognized 100 percent of the assets and liabilities of Rain and Hail at acquisition date fair value. In connection with this deemed disposition, we recognized a $175 million gain in Net realized gains (losses) in the consolidated statement of operations, which represents the excess of acquisition date fair value of the 20.1 percent ownership interest over the cost basis. Acquisition date fair value of the 20.1 percent ownership interest was determined by first calculating the implied fair value of 100 percent of Rain and Hail based on the purchase price for the net assets not previously owned by us at the acquisition date. The implied fair value of the 20.1 percent ownership interest was then reduced to reflect a noncontrolling interest discount. The acquisition generated $123 million of goodwill, none of which is expected to be deductible for income tax purposes, and $523 million of other intangible assets based on our purchase price allocation. Goodwill and other intangible assets arising from this acquisition are included in our Insurance – North American segment. Legal and other expenses incurred to complete the acquisition amounted to $2 million and are included in Other (income) expense.

On December 1, 2010, we 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.

The consolidated financial statements include the results of these acquired businesses from the date of acquisition.
Investments
Investments
Investments

a) Fixed maturities
The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:
December 31, 2012
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,553

 
$
183

 
$
(1
)
 
$
3,735

 
$

Foreign
13,016

 
711

 
(14
)
 
13,713

 

Corporate securities
15,529

 
1,210

 
(31
)
 
16,708

 
(7
)
Mortgage-backed securities
10,051

 
458

 
(36
)
 
10,473

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

 
163

 
(3
)
 
2,677

 

 
$
44,666

 
$
2,725

 
$
(85
)
 
$
47,306

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

 
$
39

 
$

 
$
1,083

 
$

Foreign
910

 
54

 

 
964

 

Corporate securities
2,133

 
142

 

 
2,275

 

Mortgage-backed securities
2,028

 
88

 

 
2,116

 

States, municipalities, and political subdivisions
1,155

 
44

 
(4
)
 
1,195

 

 
$
7,270

 
$
367

 
$
(4
)
 
$
7,633

 
$

 
 
 
 
 
 
 
 
 
 
December 31, 2011
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,774

 
$
186

 
$

 
$
2,960

 
$

Foreign
12,025

 
475

 
(99
)
 
12,401

 
(2
)
Corporate securities
14,055

 
773

 
(135
)
 
14,693

 
(22
)
Mortgage-backed securities
9,979

 
397

 
(175
)
 
10,201

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

 
96

 
(1
)
 
1,712

 

 
$
40,450

 
$
1,927

 
$
(410
)
 
$
41,967

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

 
$
48

 
$

 
$
1,126

 
$

Foreign
935

 
18

 
(23
)
 
930

 

Corporate securities
2,338

 
44

 
(45
)
 
2,337

 

Mortgage-backed securities
2,949

 
90

 
(3
)
 
3,036

 

States, municipalities, and political subdivisions
1,147

 
32

 
(3
)
 
1,176

 

 
$
8,447

 
$
232

 
$
(74
)
 
$
8,605

 
$


 
As discussed in Note 3 d), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above are the cumulative amounts of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI Recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders' equity. For the years ended December 31, 2012 and 2011, $137 million of net unrealized appreciation and $48 million of net unrealized depreciation, respectively, related to such securities is included in OCI. At December 31, 2012 and 2011, AOCI includes net unrealized depreciation of $25 million and $155 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
Mortgage-backed securities (MBS) issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 10 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 85 percent and 84 percent of the total mortgage-backed securities at December 31, 2012 and December 31, 2011, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.
The following table presents fixed maturities by contractual maturity: 
 
December 31
 
 
December 31
 
 
 
 
2012

 
 
 
2011

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

 
Fair Value

 
Amortized Cost

 
Fair Value

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

 
$
1,906

 
$
2,321

 
$
2,349

Due after 1 year through 5 years
13,411

 
14,010

 
12,325

 
12,722

Due after 5 years through 10 years
15,032

 
16,153

 
12,379

 
12,995

Due after 10 years
4,285

 
4,764

 
3,446

 
3,700

 
34,615

 
36,833

 
30,471

 
31,766

Mortgage-backed securities
10,051

 
10,473

 
9,979

 
10,201

 
$
44,666

 
$
47,306

 
$
40,450

 
$
41,967

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
656

 
$
659

 
$
393

 
$
396

Due after 1 year through 5 years
1,870

 
1,950

 
2,062

 
2,090

Due after 5 years through 10 years
2,119

 
2,267

 
2,376

 
2,399

Due after 10 years
597

 
641

 
667

 
684

 
5,242

 
5,517

 
5,498

 
5,569

Mortgage-backed securities
2,028

 
2,116

 
2,949

 
3,036

 
$
7,270

 
$
7,633

 
$
8,447

 
$
8,605


Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. 

b) Equity securities
The following table presents the cost and fair value of equity securities:
 
December 31


December 31

(in millions of U.S. dollars)
2012


2011

Cost
$
707

 
$
671

Gross unrealized appreciation
41

 
18

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

 
$
647


c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.
Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.
For all non-fixed maturities, OTTI is evaluated based on the following:
the amount of time a security has been in a loss position and the magnitude of the loss position;
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
ACE’s ability and intent to hold the security to the expected recovery period.
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired.

Evaluation of potential credit losses related to fixed maturities
We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

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

Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. We develop these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. We believe that use of a default assumption in excess of the historical mean is reasonable in light of current market conditions.

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

 
Historical Mean Default Rate

Investment Grade:
 
 
 
Aaa-Baa
0.0-1.4%

 
0.0-0.3%

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


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

Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.

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

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

Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities of $6 million, $11 million, and $32 million for the years ended December 31, 2012, 2011, and 2010, respectively.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary” and the change in net unrealized appreciation (depreciation) of investments: 
 
Years Ended December 31
 
(in millions of U.S. dollars)
2012

 
2011

 
2010

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

 
15

 
69

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

 
410

 
569

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

 
164

 
380

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

Gross realized gains excluding OTTI
11

 
15

 
86

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

 
9

 
84

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

Fair value adjustments on insurance derivative
171

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

 
(22
)
 
174

Net realized gains (losses)
78

 
(795
)
 
432

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

 
569

 
451

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

Equity securities
61

 
(47
)
 
(44
)
Other
50

 
40

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

 
316

 
742

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

 
$
(479
)
 
$
1,174


 
The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI: 
 
Years Ended December 31
 
(in millions of U.S. dollars)
2012

 
2011

 
2010

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

 
$
137

 
$
174

Additions where no OTTI was previously recorded
8

 
12

 
34

Additions where an OTTI was previously recorded
12

 
8

 
12

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

 
$
74

 
$
137


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

 
 
 
December 31

 
 
 
2012

 
 
 
2011

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

 
Cost

 
Fair Value

 
Cost

Investment funds
$
395

 
$
278

 
$
378

 
$
277

Limited partnerships
531

 
398

 
531

 
429

Partially-owned investment companies
1,186

 
1,187

 
904

 
904

Life insurance policies
148

 
148

 
127

 
127

Policy loans
164

 
164

 
143

 
143

Trading securities
243

 
242

 
194

 
195

Other
49

 
48

 
37

 
37

Total
$
2,716

 
$
2,465

 
$
2,314

 
$
2,112



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

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

 
Issued Share Capital

 
Ownership Percentage

 
Carrying Value

 
Issued Share Capital

 
Ownership Percentage

 
Domicile
Huatai Group
$
350

(1) 
$
474

 
20.0
%
 
$
228

 
$
457

 
20.0
%
 
China
Huatai Life Insurance Company
84

 
205

 
20.0
%
 
103

 
196

 
20.0
%
 
China
Freisenbruch-Meyer
9

 
6

 
40.0
%
 
8

 
5

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

 
27

 
30.0
%
 
7

 
27

 
30.0
%
 
Saudi Arabia
Russian Reinsurance Company
2

 
4

 
23.3
%
 
2

 
4

 
23.3
%
 
Russia
Island Heritage

 

 

 
4

 
27

 
10.8
%
 
Cayman Islands
Total
$
454

 
$
716

 
 
 
$
352

 
$
716

 
 
 
 

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

f) Gross unrealized loss
At December 31, 2012, there were 2,029 fixed maturities out of a total of 23,679 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $5 million. There were 56 equity securities out of a total of 193 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $1 million. Fixed maturities in an unrealized loss position at December 31, 2012 comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2012
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

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

 
$
(1.4
)
 
$

 
$

 
$
440

 
$
(1.4
)
Foreign
1,234

 
(8.6
)
 
88

 
(5.8
)
 
1,322

 
(14.4
)
Corporate securities
1,026

 
(22.7
)
 
85

 
(7.9
)
 
1,111

 
(30.6
)
Mortgage-backed securities
855

 
(3.8
)
 
356

 
(32.6
)
 
1,211

 
(36.4
)
States, municipalities, and political subdivisions
316

 
(3.0
)
 
48

 
(3.6
)
 
364

 
(6.6
)
Total fixed maturities
3,871

 
(39.5
)
 
577

 
(49.9
)
 
4,448

 
(89.4
)
Equity securities
29

 
(4.2
)
 

 

 
29

 
(4.2
)
Other investments
68

 
(4.9
)
 

 

 
68

 
(4.9
)
Total
$
3,968

 
$
(48.6
)
 
$
577

 
$
(49.9
)
 
$
4,545

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

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross
Unrealized Loss

(in millions of U.S. dollars)