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1. 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.
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 and 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 underwriting and other costs that vary with, and are primarily related to, the production of premium. 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. Policy acquisition costs on P&C contracts are generally amortized ratably over the period in which premiums are earned. Policy acquisition costs on long duration contracts are amortized over the estimated life of the contracts, generally in proportion to premium revenue recognized. 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, principally related to A&H business produced by the Insurance – Overseas General segment, which are deferred and recognized over the expected future benefit period. 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 and amortized over five years, 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 was $236 million and $253 million at December 31, 2011 and 2010, respectively. The amortization expense for deferred marketing costs was $128 million, $115 million, and $103 million for the years ended December 31, 2011, 2010, and 2009, 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 obtain reinsurance status for accounting purposes, 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 25 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 $35 million and $92 million at December 31, 2011 and 2010, 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 maturity investments 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 its 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 it earns 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 $350 million in the aggregate). Our revolving 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 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 $59 million net of discount held at December 31, 2011, representing structured settlements for which the timing and amount of future claim payments are reliably determinable, ACE does not discount its P&C loss reserves. 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, 2011, the gross liability for the amount due to claimants was $644 million and reinsurance recoverables for amounts due from the life insurance companies was $585 million. For structured settlement contracts where payments are guaranteed regardless of claimant life expectancy, the amounts recoverable from the life insurance companies are included in Other assets, as they do not meet the requirements for reinsurance accounting. At December 31, 2011, there was $59 million included in Other assets in the consolidated balance sheets relating to structured settlements.
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. Commencing with the quarter ended September 30, 2009, prior period development for the crop business includes adjustments to both crop losses and loss expenses and the related crop profit share commission.
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 and 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 one percent to six percent and one percent to seven percent at December 31, 2011 and 2010, 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 have assets that do not qualify for separate account reporting under GAAP (failed separate accounts). The assets related to failed separate accounts are 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 failed separate account assets are reported in Other income (expense) and the offsetting movements in the failed separate account 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 fees 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 ceded 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 $133 million and $144 million at December 31, 2011 and 2010, 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 $318 million and $351 million and contract holder deposit funds of $345 million and $70 million at December 31, 2011 and 2010, respectively. 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 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 $21 million, $85 million, and $26 million for the years ended December 31, 2011, 2010, and 2009, 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 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 2011 and 2010, 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 2011, 2010, or 2009.
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 2011
Testing goodwill for impairment
In September 2011, the Financial Accounting Standards Board (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.
Adopted in 2012
Accounting for costs associated with acquiring or renewing insurance contracts
In October 2010, the 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. Additionally, this new guidance will require that direct-response advertising costs be accounted for as deferred acquisition costs for measurement and subsequent accounting. This guidance is effective for interim and annual reporting periods beginning on January 1, 2012. We adopted this guidance retrospectively effective January 1, 2012 and we will therefore adjust previously issued financial statements that are presented as comparative financial statements in future filings beginning with our March 31, 2012 Form 10-Q. Upon adoption in 2012, we recorded a decrease in Retained earnings of approximately $188 million as of December 31, 2011. We anticipate that the new standard will result in an immaterial decrease to Net income for the year ended December 31, 2012, principally in our Life segment.
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. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011. This guidance, which became effective for ACE on January 1, 2012, changed disclosure only and did not impact our financial condition or results of operations.
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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 $121 million of goodwill, none of which is expected to be deductible for income tax purposes, and approximately $130 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, is a well-established underwriter in the agribusiness market since 1887 and currently operates in 34 states. PMHC operates under 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. Rio Guayas sells a range of insurance products, including auto, life, property, and A&H. The acquisition of Rio Guayas will expand our capabilities in terms of geography, products, and distribution. Rio Guayas operates under our Insurance – Overseas General segment.
Prior year acquisitions
On December 28, 2010, ACE acquired all the outstanding common stock of 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.
Prior to the consummation of this business combination, ACE's 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, ACE was deemed to have disposed of its 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, ACE 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 ACE 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 consolidated financial statements include the results of Rain and Hail from December 28, 2010.
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 ACE's 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, 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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a) Transfers of securities
As part of our fixed income diversification strategy, we hold certain securities to maturity. Because we have the intent to hold these securities to maturity, we transferred securities with a total fair value of $6.8 billion during 2010 from Fixed maturities available for sale to Fixed maturities held to maturity in the consolidated balance sheet. The net unrealized appreciation at the date of the transfer continues to be reported as a component of AOCI and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount. There were no transfers in 2011.
b) Fixed maturities
The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:
December 31, 2011 (in millions of U.S. dollars) |
Amortized Cost |
Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Fair Value | OTTI Recognized in AOCI |
|||||||||||||||||||||||
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 | $ | – |
December 31, 2010 (in millions of U.S. dollars) |
Amortized Cost |
Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Fair Value | OTTI Recognized in AOCI |
|||||||||||||||||||||||
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 subdivisions |
1,302 | 15 | (30 | ) | 1,287 | – | ||||||||||||||||||||||
$ | 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 subdivisions |
1,175 | 5 | (18 | ) | 1,162 | – | ||||||||||||||||||||||
$ | 9,501 | $ | 112 | $ | (152 | ) | $ | 9,461 | $ | – |
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, 2011 and 2010, $48 million of net unrealized depreciation and $193 million of net unrealized appreciation, respectively, related to such securities is included in OCI. At December 31, 2011 and 2010, AOCI includes net unrealized depreciation of $155 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 (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 84 percent and 79 percent of the total mortgage-backed securities at December 31, 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 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 the amortized cost and fair value of fixed maturities by contractual maturity:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
Available for sale |
||||||||||||||||||||||
Due in 1 year or less |
$ | 2,321 | $ | 2,349 | $ | 1,846 | $ | 1,985 | ||||||||||||||
Due after 1 year through 5 years |
12,325 | 12,722 | 13,094 | 13,444 | ||||||||||||||||||
Due after 5 years through 10 years |
12,379 | 12,995 | 10,276 | 10,782 | ||||||||||||||||||
Due after 10 years |
3,446 | 3,700 | 2,818 | 2,812 | ||||||||||||||||||
30,471 | 31,766 | 28,034 | 29,023 | |||||||||||||||||||
Mortgage-backed securities |
9,979 | 10,201 | 8,508 | 8,516 | ||||||||||||||||||
$ | 40,450 | $ | 41,967 | $ | 36,542 | $ | 37,539 | |||||||||||||||
Held to maturity |
||||||||||||||||||||||
Due in 1 year or less |
$ | 393 | $ | 396 | $ | 400 | $ | 404 | ||||||||||||||
Due after 1 year through 5 years |
2,062 | 2,090 | 1,983 | 2,010 | ||||||||||||||||||
Due after 5 years through 10 years |
2,376 | 2,399 | 2,613 | 2,524 | ||||||||||||||||||
Due after 10 years |
667 | 684 | 694 | 677 | ||||||||||||||||||
5,498 | 5,569 | 5,690 | 5,615 | |||||||||||||||||||
Mortgage-backed securities |
2,949 | 3,036 | 3,811 | 3,846 | ||||||||||||||||||
$ | 8,447 | $ | 8,605 | $ | 9,501 | $ | 9,461 |
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.
c) Equity securities
The following table presents the cost and fair value of equity securities:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Cost |
$ | 671 | $ | 666 | ||||||
Gross unrealized appreciation |
18 | 28 | ||||||||
Gross unrealized depreciation |
(42 | ) | (2 | ) | ||||||
Fair value |
$ | 647 | $ | 692 |
d) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI adopted on April 1, 2009, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.
Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.
For all non-fixed maturities, OTTI is evaluated based on the following:
the amount of time a security has been in a loss position and the magnitude of the loss position;
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
ACE's ability and intent to hold the security to the expected recovery period.
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.
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 $15 million of gross unrealized loss at December 31, 2011. 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 |
4.8% | 1.1% | ||||||||
B |
12.8% | 3.4% | ||||||||
Caa-C |
53.5% | 13.9% |
Consistent with management's approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody's historical mean recovery rate of 41 percent. ACE believes that use of a recovery rate assumption lower than the historical mean is reasonable in light of recent market conditions.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for corporate securities for the years ended December 31, 2011 and 2010 of $9 million and $14 million, respectively. Credit losses recognized in net income for corporate securities from April 1, 2009 (the date of adoption) to December 31, 2009, were $59 million.
Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming:
lower loss severity for Prime sector bonds versus ALT-A and Sub-prime bonds; and
lower loss severity for older vintage securities versus more recent vintage securities, which reflects the decline in underwriting standards through 2007.
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.
The following table presents the significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for potential credit loss by sector and vintage:
Range of Significant Assumptions Used | ||||||||||||||||
Sector(1) | Vintage | Default Rate(2) | Loss Severity Rate(2) |
|||||||||||||
Prime |
2003 and prior | 16% | 29% | |||||||||||||
2004 | 17-42% | 31-49% | ||||||||||||||
2005 | 25-45% | 44-58% | ||||||||||||||
2006-2007 | 26-53% | 43-58% | ||||||||||||||
ALT-A |
2003 and prior | 23% | 48% | |||||||||||||
2004 | 33% | 53% | ||||||||||||||
2005 | 30-47% | 54-67% | ||||||||||||||
2006-2007 | 57-66% | 61-72% | ||||||||||||||
Sub-prime |
2003 and prior | 45% | 62% | |||||||||||||
2004 | 49% | 76% | ||||||||||||||
2005 | 58% | 78% | ||||||||||||||
2006-2007 | 70-78% | 70-86% |
(1) Prime, ALT-A, and Sub-prime sector bonds are categorized based on creditworthiness of the borrower.
(2) Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities for the years ended December 31, 2011 and 2010, of $11 million and $32 million, respectively. Credit losses recognized in net income for mortgage-backed securities from April 1, 2009 (the date of adoption) to December 31, 2009, were $56 million.
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) on investments:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Fixed maturities: |
||||||||||||||||
OTTI on fixed maturities, gross |
$ | (61 | ) | $ | (115 | ) | $ | (536 | ) | |||||||
OTTI on fixed maturities recognized in OCI (pre-tax) |
15 | 69 | 302 | |||||||||||||
OTTI on fixed maturities, net |
(46 | ) | (46 | ) | (234 | ) | ||||||||||
Gross realized gains excluding OTTI |
410 | 569 | 591 | |||||||||||||
Gross realized losses excluding OTTI |
(200 | ) | (143 | ) | (398 | ) | ||||||||||
Total fixed maturities |
164 | 380 | (41 | ) | ||||||||||||
Equity securities: |
||||||||||||||||
OTTI on equity securities |
(1 | ) | – | (26 | ) | |||||||||||
Gross realized gains excluding OTTI |
15 | 86 | 105 | |||||||||||||
Gross realized losses excluding OTTI |
(5 | ) | (2 | ) | (224 | ) | ||||||||||
Total equity securities |
9 | 84 | (145 | ) | ||||||||||||
OTTI on other investments |
(3 | ) | (13 | ) | (137 | ) | ||||||||||
Foreign exchange losses |
(13 | ) | (54 | ) | (21 | ) | ||||||||||
Investment and embedded derivative instruments |
(143 | ) | 58 | 68 | ||||||||||||
Fair value adjustments on insurance derivative |
(779 | ) | (28 | ) | 368 | |||||||||||
S&P put options and futures |
(4 | ) | (150 | ) | (363 | ) | ||||||||||
Other derivative instruments |
(4 | ) | (19 | ) | (93 | ) | ||||||||||
Other |
(22 | ) | 174 | 168 | ||||||||||||
Net realized gains (losses) |
(795 | ) | 432 | (196 | ) | |||||||||||
Change in net unrealized appreciation (depreciation) on investments: |
||||||||||||||||
Fixed maturities available for sale |
569 | 451 | 2,723 | |||||||||||||
Fixed maturities held to maturity |
(89 | ) | 522 | (6 | ) | |||||||||||
Equity securities |
(47 | ) | (44 | ) | 213 | |||||||||||
Other |
40 | (35 | ) | 162 | ||||||||||||
Income tax expense |
(157 | ) | (152 | ) | (481 | ) | ||||||||||
Change in net unrealized appreciation on investments |
316 | 742 | 2,611 | |||||||||||||
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments |
$ | (479 | ) | $ | 1,174 | $ | 2,415 |
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 |
Nine Months Ended 2009 |
|||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | ||||||||||||||
Balance of credit losses related to securities still held-beginning of period |
$ | 137 | $ | 174 | $ | 130 | ||||||||||
Additions where no OTTI was previously recorded |
12 | 34 | 104 | |||||||||||||
Additions where an OTTI was previously recorded |
8 | 12 | 11 | |||||||||||||
Reductions reflecting amounts previously recorded in OCI but subsequently reflected in net income |
– | – | (2 | ) | ||||||||||||
Reductions for securities sold during the period |
(83 | ) | (83 | ) | (69 | ) | ||||||||||
Balance of credit losses related to securities still held-end of period |
$ | 74 | $ | 137 | $ | 174 |
e) Other investments
The following table presents the fair value and cost of other investments:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Fair Value | Cost | Fair Value | Cost | ||||||||||||||||||
Investment funds |
$ | 378 | $ | 277 | $ | 329 | $ | 232 | ||||||||||||||
Limited partnerships |
531 | 429 | 438 | 356 | ||||||||||||||||||
Partially-owned investment companies |
904 | 904 | 688 | 688 | ||||||||||||||||||
Life insurance policies |
127 | 127 | 118 | 118 | ||||||||||||||||||
Policy loans |
143 | 143 | 54 | 54 | ||||||||||||||||||
Trading securities |
194 | 195 | 37 | 35 | ||||||||||||||||||
Other |
37 | 37 | 28 | 28 | ||||||||||||||||||
Total |
$ | 2,314 | $ | 2,112 | $ | 1,692 | $ | 1,511 |
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 59 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 $162 million of mutual funds related to failed separate accounts acquired in 2011. Trading securities also include $24 million of equity securities, and $8 million of fixed maturities in rabbi trusts at December 31, 2011, compared with $28 million of equity securities and $9 million of fixed maturities in rabbi trusts at December 31, 2010. In addition, rabbi trusts also include life insurance policies. Refer to Note 11 f) for additional information.
f) Investments in partially-owned insurance companies
The following table presents Investments in partially-owned insurance companies:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||||||||||||||
(in millions of U.S. dollars, except percentages) |
Carrying Value |
Issued Share Capital |
Ownership Percentage |
Carrying Value |
Issued Share Capital |
Ownership Percentage |
Domicile | |||||||||||||||||||||||||||||||||
Freisenbruch-Meyer |
$ | 8 | $ | 5 | 40.0% | $ | 8 | $ | 5 | 40.0% | Bermuda | |||||||||||||||||||||||||||||
ACE Cooperative Ins. Co. – Saudi Arabia |
7 | 27 | 30.0% | 7 | 27 | 30.0% | Saudi Arabia | |||||||||||||||||||||||||||||||||
Huatai Insurance Company |
241 | 457 | 20.0% | 229 | 207 | 21.3% | China | |||||||||||||||||||||||||||||||||
Huatai Life Insurance Company |
118 | 196 | 20.0% | 112 | 179 | 20.0% | China | |||||||||||||||||||||||||||||||||
Russian Reinsurance Company |
2 | 4 | 23.3% | – | – | – | Russia | |||||||||||||||||||||||||||||||||
Island Heritage |
4 | 27 | 10.8% | 4 | 27 | 10.8% | Cayman Islands | |||||||||||||||||||||||||||||||||
Total |
$ | 380 | $ | 716 | $ | 360 | $ | 445 |
Huatai Insurance Company and Huatai Life Insurance Company are China-based entities which provide a range of P&C, life, and investment products.
g) Gross unrealized loss
At December 31, 2011, there were 3,873 fixed maturities out of a total of 22,198 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $9 million. There were approximately 77 equity securities out of a total of 179 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $32 million. Fixed maturities in an unrealized loss position at December 31, 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. Equity securities in an unrealized loss position include foreign fixed income securities held in a commingled fund structure for which fair value declined primarily due to widening credit spreads since the date of purchase.
The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||||||||||||
December 31, 2011 (in millions of U.S. dollars) |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
||||||||||||||||||||||||||||
Foreign |
$ | 1,801 | $ | (82.2 | ) | $ | 529 | $ | (40.0 | ) | $ | 2,330 | $ | (122.2 | ) | |||||||||||||||||||
Corporate securities |
3,084 | (148.2 | ) | 268 | (32.2 | ) | 3,352 | (180.4 | ) | |||||||||||||||||||||||||
Mortgage-backed securities |
440 | (7.5 | ) | 586 | (170.2 | ) | 1,026 | (177.7 | ) | |||||||||||||||||||||||||
States, municipalities, and political subdivisions |
30 | (0.4 | ) | 98 | (3.5 | ) | 128 | (3.9 | ) | |||||||||||||||||||||||||
Total fixed maturities |
5,355 | (238.3 | ) | 1,481 | (245.9 | ) | 6,836 | (484.2 | ) | |||||||||||||||||||||||||
Equity securities |
484 | (42.3 | ) | – | – | 484 | (42.3 | ) | ||||||||||||||||||||||||||
Other investments |
88 | (8.3 | ) | – | – | 88 | (8.3 | ) | ||||||||||||||||||||||||||
Total |
$ | 5,927 | $ | (288.9 | ) | $ | 1,481 | $ | (245.9 | ) | $ | 7,408 | $ | (534.8 | ) |
0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||||||||||||
December 31, 2010 (in millions of U.S. dollars) |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
||||||||||||||||||||||||||||
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 | ) |
h) Net investment income
The following table presents the sources of net investment income:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Fixed maturities |
$ | 2,196 | $ | 2,071 | $ | 1,985 | ||||||||||
Short-term investments |
43 | 34 | 38 | |||||||||||||
Equity securities |
36 | 26 | 54 | |||||||||||||
Other |
62 | 44 | 48 | |||||||||||||
Gross investment income |
2,337 | 2,175 | 2,125 | |||||||||||||
Investment expenses |
(95 | ) | (105 | ) | (94 | ) | ||||||||||
Net investment income |
$ | 2,242 | $ | 2,070 | $ | 2,031 |
i) Restricted assets
ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. ACE is required to restrict assets pledged under reverse repurchase agreements. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at December 31, 2011 and 2010, are fixed maturities and short-term investments totaling $14.9 billion and $13.0 billion, respectively, and cash of $179 million and $104 million, respectively.
The following table presents the components of restricted assets:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Trust funds |
$ | 9,940 | $ | 8,200 | ||||||
Deposits with non-U.S. regulatory authorities |
2,240 | 2,289 | ||||||||
Deposits with U.S. regulatory authorities |
1,307 | 1,384 | ||||||||
Other pledged assets(1) |
1,615 | 1,190 | ||||||||
$ | 15,102 | $ | 13,063 |
(1) Includes restricted assets of $1.3 billion and $1.0 billion at December 31, 2011 and 2010, respectively, pledged under reverse repurchase agreements.
|
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:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and
Level 3 – Inputs that are unobservable and reflect management's judgments about assumptions that market participants would use in pricing an asset or liability.
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, these pricing services only produce an estimate of fair value if there is observable market information that would allow them to make a fair value estimate. Based on our understanding of the market inputs used by the pricing services, all applicable investments have been valued in accordance with GAAP. We do not typically adjust prices obtained from pricing services. The following is a description of the valuation techniques and inputs used to determine fair values 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 can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs 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. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, the valuation of fixed maturity investments is more subjective when markets are less liquid due to the lack of market based inputs (i.e., stale pricing), which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. For a small number of fixed maturities, we obtain a quote from a broker (typically a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, we include these fair value estimates in 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 fair 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 is classified within Level 2. The underlying assets within failed separate accounts, as described in Note 1 i), comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans, 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 as it is reported at contract value and not fair value on the consolidated balance sheets.
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. Investment derivative instruments are recorded in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.
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 our 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. Other derivative instruments are recorded in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.
Separate account assets
Separate account assets represent segregated funds where investment risks are borne by the customers, except to the extent of certain guarantees made by ACE. Separate account assets comprise mutual funds classified in the valuation hierarchy on the same basis as other equity securities traded in active markets and are classified within Level 1. Separate account assets also include fixed maturities classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Excluded from the valuation hierarchy are the corresponding liabilities as they are reported at contract value and not fair value on the consolidated balance sheets. Separate account assets are recorded in Other assets in the consolidated balance sheets.
Guaranteed living benefits
The GLB arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of GMIB and GMAB associated with variable annuity contracts. GLB's are recorded in Accounts payable, accrued expenses, and other liabilities and Future policy benefits in the consolidated balance sheets. 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. During 2011, no changes were made to actuarial or behavioral assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $14 million and $98 million for the years ended December 31, 2011 and 2010, 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.
The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:
December 31, 2011 (in millions of U.S. dollars) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||
Fixed maturities available for sale |
||||||||||||||||||||||
U.S. Treasury and agency |
$ | 1,691 | $ | 1,264 | $ | 5 | $ | 2,960 | ||||||||||||||
Foreign |
212 | 12,156 | 33 | 12,401 | ||||||||||||||||||
Corporate securities |
20 | 14,539 | 134 | 14,693 | ||||||||||||||||||
Mortgage-backed securities |
– | 10,173 | 28 | 10,201 | ||||||||||||||||||
States, municipalities, and political subdivisions |
– | 1,711 | 1 | 1,712 | ||||||||||||||||||
1,923 | 39,843 | 201 | 41,967 | |||||||||||||||||||
Equity securities |
632 | 2 | 13 | 647 | ||||||||||||||||||
Short-term investments |
1,246 | 1,055 | – | 2,301 | ||||||||||||||||||
Other investments |
208 | 229 | 1,877 | 2,314 | ||||||||||||||||||
Securities lending collateral |
– | 1,375 | – | 1,375 | ||||||||||||||||||
Investment derivative instruments |
10 | – | – | 10 | ||||||||||||||||||
Other derivative instruments |
(16 | ) | 54 | 3 | 41 | |||||||||||||||||
Separate account assets |
607 | 53 | – | 660 | ||||||||||||||||||
Total assets measured at fair value |
$ | 4,610 | $ | 42,611 | $ | 2,094 | $ | 49,315 | ||||||||||||||
Liabilities: |
||||||||||||||||||||||
GLB(1) |
$ | – | $ | – | $ | 1,319 | $ | 1,319 |
(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 5 c) for additional information.
There were no significant gross transfers between Level 1 and Level 2 during the year ended December 31, 2011.
December 31, 2010 (in millions of U.S. dollars) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
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 | |||||||||||||||||
Separate account assets |
308 | – | – | 308 | ||||||||||||||||||
Total assets measured at fair value |
$ | 3,694 | $ | 38,420 | $ | 1,631 | $ | 43,745 | ||||||||||||||
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 5 c) for additional information.
There were no significant gross transfers between Level 1 and Level 2 during the year ended December 31, 2010.
Fair value of alternative investments
Included in Other investments in the fair value hierarchy at December 31, 2011 and 2010 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At December 31, 2011 and 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 expected liquidation period, fair value, and maximum future funding commitments of alternative investments:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||
(in millions of U.S. dollars) |
Expected Liquidation Period |
Fair Value | Maximum Future Funding Commitments |
Fair Value | Maximum Future Funding Commitments |
|||||||||||||||||||||||
Financial |
5 to 9 Years | $ | 205 | $ | 141 | $ | 192 | $ | 151 | |||||||||||||||||||
Real estate |
3 to 9 Years | 270 | 96 | 163 | 92 | |||||||||||||||||||||||
Distressed |
6 to 9 Years | 182 | 57 | 243 | 43 | |||||||||||||||||||||||
Mezzanine |
6 to 9 Years | 195 | 282 | 125 | 173 | |||||||||||||||||||||||
Traditional |
3 to 8 Years | 565 | 200 | 376 | 291 | |||||||||||||||||||||||
Vintage |
1 to 3 Years | 18 | 1 | 27 | 3 | |||||||||||||||||||||||
Investment funds |
Not Applicable | 378 | – | 329 | – | |||||||||||||||||||||||
$ | 1,813 | $ | 777 | $ | 1,455 | $ | 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):
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011 (in millions of U.S. dollars) |
U.S. Treasury and agency |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | |||||||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | – | $ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | $ | 507 | ||||||||||||||||||||||||||||||||||
Transfers into Level 3 |
– | 9 | 42 | 4 | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||
Transfers out of Level 3 |
– | (18 | ) | (4 | ) | (48 | ) | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
– | (1 | ) | (2 | ) | – | – | (1 | ) | 93 | – | – | ||||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
– | – | (3 | ) | – | – | 4 | (3 | ) | 2 | 812 | |||||||||||||||||||||||||||||||||||||||||
Purchases |
5 | 23 | 32 | 59 | – | 5 | 602 | – | – | |||||||||||||||||||||||||||||||||||||||||||
Sales |
– | (3 | ) | (27 | ) | (17 | ) | – | (8 | ) | (55 | ) | – | – | ||||||||||||||||||||||||||||||||||||||
Settlements |
– | (3 | ) | (19 | ) | (9 | ) | (1 | ) | – | (192 | ) | (3 | ) | – | |||||||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 5 | $ | 33 | $ | 134 | $ | 28 | $ | 1 | $ | 13 | $ | 1,877 | $ | 3 | $ | 1,319 | ||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | (3 | ) | $ | (1 | ) | $ | 812 |
(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 5c) for additional information.
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2010 (in millions of U.S. dollars) |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | ||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | ||||||||||||||||||||||||||||||
Transfers into (Out of) Level 3 |
(14 | ) | (25 | ) | (1 | ) | – | 1 | – | – | – | |||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
1 | 9 | – | – | – | 53 | – | – | ||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
1 | (3 | ) | – | – | 1 | (7 | ) | 2 | 64 | ||||||||||||||||||||||||||||||||||||
Purchases, Sales, Issuances, and Settlements, Net |
(21 | ) | (34 | ) | 19 | (1 | ) | (1 | ) | 237 | (12 | ) | – | |||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | $ | 507 | ||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | – | $ | – | $ | – | $ | – | $ | – | $ | (7 | ) | $ | 1 | $ | 64 |
(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 $648 million at December 31, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $507 million and $443 million, respectively.
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2009 (in millions of U.S. dollars) |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | ||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | 45 | $ | 117 | $ | 109 | $ | 3 | $ | 21 | $ | 1,099 | $ | 87 | $ | 811 | ||||||||||||||||||||||||||||||
Transfers into (Out of) Level 3 |
4 | 8 | (37 | ) | – | – | (30 | ) | – | – | ||||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
5 | 17 | 12 | – | 9 | 191 | – | – | ||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
(1 | ) | 1 | (2 | ) | – | – | (149 | ) | (71 | ) | (368 | ) | |||||||||||||||||||||||||||||||||
Purchases, Sales, Issuances, and Settlements, Net |
6 | 25 | (61 | ) | – | (18 | ) | 38 | (2 | ) | – | |||||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | ||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | 2 | $ | 1 | $ | – | $ | – | $ | – | $ | (149 | ) | $ | (71 | ) | $ | (368 | ) |
(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 $559 million at December 31, 2009, and $910 million at December 31, 2008, which includes a fair value derivative adjustment of $443 million and $811 million, respectively.
c) 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, are not included in the amounts discussed 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:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||
Assets: |
||||||||||||||||||||||
Fixed maturities held to maturity |
||||||||||||||||||||||
U.S. Treasury and agency |
$ | 1,078 | $ | 1,126 | $ | 1,105 | $ | 1,127 | ||||||||||||||
Foreign |
935 | 930 | 1,049 | 1,013 | ||||||||||||||||||
Corporate securities |
2,338 | 2,337 | 2,361 | 2,313 | ||||||||||||||||||
Mortgage-backed securities |
2,949 | 3,036 | 3,811 | 3,846 | ||||||||||||||||||
States, municipalities, and political subdivisions |
1,147 | 1,176 | 1,175 | 1,162 | ||||||||||||||||||
Total fixed maturities held to maturity |
8,447 | 8,605 | 9,501 | 9,461 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||
Short-term debt |
1,251 | 1,251 | 1,300 | 1,300 | ||||||||||||||||||
Long-term debt |
3,360 | 3,823 | 3,358 | 3,690 | ||||||||||||||||||
Trust preferred securities |
309 | 404 | 309 | 364 | ||||||||||||||||||
Total liabilities |
$ | 4,920 | $ | 5,478 | $ | 4,967 | $ | 5,354 |
|
a) Consolidated reinsurance
ACE purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate ACE's reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge ACE's primary liability. The amounts for net premiums written and net premiums earned in the consolidated statements of operations are net of reinsurance. The following table presents direct, assumed, and ceded premiums:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Premiums written |
||||||||||||||||
Direct |
$ | 17,626 | $ | 15,887 | $ | 15,467 | ||||||||||
Assumed |
3,205 | 3,624 | 3,697 | |||||||||||||
Ceded |
(5,459 | ) | (5,803 | ) | (5,865 | ) | ||||||||||
Net |
$ | 15,372 | $ | 13,708 | $ | 13,299 | ||||||||||
Premiums earned |
||||||||||||||||
Direct |
$ | 17,534 | $ | 15,780 | $ | 15,415 | ||||||||||
Assumed |
3,349 | 3,516 | 3,768 | |||||||||||||
Ceded |
(5,496 | ) | (5,792 | ) | (5,943 | ) | ||||||||||
Net |
$ | 15,387 | $ | 13,504 | $ | 13,240 |
For the years ended December 31, 2011, 2010, and 2009, reinsurance recoveries on losses and loss expenses incurred were $3.3 billion, $3.3 billion, and $3.7 billion, respectively.
b) Reinsurance recoverable on ceded reinsurance
The following table presents the composition of reinsurance recoverable on losses and loss expenses:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance |
$ | 11,602 | $ | 12,149 | ||||||
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance |
787 | 722 | ||||||||
Net reinsurance recoverable on losses and loss expenses |
$ | 12,389 | $ | 12,871 |
We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the potential failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. We have established provisions for amounts estimated to be uncollectible. At December 31, 2011 and 2010, we recorded a provision for uncollectible reinsurance of $479 million and $530 million, respectively.
The following tables present a listing, at December 31, 2011, of the categories of ACE's reinsurers. The first category, largest reinsurers, represents all groups of reinsurers where the gross recoverable exceeds one percent of ACE's total shareholders' equity. The provision for uncollectible reinsurance for the largest reinsurers, other reinsurers rated A- or better, and other reinsurers with ratings lower than A- is principally based on an analysis of the credit quality of the reinsurer and collateral balances. Other pools and government agencies include amounts backed by certain state and federal agencies. In certain states, insurance companies are required by law to participate in these pools. Structured settlements include annuities purchased from life insurance companies to settle claims. Since we retain the ultimate liability in the event that the life company fails to pay, we reflect the amount as a liability and a recoverable/receivable for GAAP purposes. Other captives include companies established and owned by our insurance clients to assume a significant portion of their direct insurance risk from ACE (they are structured to allow clients to self-insure a portion of their insurance risk). It is generally our policy to obtain collateral equal to expected losses. Where appropriate, exceptions are granted but only with review and approval at a senior officer level. The final category, Other, includes amounts recoverable that are in dispute or are from companies that are in supervision, rehabilitation, or liquidation. We establish the provision for uncollectible reinsurance in this category based on a case by case analysis of individual situations including the merits of the underlying matter, credit and collateral analysis, and consideration of our collection experience in similar situations.
(in millions of U.S. dollars, except percentages) | 2011 | Provision | % of Gross |
|||||||||||||
Categories |
||||||||||||||||
Largest reinsurers |
$ | 6,230 | $ | 109 | 1.7% | |||||||||||
Other reinsurers balances rated A- or better |
3,109 | 57 | 1.8% | |||||||||||||
Other reinsurers balances with ratings lower than A- or not rated |
667 | 108 | 16.2% | |||||||||||||
Other pools and government agencies |
122 | 8 | 6.6% | |||||||||||||
Structured settlements |
585 | 22 | 3.8% | |||||||||||||
Other captives |
1,842 | 37 | 2.0% | |||||||||||||
Other |
313 | 138 | 44.1% | |||||||||||||
Total |
$ | 12,868 | $ | 479 | 3.7% |
Largest Reinsurers |
||||
Berkshire Hathaway Insurance Group |
Munich Re Group | Swiss Re Group | ||
Everest Re Group |
National Workers Compensation | Transatlantic Holdings | ||
HDI Re Group (Hanover Re) |
Reinsurance Pool |
XL Capital Group | ||
Lloyd's of London |
Partner Re |
c) 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.
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
GMDB |
||||||||||||||||
Net premiums earned |
$ | 98 | $ | 109 | $ | 104 | ||||||||||
Policy benefits and other reserve adjustments |
$ | 59 | $ | 99 | $ | 111 | ||||||||||
GLB |
||||||||||||||||
Net premiums earned |
$ | 163 | $ | 164 | $ | 159 | ||||||||||
Policy benefits and other reserve adjustments |
47 | 29 | 20 | |||||||||||||
Net realized gains (losses) |
(812 | ) | (64 | ) | 368 | |||||||||||
(Loss) gain recognized in income |
$ | (696 | ) | $ | 71 | $ | 507 | |||||||||
Net cash received |
$ | 161 | $ | 160 | $ | 156 | ||||||||||
Net (increase) decrease in liability |
$ | (857 | ) | $ | (89 | ) | $ | 351 |
At December 31, 2011, reported liabilities for GMDB and GLB reinsurance were $138 million and $1.5 billion, respectively, compared with $185 million and $648 million, respectively, at December 31, 2010. The reported liability for GLB reinsurance of $1.5 billion at December 31, 2011, and $648 million at December 31, 2010, includes a fair value derivative adjustment of $1.3 billion 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 annuitants' 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.
Variable Annuity Net Amount at Risk
(i) Reinsurance covering the GMDB risk only
At December 31, 2011 and 2010, the net amount at risk from reinsurance programs covering the GMDB risk only was $1.8 billion in both years.
For reinsurance programs covering the GMDB risk only, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
policy account values and guaranteed values are fixed at the valuation date (December 31, 2011 and 2010, respectively);
there are no lapses or withdrawals;
mortality according to 100 percent of the Annuity 2000 mortality table;
future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 1.5 and 2.5 percent; and
reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.
The total claim amount payable on reinsurance programs covering the GMDB risk only, if all the cedants' policyholders were to die immediately at December 31, 2011 was approximately $400 million. This takes into account all applicable reinsurance treaty claim limits.
The treaty claim limits function as a ceiling on the net amount at risk as equity markets fall. In addition, the claims payable if all of the policyholders were to die immediately declines as equity markets fall due to the specific nature of these claim limits, many of which are annual claim limits calculated as a percentage of the reinsured account value. There is also some impact due to a small portion of the GMDB reinsurance under which claims are positively correlated to equity markets (claims decrease as equity markets fall).
(ii) Reinsurance covering the GLB risk only
At December 31, 2011 and 2010, the net amount at risk from reinsurance programs covering the GLB risk only was $380 million and $30 million, respectively.
For reinsurance programs covering the GLB risk only, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
policy account values and guaranteed values are fixed at the valuation date (December 31, 2011 and 2010, respectively);
there are no deaths, lapses, or withdrawals;
policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the reinsurance contracts;
for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve;
future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 3.0 and 4.0 percent; and
reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.
The treaty claim limits cause the net amount at risk to increase at a declining rate as equity markets fall.
(iii) Reinsurance covering both the GMDB and GLB risks on the same underlying policyholders
At December 31, 2011 and 2010, the GMDB net amount at risk from reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders was $182 million and $145 million, respectively.
At December 31, 2011 and 2010, the GLB net amount at risk from reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders was $998 million and $619 million, respectively.
These net amounts at risk reflect the interaction between the two types of benefits on any single policyholder (eliminating double-counting), and therefore the net amounts at risk should be considered additive.
For reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
policy account values and guaranteed values are fixed at the valuation date (December 31, 2011 and 2010, respectively);
there are no lapses, or withdrawals;
mortality according to 100 percent of the Annuity 2000 mortality table;
policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the reinsurance contracts;
for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve;
future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 1.0 and 2.0 percent; and
reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.
The total claim amount payable on reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders, if all of the cedants' policyholders were to die immediately at December 31, 2011 was approximately $1.1 billion. This takes into account all applicable reinsurance treaty claim limits. Although there would be an increase in death claims resulting from 100 percent immediate mortality of all policyholders, the GLB claims would be zero.
The treaty limits control the increase in the GMDB net amount at risk as equity markets fall. The GMDB net amount at risk continues to grow as equity markets fall because most of these reinsurance treaties do not have annual claim limits calculated as a percentage of the underlying account value.
The treaty limits cause the GLB net amount at risk to increase at a declining rate as equity markets fall.
The average attained age of all policyholders under sections a), b), and c) above, weighted by the guaranteed value of each reinsured policy, is approximately 67 years.
|
Included in Goodwill and other intangible assets in the consolidated balance sheets at December 31, 2011, are goodwill of $4.2 billion and other intangible assets of $651 million.
The following table presents a roll-forward of Goodwill by business segment:
(in millions of U.S. dollars) | Insurance - North American |
Insurance - Overseas General |
Global Reinsurance |
Life | ACE Consolidated |
|||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,205 | $ | 1,497 | $ | 365 | $ | 747 | $ | 3,814 | ||||||||||||||||||
Acquisition of Rain and Hail |
135 | – | – | – | 135 | |||||||||||||||||||||||
Acquisition of Jerneh |
– | 94 | – | – | 94 | |||||||||||||||||||||||
Purchase price allocation adjustment |
– | – | – | 3 | 3 | |||||||||||||||||||||||
Foreign exchange revaluation and other |
11 | (27 | ) | – | – | (16 | ) | |||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,351 | $ | 1,564 | $ | 365 | $ | 750 | $ | 4,030 | ||||||||||||||||||
Purchase price allocation adjustment |
(12 | ) | 5 | – | – | (7 | ) | |||||||||||||||||||||
Acquisition of New York Life's Korea operations and Hong Kong operations |
– | – | – | 121 | 121 | |||||||||||||||||||||||
Acquisition of PMHC |
11 | – | – | – | 11 | |||||||||||||||||||||||
Acquisition of Rio Guayas |
– | 31 | – | – | 31 | |||||||||||||||||||||||
Foreign exchange revaluation and other |
– | 3 | – | (9 | ) | (6 | ) | |||||||||||||||||||||
Balance at December 31, 2011 |
$ | 1,350 | $ | 1,603 | $ | 365 | $ | 862 | $ | 4,180 |
Included in the other intangible assets balance at December 31, 2011, are intangible assets subject to amortization of $558 million and intangible assets not subject to amortization of $93 million. Intangible assets subject to amortization include agency relationships, software, client lists, renewal rights, and trademarks, primarily attributable to the acquisitions of Rain and Hail and Combined Insurance. The majority of the balance of intangible assets not subject to amortization relates to Lloyd's of London (Lloyd's) Syndicate 2488 capacity. Amortization expense related to other intangible assets amounted to $29 million, $9 million, and $11 million for the years ended December 31, 2011, 2010, and 2009, respectively. Amortization expense related to other intangible assets is estimated to be between approximately $31 million and $43 million for each of the next five fiscal years.
The following table presents a roll-forward of VOBA:
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Balance, beginning of year |
$ | 634 | $ | 748 | $ | 823 | ||||||||||
Acquisition of New York Life's Korea operations and Hong Kong operations |
120 | – | – | |||||||||||||
Amortization expense |
(105 | ) | (111 | ) | (130 | ) | ||||||||||
Foreign exchange revaluation |
(1 | ) | (3 | ) | 55 | |||||||||||
Balance, end of year |
$ | 648 | $ | 634 | $ | 748 |
The following table presents the estimated amortization expense related to VOBA for the next five years:
For the Year Ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 96 | ||
2013 |
86 | |||
2014 |
77 | |||
2015 |
70 | |||
2016 |
65 | |||
Total |
$ | 394 |
|
7. Unpaid losses and loss expenses
Property and casualty
ACE establishes reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. These reserves include estimates for both claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. The process of establishing reserves for P&C claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. We continually evaluate our estimate of reserves in light of developing information and in light of discussions and negotiations with our insureds. While we believe that our reserves for unpaid losses and loss expenses at December 31, 2011 are adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserves provided. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed.
The following table presents a reconciliation of unpaid losses and loss expenses:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Gross unpaid losses and loss expenses, beginning of year |
$ | 37,391 | $ | 37,783 | $ | 37,176 | ||||||||||
Reinsurance recoverable on unpaid losses(1) |
(12,149 | ) | (12,745 | ) | (12,935 | ) | ||||||||||
Net unpaid losses and loss expenses, beginning of year |
25,242 | 25,038 | 24,241 | |||||||||||||
Acquisition of subsidiaries |
92 | 145 | – | |||||||||||||
Total |
25,334 | 25,183 | 24,241 | |||||||||||||
Net losses and loss expenses incurred in respect of losses occurring in: |
||||||||||||||||
Current year |
10,076 | 8,082 | 7,998 | |||||||||||||
Prior years |
(556 | ) | (503 | ) | (576 | ) | ||||||||||
Total |
9,520 | 7,579 | 7,422 | |||||||||||||
Net losses and loss expenses paid in respect of losses occurring in: |
||||||||||||||||
Current year |
4,209 | 2,689 | 2,493 | |||||||||||||
Prior years |
4,657 | 4,724 | 4,455 | |||||||||||||
Total |
8,866 | 7,413 | 6,948 | |||||||||||||
Foreign currency revaluation and other |
(113 | ) | (107 | ) | 323 | |||||||||||
Net unpaid losses and loss expenses, end of year |
25,875 | 25,242 | 25,038 | |||||||||||||
Reinsurance recoverable on unpaid losses(1) |
11,602 | 12,149 | 12,745 | |||||||||||||
Gross unpaid losses and loss expenses, end of year |
$ | 37,477 | $ | 37,391 | $ | 37,783 |
(1) Net of provision for uncollectible reinsurance.
Net losses and loss expenses incurred includes $556 million, $503 million, and $576 million, of net favorable prior period development in the years ended December 31, 2011, 2010, and 2009, respectively. The following is a summary of prior period development for the periods indicated. The remaining net development for long-tail and short-tail business for each segment comprises numerous favorable and adverse movements across lines and accident years.
Insurance – North American
Insurance – North American's active operations experienced net favorable prior period development of $297 million in 2011, representing 1.9 percent of net unpaid reserves at December 31, 2010. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $186 million on long-tail business included favorable development of $82 million in the directors and officers (D&O) portfolio affecting the 2006 and prior accident years; $54 million in the excess casualty business affecting the 2005 and prior accident years; $43 million on medical risk operations; $28 million on the national accounts portfolio (commercial auto liability, general liability, and workers' compensation lines of business); and $26 million within the financial solutions business relating to a single account on the 2002 through 2010 accident years. Additional favorable development included $26 million in the foreign casualty product affecting the 2007 and prior accident years; and $21 million on surety business primarily impacting the 2009 year. Partially offsetting this favorable development was adverse development of $40 million on errors and omissions coverage primarily affecting the 2007 and 2008 accident years and adverse development of $29 million within the environmental liability product line concentrated in the 2005 through 2007 accident years. Net prior period development also included adverse development of $25 million on other lines across a number of accident years, none of which was significant. Net favorable development of $111 million on short-tail business included favorable development of $48 million in the property portfolios primarily affecting the 2009 and 2010 accident years and favorable development of $63 million on other lines across a number of accident years, primarily following better than expected loss emergence.
Insurance – North American's runoff operations experienced net adverse prior period development of $102 million in the Westchester and Brandywine runoff operations during 2011, which was the net result of adverse movements impacting the accident years 2000 and prior, representing 0.6 percent of net unpaid reserves at December 31, 2010. Net adverse prior period development was driven by adverse development of $82 million related to the completion of the reserve review during 2011 and $17 million of unallocated loss adjustment expenses due to operating expenses reserved and paid during the current year. Net prior period development also included $3 million of adverse development on other lines across a number of accident years, none of which was significant.
Insurance – North American's active operations experienced net favorable prior period development of $239 million in 2010, representing 1.5 percent of net unpaid reserves at December 31, 2009. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $102 million on long-tail business included $49 million within the financial solutions business, primarily in the 2000 and prior accident years; favorable development of $105 million in the D&O and E&O portfolios, primarily in the 2006 and prior accident years partially offset by adverse movements in the 2007-2009 years; and favorable development of $54 million on the national accounts portfolio primarily in the 2005, 2006, and 2009 accident years. Partially offsetting this favorable development was adverse development of $91 million in excess casualty businesses principally arising in the 2007 accident year and adverse development of $30 million in small and middle market guaranteed cost workers' compensation portfolios on accident years 2008 and subsequent. Net prior period development also included favorable development of $15 million on other lines across a number of accident years, due primarily to better than expected loss emergence. Net favorable development of $137 million on short-tail business included favorable development of $41 million in the crop/hail business associated with recording the most recent bordereaux for the 2009 and prior crop years and favorable development of $96 million in property, aviation, inland and recreational marine, political risk, and other short-tailed exposures principally in accident years 2007-2009.
Insurance – North American's runoff operations experienced net adverse prior period development of $132 million in 2010, representing 0.8 percent of net unpaid reserves at December 31, 2009. Net prior period development was the net result of several underlying favorable and adverse movements, including adverse development of $114 million in the Westchester and Brandywine runoff operations, impacting accident years 1999 and prior, including $89 million related to the completion of the reserve review during 2010, and adverse development of $18 million on runoff CIS workers' compensation following emergence of higher than expected medical costs impacting accident years 2000 and prior.
Insurance – North American experienced net favorable prior period development of $179 million in 2009, representing 1.2 percent of the segment's net unpaid reserves at December 31, 2008.
Insurance – Overseas General
Insurance – Overseas General experienced net favorable prior period development of $290 million in 2011 representing 4.2 percent of net unpaid reserves at December 31, 2010. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $154 million on long-tail business included favorable development of $337 million in casualty (primary and excess) and financial lines for accident years 2007 and prior, and adverse development of $183 million in the casualty (primary and excess) and financial lines book for accident years 2008-2010. Net favorable development of $136 million on short-tail business included property, marine, A&H, and energy lines across multiple geographical regions, and within both retail and wholesale operations, principally on accident years 2008-2009.
Insurance – Overseas General experienced net favorable prior period development of $290 million in 2010 representing 4.3 percent of net unpaid reserves at December 31, 2009. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $159 million on long-tail business included favorable development of $241 million in casualty (primary and excess) and financial lines for accident years 2006 and prior, and adverse development of $82 million in the casualty (primary and excess) and financial lines book for accident years 2007-2009. Net favorable development of $131 million on short-tail business included property, marine, A&H, and energy lines across multiple geographical regions, and within both retail and wholesale operations, principally on accident years 2007-2009.
Insurance – Overseas General experienced net favorable prior period development of $255 million in 2009, representing 4.2 percent of the segment's net unpaid reserves at December 31, 2008.
Global Reinsurance
Global Reinsurance experienced net favorable prior period development of $71 million in 2011 representing 3.1 percent of net unpaid reserves at December 31, 2010. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $58 million on long-tail business included net favorable development of $79 million principally in treaty years 2007 and prior across a number of portfolios (professional liability, D&O, casualty, and medical malpractice). Net favorable development of $13 million on short-tail business, primarily in treaty years 2009 and prior across property lines, included property catastrophe, trade credit, and surety.
Global Reinsurance experienced net favorable prior period development of $106 million in 2010 representing 4.7 percent of net unpaid reserves at December 31, 2009. Net prior period development was the net result of several underlying favorable and adverse movements. Net favorable development of $72 million on long-tail business included net favorable development of $96 million principally in treaty years 2003-2006 across a number of portfolios (professional liability, D&O, casualty, and medical malpractice). Net favorable development of $34 million on short-tail business, primarily in treaty years 2003-2008 across property lines, included property catastrophe, trade credit, and surety.
Global Reinsurance experienced net favorable prior period development of $142 million in 2009, representing 5.6 percent of the segment's net unpaid reserves at December 31, 2008.
Asbestos and environmental (A&E) and other run-off liabilities
Included in liabilities for losses and loss expenses are amounts for A&E (A&E liabilities). The A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of A&E liabilities is particularly sensitive to future changes in the legal, social, and economic environment. ACE has not assumed any such future changes in setting the value of its A&E reserves, which include provisions for both reported and IBNR claims.
ACE's exposure to A&E claims principally arises out of liabilities acquired when it purchased Westchester Specialty in 1998 and CIGNA's P&C business in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to ACE's acquisition of CIGNA's P&C business, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the Restructuring) which included the division of Insurance Company of North America (INA) into two separate corporations:
(1) An active insurance company that retained the INA name and continued to write P&C business; and
(2) An inactive run-off company, now called Century Indemnity Company (Century).
As a result of the division, predominantly all A&E and certain other liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA.
As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century. Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings. ACE acquired Brandywine Holdings and its various subsidiaries as part of the 1999 acquisition of CIGNA's P&C business. For more information, refer to "Brandywine Run-Off Entities" below.
During 2011, we conducted our annual internal, ground-up review of our consolidated A&E liabilities as of December 31, 2010. As a result of the internal review, we increased our net loss reserves in 2011 for the Brandywine operations, including A&E, by $76 million, while the gross loss reserves increased by $241 million. In addition, we decreased gross loss reserves for Westchester Specialty's A&E and other liabilities by $29 million, while the net loss reserves increased by $6 million. An internal review was also conducted during 2010 of consolidated A&E liabilities as of December 31, 2009. As a result of that internal review, we increased net loss reserves in 2010 for the Brandywine operations, including A&E, by $84 million, while the gross loss reserves increased by $247 million.
In 2010, in addition to our annual internal review, a team of external actuaries performed an evaluation as to the adequacy of Century's reserves. This external review was conducted in accordance with the Brandywine Restructuring Order, which requires that an independent actuarial review of Century's reserves be completed every two years. Management takes full responsibility for the estimation of its A&E liabilities. The difference between the conclusions of the internal and external reviews is an immaterial amount to reserves on a net basis after giving effect to the reserve increases for the Brandywine operations described above.
ACE's A&E reserves are not discounted for GAAP reporting and do not reflect any anticipated future changes in the legal, social, or economic environment, or any benefit from future legislative reforms.
The table below presents a roll-forward of consolidated A&E loss reserves (excluding other run-off liabilities), allocated loss expense reserves for A&E exposures, and the provision for uncollectible paid and unpaid reinsurance recoverables:
Asbestos | Environmental | Total | ||||||||||||||||||||||||||||||||
(in millions of U.S. dollars) | Gross | Net | Gross | Net | Gross | Net | ||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 2,130 | $ | 1,120 | $ | 316 | $ | 215 | $ | 2,446 | $ | 1,335 | ||||||||||||||||||||||
Incurred activity |
148 | 67 | 66 | 37 | 214 | 104 | ||||||||||||||||||||||||||||
Payment activity |
(311 | ) | (168 | ) | (99 | ) | (75 | ) | (410 | ) | (243 | ) | ||||||||||||||||||||||
Balance at December 31, 2011 |
$ | 1,967 | $ | 1,019 | $ | 283 | $ | 177 | $ | 2,250 | $ | 1,196 |
The A&E net loss reserves including allocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2011, of $1.2 billion shown in the table above comprise $909 million in reserves in respect of Brandywine operations, $143 million of reserves held by Westchester Specialty, $61 million of reserves held by ACE Bermuda, and $83 million of reserves held by Insurance – Overseas General. The incurred activity of $104 million is the result of adverse activity in Brandywine and Westchester of $59 million and $48 million, respectively, offset by favorable activity in Insurance – Overseas General of $3 million on the provision for uncollectible reinsurance.
The net figures in the above table reflect third-party reinsurance other than reinsurance provided by NICO under two aggregate excess of loss contracts described below (collectively, the NICO contracts). ACE excludes the NICO contracts as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependent on the timing of the payment of the related claims. ACE's ability to make an estimate of this split is not practicable. ACE believes, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and non-A&E, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for the net A&E incurred losses and allocated loss expenses within the limits of coverage and above ACE's retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participation by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.
Brandywine run-off – impact of NICO contracts on ACE's run-off liabilities
As part of the acquisition of CIGNA's P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and allocated loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO contract (the Brandywine NICO Agreement) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in the fourth quarter of 2002.
The following table presents a roll-forward of net loss reserves, allocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement for the year ended December 31, 2011:
Brandywine | NICO Coverage | Net of NICO Coverage |
||||||||||||||||||||||||||
(in millions of U.S. dollars) | A&E | Other(1) | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,044 | $ | 881 | $ | 1,925 | $ | 928 | $ | 997 | ||||||||||||||||||
Incurred activity |
59 | 9 | 68 | |
– |
|
68 | |||||||||||||||||||||
Paid activity |
(194 | ) | (98 | ) | (292 | ) | (304 | ) | 12 | |||||||||||||||||||
Balance at December 31, 2011 |
$ | 909 | $ | 792 | $ | 1,701 | $ | 624 | $ | 1,077 |
(1) Other consists primarily of workers' compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business.
The incurred activity of $68 million primarily relates to the internal review of consolidated A&E liabilities as discussed above.
Westchester Specialty – impact of NICO contracts on ACE's run-off liabilities
As part of the Westchester Specialty acquisition in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million (the 1998 NICO Agreement). NICO has also provided an 85 percent pro-rata share of $150 million of reinsurance protection on losses and allocated loss adjustment expenses incurred on or before December 31, 1992, in excess of a retention of $755 million (the 1992 NICO Agreement). At December 31, 2011, the remaining unused incurred limit under the 1998 NICO Agreement was $504 million, which is only available for losses and loss adjustment expenses. The 1992 NICO Agreement was exhausted on a paid basis in 2009.
The following table presents a roll-forward of net loss reserves, allocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of 1996 and prior Westchester Specialty operations that are the subject business of the NICO covers for the year ended December 31, 2011:
Westchester Specialty | NICO Coverage | Net of NICO Coverage |
||||||||||||||||||||||||||
(in millions of U.S. dollars) | A&E | Other | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 122 | $ | 87 | $ | 209 | $ | 186 | $ | 23 | ||||||||||||||||||
Incurred activity |
48 | (29 | ) | 19 | 14 | 5 | ||||||||||||||||||||||
Paid activity |
(27 | ) | (4 | ) | (31 | ) | (35 | ) | 4 | |||||||||||||||||||
Balance at December 31, 2011 |
$ | 143 | $ | 54 | $ | 197 | $ | 165 | $ | 32 |
Brandywine run-off entities
In addition to housing a significant portion of ACE's A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. ACE's Brandywine operations comprise Century (a Pennsylvania insurer) and Century International Reinsurance Company Ltd., a Bermuda insurer (CIRC). The Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.
During the three months ended June 30, 2010, in order to better align assets and liabilities, Brandywine Holdings Corporation transferred its ownership of CIRC stock to Century. Thus, Century (which reinsures substantially all of CIRC's liabilities) became the direct parent of CIRC and Century's statutory surplus rose above the $25 million required by the 1996 Pennsylvania Insurance Department Restructuring Order. The realignment of CIRC as a subsidiary of Century increased Century's surplus and strengthened its ability to meet its future obligations, including its obligations as a reinsurer of the ACE active companies. The transfer of CIRC stock increased Century's assets by $169 million and resulted in (a) the elimination of Century's reserve cession to the aggregate excess of loss agreement, described below (the XOL) and (b) an increase in Century's surplus by $26 million to $51 million as of June 30, 2010. Century's increased statutory surplus position allowed it to satisfy certain balances payable to ACE active companies under another affiliate reinsurance agreement. Due to a contractual provision, these balances were prohibited from being paid to ACE active companies while Century was ceding statutory reserves under the XOL.
The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of the XOL.
INA Financial Corporation established and funded a dividend retention fund (the Dividend Retention Fund) consisting of $50 million plus investment earnings. Pursuant to an interpretation of the Brandywine Restructuring Order, the full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. Under the Restructuring Order, while any obligation to maintain the Dividend Retention Fund is in effect, to the extent dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million. During 2011 and 2010, $35 million and $15 million, respectively, were withheld from such dividends and deposited in the Dividend Retention Fund by INA Financial Corporation. Effective January 28, 2011, the Pennsylvania Insurance Department clarified the scope of the Dividend Retention Fund that capital contributions from the Dividend Retention Fund to Century shall not be required until the XOL Agreement has less than $200 million of capacity remaining on an incurred basis for statutory reporting purposes. The amount of the capital contribution shall be the lesser of the amount necessary to restore the XOL Agreement capacity to $200 million or the Dividend Retention Fund balance. The Dividend Retention Fund may not be terminated without prior written approval from the Pennsylvania Insurance Commissioner.
In addition, an ACE INA insurance subsidiary provided reinsurance coverage to Century in the amount of $800 million under an XOL, triggered if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due.
Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at December 31, 2011 was $25 million and approximately $146 million in statutory-basis losses have been ceded to the XOL on an inception-to-date basis. Century reports the amount ceded under the XOL in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its liabilities, including certain asbestos related and environmental pollution liabilities. For GAAP reporting purposes, intercompany reinsurance recoverables related to the XOL are eliminated upon consolidation. To estimate ACE's remaining claim exposure under the XOL on an undiscounted basis, ACE adjusts the statutory cession to exclude the discount embedded in statutory loss reserves. At December 31, 2011, approximately $440 million in undiscounted losses were ceded under the XOL, leaving a remaining limit of coverage under that agreement of approximately $360 million. At December 31, 2010, the remaining limit of coverage under the agreement was $410 million on an undiscounted basis.
While ACE believes it has no legal obligation to fund losses above the XOL limit of coverage, ACE's consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine companies remain consolidated subsidiaries of ACE.
Uncertainties relating to ACE's ultimate Brandywine exposure
In addition to the Dividend Retention Fund and XOL commitments described above, certain ACE entities are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. At December 31, 2011 and 2010, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $877 million and $881 million, respectively. At December 31, 2011 and 2010, Century's carried gross reserves (including reserves ceded by the active ACE companies to Century) were $2.4 billion and $2.7 billion, respectively. ACE believes the intercompany reinsurance recoverables, which relate to liabilities payable over many years (i.e., 25 years or more), are not impaired. A substantial portion of the liabilities ceded to Century by its affiliates have, in turn, been ceded by Century to NICO and, at December 31, 2011 and 2010, remaining cover on a paid loss basis was approximately $624 million and $928 million, respectively. Should Century's loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables. Losses ceded by Century to the active ACE companies and other amounts owed to Century by the active ACE companies were, in the aggregate, approximately $526 million and $453 million at December 31, 2011 and 2010, respectively.
|
Under Swiss law, a resident company is subject to income tax at the federal, cantonal, and communal levels that is levied on net worldwide income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. ACE Limited is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, ACE Limited is subject to Swiss income tax only at the federal level. Furthermore, participation relief (i.e., tax relief) is granted to ACE Limited at the federal level for qualifying dividend income and capital gains related to the sale of qualifying participations (i.e., subsidiaries). It is expected that the participation relief will result in a full exemption of participation income from federal income tax. ACE Limited is resident in the Canton and City of Zurich and, as such, is subject to an annual cantonal and communal capital tax on the taxable equity of ACE Limited in Switzerland.
ACE has two Swiss operating subsidiaries resident in the Canton and City of Zurich, an insurance company, ACE Insurance (Switzerland) Limited, which, in turn, owns a reinsurance company, ACE Reinsurance (Switzerland) Limited. Both are subject to federal, cantonal, and communal income tax and to annual cantonal and communal capital tax.
Under current Bermuda law, ACE Limited and its Bermuda subsidiaries are not required to pay any taxes on income or capital gains. If a Bermuda law were enacted that would impose taxes on income or capital gains, ACE Limited and the Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that would exempt such companies from Bermudian taxation until March 2035.
Income from ACE's operations at Lloyd's is subject to United Kingdom corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd's syndicates. Lloyd's has a closing agreement with the Internal Revenue Service (IRS) whereby the amount of tax due on this business is calculated by Lloyd's and remitted directly to the IRS. These amounts are then charged to the accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. ACE's Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.
ACE Group Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. Combined Insurance and its subsidiaries will file a separate consolidated U.S. tax return for tax years prior to 2014. Should ACE Group Holdings pay a dividend to ACE, withholding taxes would apply. Currently, however, no withholding taxes are accrued with respect to such un-remitted earnings as management has no intention of remitting these earnings. The cumulative amount that would be subject to withholding tax, if distributed, as well as the determination of the associated tax liability are not practicable to compute; however, such amount would be material to ACE. Certain international operations of ACE are also subject to income taxes imposed by the jurisdictions in which they operate.
ACE is not subject to income taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations, or treaties which might require ACE to change the way it operates or become subject to taxation.
ACE's domestic operations are in Switzerland, the jurisdiction where we are legally organized, incorporated, and registered. Domestic operations for the years ended December 31, 2011, 2010, and 2009 are not considered significant to the consolidated income before income taxes for the respective periods.
The following table presents the provision for income taxes:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Current tax expense |
$ | 485 | $ | 443 | $ | 547 | ||||||||||
Deferred tax expense (benefit) |
21 | 116 | (19 | ) | ||||||||||||
Provision for income taxes |
$ | 506 | $ | 559 | $ | 528 |
The most significant jurisdictions contributing to the overall taxation of ACE are calculated using the following rates: Switzerland 7.83 percent, Bermuda 0.0 percent, U.S. 35.0 percent, and U.K. 26.0 percent. The following table presents a reconciliation of the difference between the provision for income taxes and the expected tax provision at the Swiss statutory income tax rate:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Expected tax provision at Swiss statutory tax rate |
$ | 164 | $ | 287 | $ | 241 | ||||||||||
Permanent differences: |
||||||||||||||||
Taxes on earnings subject to rate other than Swiss statutory tax rate |
323 | 327 | 319 | |||||||||||||
Tax-exempt interest and dividends received deduction, net of proration |
(21 | ) | (20 | ) | (25 | ) | ||||||||||
Net withholding taxes |
19 | 15 | 14 | |||||||||||||
Change in valuation allowance |
(2 | ) | (3 | ) | (48 | ) | ||||||||||
Non-taxable acquisition gain |
– | (61 | ) | – | ||||||||||||
Other |
23 | 14 | 27 | |||||||||||||
Total provision for income taxes |
$ | 506 | $ | 559 | $ | 528 |
The following table presents the components of the net deferred tax assets:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Deferred tax assets: |
||||||||||
Loss reserve discount |
$ | 933 | $ | 852 | ||||||
Unearned premiums reserve |
85 | 87 | ||||||||
Foreign tax credits |
1,074 | 952 | ||||||||
Investments |
67 | 51 | ||||||||
Provision for uncollectible balances |
113 | 132 | ||||||||
Loss carry-forwards |
43 | 57 | ||||||||
Other, net |
31 | 114 | ||||||||
Cumulative translation adjustment |
5 | 2 | ||||||||
Total deferred tax assets |
2,351 | 2,247 | ||||||||
Deferred tax liabilities: |
||||||||||
Deferred policy acquisition costs |
107 | 100 | ||||||||
VOBA and other intangible assets |
373 | 367 | ||||||||
Un-remitted foreign earnings |
810 | 718 | ||||||||
Unrealized appreciation on investments |
392 | 262 | ||||||||
Total deferred tax liabilities |
1,682 | 1,447 | ||||||||
Valuation allowance |
57 | 31 | ||||||||
Net deferred tax assets |
$ | 612 | $ | 769 |
The valuation allowance of $57 million at December 31, 2011, and $31 million at December 31, 2010, reflects management's assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income and the inability of ACE Group Holdings and its subsidiaries to utilize foreign tax credits. Adjustments to the valuation allowance are made when there is a change in management's assessment of the amount of deferred tax assets that are realizable.
At December 31, 2011, ACE has net operating loss carry-forwards of $172 million which, if unutilized, will expire in the years 2012-2031, and a foreign tax credit carry-forward in the amount of $42 million which, if unutilized, will expire in the years 2015-2019.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Balance, beginning of year |
$ | 139 | $ | 155 | ||||||
Additions based on tax positions related to the current year |
1 | 1 | ||||||||
Reductions for tax positions of prior years |
(6 | ) | (17 | ) | ||||||
Balance, end of year |
$ | 134 | $ | 139 |
Included in the balance at December 31, 2011 and 2010, is $1 million of unrecognized tax benefits for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, an unfavorable resolution of these temporary items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Consequently, the total amount of unrecognized tax benefits at December 31, 2011, that would affect the effective tax rate, if recognized, is $133 million.
ACE recognizes accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. Tax-related interest and penalties reported in the consolidated statements of operations for the years ended December 31, 2011, 2010, and 2009 were $3 million, $(1) million, and $6 million, respectively. At December 31, 2011 and 2010, ACE recorded $22 million and $19 million, respectively, in liabilities for tax-related interest in our consolidated balance sheets.
In 2010, ACE reached final settlement with the IRS Appeals Division (Appeals) regarding its federal tax returns for 2002, 2003, and 2004. As a result of the settlement, the amount of unrecognized tax benefits including interest 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 Appeals. ACE believes that it is reasonably likely that a settlement will be reached with Appeals on these tax years during 2012. The IRS commenced its field examination of ACE's federal tax returns for 2008 and 2009 during January 2011. It is reasonably possible that over the next twelve months, the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations of taxing authorities and from the closing of tax statutes of limitations. In particular, the resolution of appeals and negotiations with taxing authorities cannot be predicted with reasonable precision in advance of final resolution although favorable settlements have been reached in prior periods. With few exceptions, ACE is no longer subject to state and local or non-U.S. income tax examinations for years before 2005.
|
Debt outstanding consisted of the following:
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Short-term debt |
||||||||||
ACE Limited revolving credit facility |
$ | – | $ | 300 | ||||||
Reverse repurchase agreements |
1,251 | 1,000 | ||||||||
$ | 1,251 | $ | 1,300 | |||||||
Long-term debt |
||||||||||
ACE INA senior notes due 2014 |
$ | 500 | $ | 500 | ||||||
ACE INA senior notes due 2015 |
449 | 447 | ||||||||
ACE INA senior notes due 2015 |
699 | 699 | ||||||||
ACE INA senior notes due 2017 |
500 | 500 | ||||||||
ACE INA senior notes due 2018 |
300 | 300 | ||||||||
ACE INA senior notes due 2019 |
500 | 500 | ||||||||
ACE INA debentures due 2029 |
100 | 100 | ||||||||
ACE INA senior notes due 2036 |
299 | 299 | ||||||||
Other |
13 | 13 | ||||||||
$ | 3,360 | $ | 3,358 | |||||||
Trust Preferred Securities |
||||||||||
ACE INA capital securities due 2030 |
$ | 309 | $ | 309 |
a) Short-term debt
ACE has executed reverse repurchase agreements with certain counterparties under which ACE agreed to sell securities and repurchase them at a future date for a predetermined price. At December 31, 2011, there were $1.3 billion of reverse repurchase agreements outstanding with a weighted average interest rate of 0.32 percent.
b) ACE INA notes and debentures
In June 2004, ACE INA issued $500 million of 5.875 percent senior notes due June 2014. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In May 2008, ACE INA issued $450 million of 5.6 percent senior notes due May 2015. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.35 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In November 2010, ACE INA issued $700 million of 2.6 percent senior notes due November 2015. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In February 2007, ACE INA issued $500 million of 5.7 percent senior notes due February 2017. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In February 2008, as part of the financing of the Combined Insurance acquisition, ACE INA issued $300 million of 5.8 percent senior notes due March 2018. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.35 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In June 2009, ACE INA issued $500 million of 5.9 percent senior notes due June 2019. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.40 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In August 1999, ACE INA issued $100 million of 8.875 percent debentures due August 2029. Subject to certain exceptions, the debentures are not redeemable before maturity and do not have the benefit of any sinking fund. These unsecured debentures are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE INA's other senior indebtedness.
In May 2006, ACE INA issued $300 million of 6.7 percent notes due May 2036. These notes are redeemable at any time at ACE INA's option subject to a "make-whole" premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
c) Other long-term debt
In August 2005, ACE American borrowed $10 million from the Pennsylvania Industrial Development Authority (PIDA) at a rate of 2.75 percent due September 2020. The proceeds from PIDA were restricted for purposes of defraying construction costs of a new office building. Principal and interest are payable on a monthly basis. The current balance outstanding is $6 million.
In addition, in 1999, ACE American assumed a CIGNA loan of $8 million borrowed from the City of Philadelphia under the Urban Development Action Grant with an imputed rate of 7.1 percent due December 2019. The current amount outstanding is $7 million.
d) ACE INA capital securities
In March 2000, ACE Capital Trust II, a Delaware statutory business trust, publicly issued $300 million of 9.7 percent Capital Securities (the Capital Securities). At the same time, ACE INA purchased $9.2 million of common securities of ACE Capital Trust II.
The Capital Securities mature in April 2030. Distributions on the Capital Securities are payable semi-annually. ACE Capital Trust II may defer these payments for up to ten consecutive semi-annual periods (but no later than April 1, 2030). Any deferred payments would accrue interest compounded semi-annually if ACE INA defers interest on the Subordinated Debentures due 2030 (as defined below).
The sole assets of ACE Capital Trust II consist of $309 million principal amount of 9.7 percent Junior Subordinated Deferrable Interest Debentures (the Subordinated Debentures) issued by ACE INA. The Subordinated Debentures mature in April 2030. Interest on the Subordinated Debentures is payable semi-annually. ACE INA may defer such interest payments (but no later than April 1, 2030), with such deferred payments accruing interest compounded semi-annually. ACE INA may redeem the Subordinated Debentures in the event certain changes in tax or investment company law occur at a redemption price equal to accrued and unpaid interest to the redemption date plus the greater of (i) 100 percent of the principal amount thereof, or (ii) the sum of the present value of scheduled payments of principal and interest on the debentures from the redemption date to April 1, 2030. The Capital Securities and the ACE Capital Trust II Common Securities will be redeemed upon repayment of the Subordinated Debentures.
ACE Limited has guaranteed, on a subordinated basis, ACE INA's obligations under the Subordinated Debentures, and distributions and other payments due on the Capital Securities. These guarantees, when taken together with ACE's obligations under expense agreements entered into with ACE Capital Trust II, provide a full and unconditional guarantee of amounts due on the Capital Securities.
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10. 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 December 31, 2011, 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:
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||
(in millions of U.S. dollars) | Consolidated Balance Sheet Location |
Fair Value | Notional Value/ Payment Provision |
Fair Value | Notional Value/ Payment Provision |
|||||||||||||||||||||||
Investment and embedded derivative instruments |
||||||||||||||||||||||||||||
Foreign currency forward contracts |
AP | $ | 7 | $ | 674 | $ | 3 | $ | 729 | |||||||||||||||||||
Futures contracts on money market instruments |
AP | 7 | 10,476 | 3 | 4,297 | |||||||||||||||||||||||
Futures contracts on notes and bonds |
AP | (4 | ) | 1,055 | 5 | 676 | ||||||||||||||||||||||
Options on money market instruments |
AP | – | 292 | – | 1 | |||||||||||||||||||||||
Convertible bonds |
FM AFS | 357 | 353 | 416 | 382 | |||||||||||||||||||||||
TBAs |
FM AFS | 60 | 56 | 101 | 98 | |||||||||||||||||||||||
$ | 427 | $ | 12,906 | $ | 528 | $ | 6,183 | |||||||||||||||||||||
Other derivative instruments |
||||||||||||||||||||||||||||
Futures contracts on equities(1) |
AP | $ | (16 | ) | $ | 1,367 | $ | (25 | ) | $ | 1,069 | |||||||||||||||||
Options on equity market indices(1) |
AP | 54 | 250 | 46 | 250 | |||||||||||||||||||||||
Credit default swaps |
AP | 3 | 350 | 4 | 350 | |||||||||||||||||||||||
Other |
AP | – | 6 | – | 17 | |||||||||||||||||||||||
$ | 41 | $ | 1,973 | $ | 25 | $ | 1,686 | |||||||||||||||||||||
GLB(2) |
AP/FPB | $ | (1,505 | ) | $ | 1,378 | $ | (648 | ) | $ | 649 |
(1) Related to GMDB and GLB blocks of business.
(2) Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 5 c) 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 statements of operations:
Years Ended December 31 | ||||||||||
(in millions of U.S. dollars) |
2011 |
2010 |
||||||||
Investment and embedded derivative instruments |
||||||||||
Foreign currency forward contracts |
$ | 6 | $ | 21 | ||||||
All other futures contracts and options |
(98 | ) | 29 | |||||||
Convertible bonds |
(50 | ) | 7 | |||||||
TBAs |
(1 | ) | 1 | |||||||
Total investment and embedded derivative instruments |
$ | (143 | ) | $ | 58 | |||||
GLB and other derivative instruments |
||||||||||
GLB(1) |
$ | (779 | ) | $ | (28 | ) | ||||
Futures contracts on equities(2) |
(12 | ) | (140 | ) | ||||||
Options on equity market indices(2) |
8 | (10 | ) | |||||||
Interest rate swaps |
– | (21 | ) | |||||||
Credit default swaps |
(4 | ) | 1 | |||||||
Other |
– | 1 | ||||||||
Total GLB and other derivative instruments |
$ | (787 | ) | $ | (197 | ) | ||||
$ | (930 | ) | $ | (139 | ) |
(1) Excludes foreign exchange gains (losses) related to GLB.
(2) Related to GMDB and GLB blocks of business.
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 futures contracts on money market instruments, notes and bonds are used in fixed maturity portfolios to more efficiently manage duration, as substitutes for ownership of the money market instruments, 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
We use interest rate swaps related to certain debt issuances for the purpose of either fixing and/or reducing borrowing costs.
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller pays the protection buyer the difference between the fair value of assets and the principal amount. 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, we make a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, we account for our position 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) Concentrations of credit risk
Our investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuer. We believe that there are no significant concentrations of credit risk associated with our investments. Our three largest exposures by issuer at December 31, 2011, were General Electric Company, JP Morgan Chase & Co., and Citigroup Inc. Our largest exposure by industry at December 31, 2011, was financial services.
We market our insurance and reinsurance worldwide primarily through insurance and reinsurance brokers. We assume a degree of credit risk associated with brokers with whom we transact business. During the year ended December 31, 2011, approximately 12 percent of our gross premiums written were generated from or placed by Marsh, Inc. and its affiliates and 10 percent by Aon Corporation and its affiliates. Both of these entities are large, well established companies and there are no indications that either of them is financially troubled at December 31, 2011. No other broker and no one insured or reinsured accounted for more than ten percent of gross premiums written in the three years ended December 31, 2011, 2010, and 2009.
c) Other investments
At December 31, 2011, included in Other investments in the consolidated balance sheet are investments in limited partnerships and partially-owned investment companies with a carrying value of $1,435 million. In connection with these investments, we have commitments that may require funding of up to $777 million over the next several years.
d) Credit facilities
We have a $500 million unsecured revolving credit facility expiring in November 2012 available for general corporate purposes and the issuance of LOCs. Outstanding LOCs issued under this facility were $55 million at December 31, 2011. This facility requires that ACE Limited and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant, which have been met at December 31, 2011.
e) Letters of credit
We have a $1 billion unsecured operational LOC facility expiring in November 2012. At December 31, 2011, $948 million of this facility was utilized. We also have a $500 million unsecured operational LOC facility expiring in September 2014. At December 31, 2011, this facility was fully utilized.
To satisfy funding requirements of ACE's Lloyd's Syndicate 2488 through 2012, we have a series of four bilateral uncollateralized LOC facilities totaling $400 million. LOCs issued under these facilities will expire no earlier than December 2015. At December 31, 2011, $392 million of this facility was utilized.
These facilities require that ACE Limited and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant, which have been met at December 31, 2011.
f) Legal proceedings
(i) Claims and other litigation
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we 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, among other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures. In the opinion of management, our ultimate liability for these matters is not likely to have a material adverse effect on our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period.
(ii) Business practices litigation
ACE Limited, 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 Limited has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE Limited, 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 the ACE defendants: 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, the ACE defendants, 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 and stayed the case. On October 17, 2011 the Court lifted the stay and indicated that it will issue a new scheduling order in the coming months. The Court has not yet finally approved the proposed class settlement, and has not yet indicated when it will finally resolve all issues such that the ACE defendants may re-file their motions to dismiss.
As of February 23, 2012, 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"). On October 17, 2011 the Court lifted the stay and indicated that it will issue a new scheduling order in the coming months.
New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; D.N.J.), was originally filed in the Northern District of Georgia on April 4, 2006. ACE Limited, ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Insurance Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd's of London Syndicate 2488 AGM, along with a number of other insurers and brokers, are named.
Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757; D.N.J.) was filed on February 13, 2007. ACE Limited, ACE INA Holdings Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, are named.
Henley Management Co., Inc. et al. v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, Inc., are named.
Lincoln Adventures LLC et al. v. Those Certain Underwriters at Lloyd's, London Members of Syndicates 0033 et al. (Case No. 07-60991; D.N.J.) was originally filed in the Southern District of Florida on July 13, 2007. Supreme Auto Transport LLC et al. v. Certain Underwriters of Lloyd's of London, et al. (Case No. 07-6703; D.N.J.) was originally filed in the Southern District of New York on July 25, 2007. Lloyd's of London Syndicate 2488 AGM, along with a number of other Lloyd's of London Syndicates and various brokers, are named in both actions. The allegations in these putative class-action lawsuits are similar to the allegations in the consolidated federal actions identified above, although these lawsuits focus on alleged conduct within the London insurance market.
Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535; D.N.J.) was originally filed in the Northern District of Georgia on October 12, 2007. ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, are named.
As of February 23, 2012, 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 the ACE defendants 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 Multidistrict Litigation 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:
Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts), a class action in Massachusetts, was filed on January 13, 2005. Illinois Union Insurance Company is named. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court.
As of February 23, 2012, plaintiffs have not specified an amount of alleged damages in this case. The proceedings were stayed at a very early stage, before Illinois Union 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.
State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int'l Group, Inc. et al. (Case No. 07-633857; Court of Common Pleas in Cuyahoga County, Ohio) is an Ohio state action filed by the Ohio Attorney General on August 24, 2007. ACE INA Holdings Inc., ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, are named. In December 2011 the ACE parties agreed to settle the case for $1.97 million. On December 27, 2011 the case was voluntarily dismissed with prejudice.
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.
g) Lease commitments
We lease office space and equipment in the countries in which we operate under operating leases which expire at various dates through 2033. We renew and enter into new leases in the ordinary course of business as required. Total rent expense with respect to these operating leases was $114 million, $83 million, and $84 million for the years ended December 31, 2011, 2010, and 2009, respectively. Future minimum lease payments under the leases are expected to be as follows:
For the year ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 93 | ||
2013 |
72 | |||
2014 |
60 | |||
2015 |
54 | |||
2016 |
52 | |||
Thereafter |
166 | |||
Total minimum future lease commitments |
$ | 497 |
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ACE provides pension benefits to eligible employees and their dependents through various defined contribution plans and defined benefit plans sponsored by ACE. The defined contribution plans include a capital accumulation plan (401(k)) in the U.S. The defined benefit plans consist of various plans offered in certain jurisdictions outside of the U.S. and Bermuda.
Defined contribution plans (including 401(k))
Under these plans, employees' contributions may be supplemented by ACE matching contributions based on the level of employee contribution. These contributions are invested at the election of each employee in one or more of several investment portfolios offered by a third party investment advisor. Expenses for these plans totaled $96 million, $87 million, and $84 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Defined benefit plans
We maintain non-contributory defined benefit plans that cover certain employees, principally located in Europe and Asia. We do not provide any such plans to U.S.-based employees. We account for pension benefits using the accrual method. Benefits under these plans are based on employees' years of service and compensation during final years of service. All underlying defined benefit plans are subject to periodic actuarial valuation by qualified local actuarial firms using actuarial models in calculating the pension expense and liability for each plan. We use December 31 as the measurement date for our defined benefit pension plans.
At December 31, 2011, the fair value of plan assets and the projected benefit obligation were $434 million and $508 million, respectively. The fair value of plan assets and the projected benefit obligation were $394 million and $487 million, respectively, at December 31, 2010. The accrued pension liability of $74 million at December 31, 2011, and $93 million at December 31, 2010, is included in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.
The defined benefit pension plan contribution for 2012 is expected to be $17 million. The estimated net actuarial loss for the defined benefit pension plans that will be amortized from AOCI into net benefit costs over the next year is $2 million.
Benefit payments were $16 million and $15 million in 2011 and 2010, respectively. Expected future payments are as follows:
For the year ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 22 | ||
2013 |
23 | |||
2014 |
22 | |||
2015 |
24 | |||
2016 |
25 | |||
2017-2021 |
131 |
|
The following table presents the components of Other (income) expense as reflected in the consolidated statements of operations:
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Losses from separate account assets |
$ | 36 | $ | – | $ | – | ||||||||||
Equity in net (income) loss of partially-owned entities |
(40 | ) | (81 | ) | 39 | |||||||||||
Federal excise and capital taxes |
20 | 19 | 16 | |||||||||||||
Amortization of intangible assets |
29 | 9 | 11 | |||||||||||||
Noncontrolling interest expense |
2 | 14 | 3 | |||||||||||||
Other(1) |
26 | 23 | 16 | |||||||||||||
Other (income) expense |
$ | 73 | $ | (16 | ) | $ | 85 |
(1) Included in Other are acquisition-related costs of $5 million and $14 million in 2011 and 2010, respectively. Acquisition-related costs were immaterial in 2009.
Other (income) expense includes losses from separate account assets that do not qualify for separate account reporting under GAAP (failed separate accounts). The offsetting movement in the separate account liabilities is included in Policy benefits. Refer to Note 1 i) for additional information. Equity in net (income) loss of partially-owned entities includes our share of net (income) loss related to investment funds, limited partnerships, partially-owned investment companies, and partially-owned insurance companies. Certain federal excise and capital taxes incurred as a result of capital management initiatives are included in Other (income) expense in the consolidated statements of operations. As these are considered capital transactions, they are excluded from underwriting results.
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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.
The Insurance – North American segment comprises the operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Bermuda, ACE Commercial Risk Services, ACE Private Risk Services, ACE Westchester, ACE Agriculture, and various run-off operations. ACE USA is the North American retail operating division which provides a broad array of P&C, A&H, and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Bermuda provides commercial insurance products on an excess basis mainly to a global client base targeting Fortune 1000 companies, covering exposures that are generally low in frequency and high in severity. ACE Commercial Risk Services addresses the insurance needs of small to mid-sized businesses in North America by delivering an array of specialty product solutions for targeted industries that lend themselves to technology-assisted underwriting. ACE Private Risk Services provides personal lines coverages for high net worth individuals and families in North America. ACE Westchester specializes in the North American wholesale distribution of excess and surplus P&C, environmental, professional and inland marine products. ACE Agriculture provides comprehensive Multi-Peril Crop Insurance and crop/hail insurance protection to customers throughout the U.S. and Canada through Rain and Hail and Agribusiness insurance through Penn Millers Insurance Company. The run-off operations include Brandywine, Commercial Insurance Services, residual market workers' compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and settlement of related claims.
The Insurance – Overseas General segment comprises ACE International, our global retail insurance operations, the wholesale insurance business of ACE Global Markets, and the international A&H and life business of Combined Insurance. ACE International is our retail business serving territories outside the U.S., Bermuda, and Canada, and maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE International has four regions of operations: ACE Europe, ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including P&C, professional lines (D&O and E&O), marine, energy, aviation, political risk, specialty consumer-oriented products, and A&H (principally accident and supplemental health). ACE Global Markets, our London-based excess and surplus lines business, includes Lloyd's Syndicate 2488, offers products through its parallel distribution network via ACE European Group Limited (AEGL) and Lloyd's Syndicate 2488. ACE provides funds at Lloyd's to support underwriting by Syndicate 2488, which is managed by ACE Underwriting Agencies Limited. ACE Global Markets utilizes Syndicate 2488 to underwrite P&C business on a global basis through Lloyd's worldwide licenses. ACE Global Markets utilizes AEGL to underwrite similar classes of business through its network of U.K. and European licenses, and in the U.S. where it is eligible to write excess and surplus lines business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Combined Insurance distributes a wide range of supplemental accident and health products.
The Global Reinsurance segment represents ACE's reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C insurers. The Global Reinsurance segment also includes ACE Global Markets' reinsurance operations.
The Life segment includes ACE's international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. ACE Life provides a broad portfolio of protection and savings products including whole life, endowment plans, individual term life, group term life, group medical, personal accident, universal life and unit linked contracts through multiple distribution channels primarily in emerging markets, including Egypt, Indonesia, Taiwan, Thailand, Vietnam, the United Arab Emirates, throughout Latin America, selectively in Europe, as well as China through a partially-owned insurance company. ACE Life also includes the newly acquired business of New York Life's Korea operations and Hong Kong operations which expands our presence in the North Asia market and complements our life insurance business established in that region. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, and lapse risks embedded in their books of business. ACE Life Re's core business is a Bermuda-based operation which provides reinsurance to primary life insurers, focusing on guarantees included in certain fixed and variable annuity products and also on more traditional mortality reinsurance protection. ACE Life Re's U.S.-based traditional life reinsurance operation was discontinued for new business in January 2010. Since 2007, ACE Life Re has not quoted on new opportunities in the variable annuity reinsurance marketplace. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in the U.S. and Canada.
Corporate and Other (Corporate) includes ACE Limited, ACE Group Management and Holdings Ltd., ACE INA Holdings, Inc., and intercompany eliminations. Losses and loss expenses arise in connection with the commutation of ceded reinsurance contracts that result from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to our initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting Losses and loss expenses, Policy benefits, Policy acquisition costs, and Administrative expenses from Net premiums earned. For the Life business, management also includes Net investment income and gains (losses) from separate account assets that do not qualify for separate account reporting as components of underwriting income. For the year ended December 31, 2011, Life underwriting income of $424 million includes net investment income of $224 million and Losses from separate account assets of $36 million.
The following tables present the operations by segment:
Statement of Operations by Segment
For the year ended December 31, 2011 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 6,851 | $ | 5,756 | $ | 979 | $ | 1,786 | $ | – | $ | 15,372 | ||||||||||||||||||||||
Net premiums earned |
6,911 | 5,737 | 1,003 | 1,736 | – | 15,387 | ||||||||||||||||||||||||||||
Losses and loss expenses |
5,276 | 3,073 | 621 | 549 | 1 | 9,520 | ||||||||||||||||||||||||||||
Policy benefits |
– | – | – | 401 | – | 401 | ||||||||||||||||||||||||||||
Policy acquisition costs |
613 | 1,393 | 185 | 255 | 1 | 2,447 | ||||||||||||||||||||||||||||
Administrative expenses |
592 | 945 | 52 | 295 | 168 | 2,052 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
430 | 326 | 145 | 236 | (170 | ) | 967 | |||||||||||||||||||||||||||
Net investment income |
1,170 | 548 | 287 | 224 | 13 | 2,242 | ||||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
34 | 33 | (50 | ) | (806 | ) | (6 | ) | (795 | ) | ||||||||||||||||||||||||
Interest expense |
15 | 5 | 2 | 11 | 217 | 250 | ||||||||||||||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||||||||||||
Losses from separate account assets |
– | – | – | 36 | – | 36 | ||||||||||||||||||||||||||||
Other |
5 | – | (1 | ) | 18 | 15 | 37 | |||||||||||||||||||||||||||
Income tax expense (benefit) |
394 | 169 | 30 | 50 | (137 | ) | 506 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,220 | $ | 733 | $ | 351 | $ | (461 | ) | $ | (258 | ) | $ | 1,585 |
Statement of Operations by Segment
For the year ended December 31, 2010 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 5,797 | $ | 5,280 | $ | 1,075 | $ | 1,556 | $ | – | $ | 13,708 | ||||||||||||||||||||||
Net premiums earned |
5,651 | 5,240 | 1,071 | 1,542 | – | 13,504 | ||||||||||||||||||||||||||||
Losses and loss expenses |
3,918 | 2,647 | 518 | 496 | – | 7,579 | ||||||||||||||||||||||||||||
Policy benefits |
– | 4 | – | 353 | – | 357 | ||||||||||||||||||||||||||||
Policy acquisition costs |
625 | 1,251 | 204 | 257 | – | 2,337 | ||||||||||||||||||||||||||||
Administrative expenses |
561 | 840 | 55 | 228 | 174 | 1,858 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
547 | 498 | 294 | 208 | (174 | ) | 1,373 | |||||||||||||||||||||||||||
Net investment income |
1,138 | 475 | 288 | 172 | (3 | ) | 2,070 | |||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
417 | 123 | 93 | (192 | ) | (9 | ) | 432 | ||||||||||||||||||||||||||
Interest expense |
9 | 1 | – | 3 | 211 | 224 | ||||||||||||||||||||||||||||
Other (income) expense |
(22 | ) | (13 | ) | (23 | ) | 20 | 22 | (16 | ) | ||||||||||||||||||||||||
Income tax expense (benefit) |
436 | 173 | 42 | 62 | (154 | ) | 559 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,679 | $ | 935 | $ | 656 | $ | 103 | $ | (265 | ) | $ | 3,108 |
Statement of Operations by Segment
For the year ended December 31, 2009 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 5,641 | $ | 5,145 | $ | 1,038 | $ | 1,475 | $ | – | $ | 13,299 | ||||||||||||||||||||||
Net premiums earned |
5,684 | 5,147 | 979 | 1,430 | – | 13,240 | ||||||||||||||||||||||||||||
Losses and loss expenses |
4,013 | 2,597 | 330 | 482 | – | 7,422 | ||||||||||||||||||||||||||||
Policy benefits |
– | 4 | – | 321 | – | 325 | ||||||||||||||||||||||||||||
Policy acquisition costs |
517 | 1,202 | 195 | 216 | – | 2,130 | ||||||||||||||||||||||||||||
Administrative expenses |
572 | 783 | 55 | 243 | 158 | 1,811 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
582 | 561 | 399 | 168 | (158 | ) | 1,552 | |||||||||||||||||||||||||||
Net investment income |
1,094 | 479 | 278 | 176 | 4 | 2,031 | ||||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
10 | (20 | ) | (17 | ) | (15 | ) | (154 | ) | (196 | ) | |||||||||||||||||||||||
Interest expense |
1 | – | – | – | 224 | 225 | ||||||||||||||||||||||||||||
Other (income) expense |
36 | 20 | 2 | 2 | 25 | 85 | ||||||||||||||||||||||||||||
Income tax expense (benefit) |
384 | 186 | 46 | 48 | (136 | ) | 528 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,265 | $ | 814 | $ | 612 | $ | 279 | $ | (421 | ) | $ | 2,549 |
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:
For the year ended December 31, 2011
(in millions of U.S. dollars) |
Property & All Other |
Casualty | Life, Accident & Health |
ACE Consolidated |
||||||||||||||||||
Insurance – North American |
$ | 3,174 | $ | 3,380 | $ | 357 | $ | 6,911 | ||||||||||||||
Insurance – Overseas General |
2,080 | 1,415 | 2,242 | 5,737 | ||||||||||||||||||
Global Reinsurance |
458 | 545 | – | 1,003 | ||||||||||||||||||
Life |
– | – | 1,736 | 1,736 | ||||||||||||||||||
$ | 5,712 | $ | 5,340 | $ | 4,335 | $ | 15,387 | |||||||||||||||
For the year ended December 31, 2010 | ||||||||||||||||||||||
Insurance – North American |
$ | 1,578 | $ | 3,777 | $ | 296 | $ | 5,651 | ||||||||||||||
Insurance – Overseas General |
1,800 | 1,424 | 2,016 | 5,240 | ||||||||||||||||||
Global Reinsurance |
520 | 551 | – | 1,071 | ||||||||||||||||||
Life |
– | – | 1,542 | 1,542 | ||||||||||||||||||
$ | 3,898 | $ | 5,752 | $ | 3,854 | $ | 13,504 | |||||||||||||||
For the year ended December 31, 2009 | ||||||||||||||||||||||
Insurance – North American |
$ | 1,690 | $ | 3,734 | $ | 260 | $ | 5,684 | ||||||||||||||
Insurance – Overseas General |
1,787 | 1,420 | 1,940 | 5,147 | ||||||||||||||||||
Global Reinsurance |
546 | 433 | – | 979 | ||||||||||||||||||
Life |
– | – | 1,430 | 1,430 | ||||||||||||||||||
$ | 4,023 | $ | 5,587 | $ | 3,630 | $ | 13,240 |
The following table presents ACE's net premiums earned by geographic region. Allocations have been made on the basis of location of risk:
Year ended | North America | Europe | Asia Pacific/Far East |
Latin America | ||||||||||||||||||
2011 |
61% | 18% | 14% | 7% | ||||||||||||||||||
2010 |
61% | 20% | 13% | 6% | ||||||||||||||||||
2009 |
63% | 20% | 12% | 5% |
|
17. Related party transactions
The ACE Foundation – Bermuda is an unconsolidated not-for-profit organization whose primary purpose is to fund charitable causes in Bermuda. The Trustees are principally ACE management. ACE maintains a non-interest bearing demand note receivable from the ACE Foundation – Bermuda, the balance of which was $29 million and $30 million, at December 31, 2011 and 2010, respectively. The receivable is included in Other assets in the consolidated balance sheets. The borrower has used the related proceeds to finance investments in Bermuda real estate, some of which have been rented to ACE employees at rates established by independent, professional real estate appraisers. The borrower uses income from the investments to both repay the note and to fund charitable activities. Accordingly, we report the demand note at the lower of its principal value or the fair value of assets held by the borrower to repay the loan, including the real estate properties.
|
18. Statutory financial information
ACE's insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.
There are no statutory restrictions on the payment of dividends from retained earnings by any of the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries.
Our U.S. subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators.
Statutory accounting differs from GAAP in the reporting of certain reinsurance contracts, investments, subsidiaries, acquisition expenses, fixed assets, deferred income taxes, and certain other items. The statutory capital and surplus of the U.S. subsidiaries met regulatory requirements for 2011, 2010, and 2009. The amount of dividends available to be paid in 2012, without prior approval from the state insurance departments, totals $653 million.
The following table presents the combined statutory capital and surplus and statutory net income (loss) of the Bermuda, U.S., and Swiss subsidiaries at and for the years ended December 31, 2011, 2010, and 2009:
Bermuda Subsidiaries | ||||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||||
Statutory capital and surplus |
$ | 11,786 | $ | 11,484 | $ | 9,164 | ||||||||||||
Statutory net income |
$ | 713 | $ | 2,175 | $ | 2,369 | ||||||||||||
U.S. Subsidiaries | ||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||
Statutory capital and surplus |
$ | 5,851 | $ | 6,279 | $ | 5,885 | ||||||||||||
Statutory net income |
$ | 693 | $ | 1,025 | $ | 904 | ||||||||||||
Swiss Subsidiaries | ||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||
Statutory capital and surplus |
$ | 578 | $ | 518 | $ | 468 | ||||||||||||
Statutory net income (loss) |
$ | 20 | $ | 35 | $ | (12 | ) |
As permitted by the Restructuring discussed previously in Note 7, certain of our U.S. subsidiaries discount certain A&E liabilities, which increased statutory capital and surplus by approximately $192 million, $206 million, and $215 million at December 31, 2011, 2010, and 2009, respectively.
Our international subsidiaries prepare statutory financial statements based on local laws and regulations. Some jurisdictions impose complex regulatory requirements on insurance companies while other jurisdictions impose fewer requirements. In some countries, we must obtain licenses issued by governmental authorities to conduct local insurance business. These licenses may be subject to reserves and minimum capital and solvency tests. Jurisdictions may impose fines, censure, and/or criminal sanctions for violation of regulatory requirements.
|
19. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at December 31, 2011 and December 31, 2010, and for the years ended December 31, 2011, 2010, and 2009 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 December 31, 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 |
$ | 33 | $ | 28,848 | $ | 26,795 | $ | – | $ | 55,676 | ||||||||||||||||||
Cash |
106 | 382 | 126 | – | 614 | |||||||||||||||||||||||
Insurance and reinsurance balances receivable |
– | 3,944 | 443 | – | 4,387 | |||||||||||||||||||||||
Reinsurance recoverable on losses and loss expenses |
– | 17,146 | (4,757 | ) | – | 12,389 | ||||||||||||||||||||||
Reinsurance recoverable on policy benefits |
– | 941 | (692 | ) | – | 249 | ||||||||||||||||||||||
Value of business acquired |
– | 648 | – | – | 648 | |||||||||||||||||||||||
Goodwill and other intangible assets |
– | 4,280 | 551 | – | 4,831 | |||||||||||||||||||||||
Investments in subsidiaries |
24,055 | – | – | (24,055 | ) | – | ||||||||||||||||||||||
Due from subsidiaries and affiliates, net |
498 | – | – | (498 | ) | – | ||||||||||||||||||||||
Other assets |
8 | 7,181 | 1,522 | – | 8,711 | |||||||||||||||||||||||
Total assets |
$ | 24,700 | $ | 63,370 | $ | 23,988 | $ | (24,553 | ) | $ | 87,505 | |||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||
Unpaid losses and loss expenses |
$ | – | $ | 30,837 | $ | 6,640 | $ | – | $ | 37,477 | ||||||||||||||||||
Unearned premiums |
– | 5,416 | 918 | – | 6,334 | |||||||||||||||||||||||
Future policy benefits |
– | 3,673 | 601 | – | 4,274 | |||||||||||||||||||||||
Due to subsidiaries and affiliates, net |
– | 316 | 182 | (498 | ) | – | ||||||||||||||||||||||
Short-term debt |
– | 850 | 401 | – | 1,251 | |||||||||||||||||||||||
Long-term debt |
– | 3,360 | – | – | 3,360 | |||||||||||||||||||||||
Trust preferred securities |
– | 309 | – | – | 309 | |||||||||||||||||||||||
Other liabilities |
184 | 7,769 | 2,031 | – | 9,984 | |||||||||||||||||||||||
Total liabilities |
184 | 52,530 | 10,773 | (498 | ) | 62,989 | ||||||||||||||||||||||
Total shareholders' equity |
24,516 | 10,840 | 13,215 | (24,055 | ) | 24,516 | ||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ | 24,700 | $ | 63,370 | $ | 23,988 | $ | (24,553 | ) | $ | 87,505 |
(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(3) |
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 subsidiaries and affiliates, net |
564 | – | – | (564 | ) | – | ||||||||||||||||||||||
Other assets |
14 | 7,045 | 1,434 | – | 8,493 | |||||||||||||||||||||||
Total assets |
$ | 23,462 | $ | 60,629 | $ | 22,357 | $ | (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 | |||||||||||||||||||||||
Due to subsidiaries and affiliates, net |
– | 555 | 9 | (564 | ) | – | ||||||||||||||||||||||
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 | 50,920 | 9,537 | (564 | ) | 60,381 | ||||||||||||||||||||||
Total shareholders' equity |
22,974 | 9,709 | 12,820 | (22,529 | ) | 22,974 | ||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ | 23,462 | $ | 60,629 | $ | 22,357 | $ | (23,093 | ) | $ | 83,355 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools (Pools) with a third-party bank. At December 31, 2010, the cash balance of one or more entities was negative; however, the overall Pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Operations
For the year ended December 31, 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 |
$ | – | $ | 9,081 | $ | 6,291 | $ | – | $ | 15,372 | ||||||||||||||||||
Net premiums earned |
– | 9,082 | 6,305 | – | 15,387 | |||||||||||||||||||||||
Net investment income |
2 | 1,096 | 1,144 | – | 2,242 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
1,504 | – | – | (1,504 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(4 | ) | 62 | (853 | ) | – | (795 | ) | ||||||||||||||||||||
Losses and loss expenses |
– | 5,889 | 3,631 | – | 9,520 | |||||||||||||||||||||||
Policy benefits |
– | 192 | 209 | – | 401 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
69 | 2,520 | 1,910 | – | 4,499 | |||||||||||||||||||||||
Interest (income) expense |
(37 | ) | 267 | 20 | – | 250 | ||||||||||||||||||||||
Other (income) expense |
(125 | ) | 135 | 63 | – | 73 | ||||||||||||||||||||||
Income tax expense |
10 | 422 | 74 | – | 506 | |||||||||||||||||||||||
Net income |
$ | 1,585 | $ | 815 | $ | 689 | $ | (1,504 | ) | $ | 1,585 |
Condensed Consolidating Statement of Operations
For the year ended 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 |
|||||||||||||||||||||||
Net premiums written |
$ | – | $ | 8,195 | $ | 5,513 | $ | – | $ | 13,708 | ||||||||||||||||||
Net premiums earned |
– | 7,940 | 5,564 | – | 13,504 | |||||||||||||||||||||||
Net investment income |
1 | 1,011 | 1,058 | – | 2,070 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
3,066 | – | – | (3,066 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(42 | ) | 303 | 171 | – | 432 | ||||||||||||||||||||||
Losses and loss expenses |
– | 4,910 | 2,669 | – | 7,579 | |||||||||||||||||||||||
Policy benefits |
– | 148 | 209 | – | 357 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
70 | 2,372 | 1,753 | – | 4,195 | |||||||||||||||||||||||
Interest (income) expense |
(37 | ) | 251 | 10 | – | 224 | ||||||||||||||||||||||
Other (income) expense |
(123 | ) | 95 | 12 | – | (16 | ) | |||||||||||||||||||||
Income tax expense |
7 | 447 | 105 | – | 559 | |||||||||||||||||||||||
Net income |
$ | 3,108 | $ | 1,031 | $ | 2,035 | $ | (3,066 | ) | $ | 3,108 |
(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 year ended December 31, 2009 (in millions of U.S. dollars) |
ACE Limited (Parent Guarantor) |
ACE INA Holdings, Inc. (Subsidiary Issuer) |
Other ACE Limited Subsidiaries and Eliminations(1) |
Consolidating Adjustments(2) |
ACE Limited Consolidated |
|||||||||||||||||||||||
Net premiums written |
$ | – | $ | 7,407 | $ | 5,892 | $ | – | $ | 13,299 | ||||||||||||||||||
Net premiums earned |
– | 7,411 | 5,829 | – | 13,240 | |||||||||||||||||||||||
Net investment income |
1 | 1,003 | 1,027 | – | 2,031 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
2,636 | – | – | (2,636 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(75 | ) | 75 | (196 | ) | – | (196 | ) | ||||||||||||||||||||
Losses and loss expenses |
– | 4,620 | 2,802 | – | 7,422 | |||||||||||||||||||||||
Policy benefits |
– | 84 | 241 | – | 325 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
54 | 2,180 | 1,707 | – | 3,941 | |||||||||||||||||||||||
Interest (income) expense |
(43 | ) | 261 | 7 | – | 225 | ||||||||||||||||||||||
Other (income) expense |
7 | 44 | 34 | – | 85 | |||||||||||||||||||||||
Income tax expense (benefit) |
(5 | ) | 395 | 138 | – | 528 | ||||||||||||||||||||||
Net income |
$ | 2,549 | $ | 905 | $ | 1,731 | $ | (2,636 | ) | $ | 2,549 |
(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 year ended December 31, 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 |
$ | 762 | $ | 1,053 | $ | 2,395 | $ | (740 | ) | $ | 3,470 | |||||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||||||
Purchases of fixed maturities available for sale |
– | (12,203 | ) | (12,375 | ) | – | (24,578 | ) | ||||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (338 | ) | (2 | ) | – | (340 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (157 | ) | (152 | ) | – | (309 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
9 | 9,718 | 8,244 | – | 17,971 | |||||||||||||||||||||||
Sales of equity securities |
– | 354 | 22 | – | 376 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,784 | 1,936 | – | 3,720 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 933 | 346 | – | 1,279 | |||||||||||||||||||||||
Net derivative instruments settlements |
(3 | ) | (24 | ) | (40 | ) | – | (67 | ) | |||||||||||||||||||
Capital contribution to subsidiaries |
(385 | ) | – | – | 385 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
41 | – | – | (41 | ) | – | ||||||||||||||||||||||
Acquisition of subsidiaries (net of cash acquired of $91) |
– | (569 | ) | (37 | ) | – | (606 | ) | ||||||||||||||||||||
Other |
– | (420 | ) | (62 | ) | – | (482 | ) | ||||||||||||||||||||
Net cash flows used for investing activities |
(338 | ) | (922 | ) | (2,120 | ) | 344 | (3,036 | ) | |||||||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||||||
Dividends paid on Common Shares |
(459 | ) | – | – | – | (459 | ) | |||||||||||||||||||||
Common Shares repurchased |
– | – | (195 | ) | – | (195 | ) | |||||||||||||||||||||
Net proceeds from issuance (repayment) of short-term debt |
(300 | ) | (150 | ) | 400 | – | (50 | ) | ||||||||||||||||||||
Proceeds from share-based compensation plans |
133 | – | – | – | 133 | |||||||||||||||||||||||
Advances (to) from affiliates |
– | (149 | ) | 108 | 41 | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (740 | ) | 740 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 385 | (385 | ) | – | ||||||||||||||||||||||
Tax benefit on share-based compensation expense |
– | 3 | 3 | – | 6 | |||||||||||||||||||||||
Net cash flows used for financing activities |
(626 | ) | (296 | ) | (39 | ) | 396 | (565 | ) | |||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | (26 | ) | (1 | ) | – | (27 | ) | ||||||||||||||||||||
Net increase (decrease) in cash |
(202 | ) | (191 | ) | 235 | – | (158 | ) | ||||||||||||||||||||
Cash – beginning of period(3) |
308 | 573 | (109 | ) | – | 772 | ||||||||||||||||||||||
Cash – end of period |
$ | 106 | $ | 382 | $ | 126 | $ | – | $ | 614 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2010, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Cash Flows
For the year ended 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 |
|||||||||||||||||||||||
Net cash flows from operating activities |
$ | (176 | ) | $ | 1,798 | $ | 2,124 | $ | (200 | ) | $ | 3,546 | ||||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||||||
Purchases of fixed maturities available for sale |
(1 | ) | (13,785 | ) | (17,470 | ) | – | (31,256 | ) | |||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (615 | ) | (1 | ) | – | (616 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (107 | ) | (687 | ) | – | (794 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
– | 10,225 | 14,054 | – | 24,279 | |||||||||||||||||||||||
Sales of equity securities |
– | 17 | 757 | – | 774 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,845 | 1,815 | – | 3,660 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 1,142 | 211 | – | 1,353 | |||||||||||||||||||||||
Net derivative instruments settlements |
(3 | ) | (10 | ) | (96 | ) | – | (109 | ) | |||||||||||||||||||
Capital contribution to subsidiaries |
(290 | ) | – | – | 290 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
851 | – | – | (851 | ) | – | ||||||||||||||||||||||
Acquisition of subsidiaries (net of cash acquired of $80) |
– | (1,139 | ) | – | – | (1,139 | ) | |||||||||||||||||||||
Other |
– | (253 | ) | (80 | ) | – | (333 | ) | ||||||||||||||||||||
Net cash flows from (used for) investing activities |
557 | (2,680 | ) | (1,497 | ) | (561 | ) | (4,181 | ) | |||||||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||||||
Dividends paid on Common Shares |
(435 | ) | – | – | – | (435 | ) | |||||||||||||||||||||
Common shares repurchased |
– | – | (235 | ) | – | (235 | ) | |||||||||||||||||||||
Proceeds from share-based compensation plans |
63 | – | – | – | 63 | |||||||||||||||||||||||
Net proceeds from issuance of short-term debt |
300 | 841 | – | – | 1,141 | |||||||||||||||||||||||
Net proceeds from issuance of long-term debt |
– | 199 | – | – | 199 | |||||||||||||||||||||||
Advances (to) from affiliates |
– | 3 | (854 | ) | 851 | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (200 | ) | 200 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 290 | (290 | ) | – | ||||||||||||||||||||||
Tax expense on share-based compensation expense |
– | – | (1 | ) | – | (1 | ) | |||||||||||||||||||||
Net cash flows from (used for) financing activities |
(72 | ) | 1,043 | (1,000 | ) | 761 | 732 | |||||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | 12 | (6 | ) | – | 6 | ||||||||||||||||||||||
Net increase (decrease) in cash |
309 | 173 | (379 | ) | – | 103 | ||||||||||||||||||||||
Cash – beginning of period(3) |
(1 | ) | 400 | 270 | – | 669 | ||||||||||||||||||||||
Cash – end of period(3) |
$ | 308 | $ | 573 | $ | (109 | ) | $ | – | $ | 772 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2010 and 2009, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2009 (in millions of U.S. dollars) |
ACE Limited (Parent Guarantor) |
ACE INA Holdings, Inc. (Subsidiary Issuer) |
Other ACE Limited Subsidiaries and Eliminations(1) |
Consolidating Adjustments(2) |
ACE Limited Consolidated |
|||||||||||||||||||||||
Net cash flows from operating activities |
$ | 594 | $ | 1,888 | $ | 1,203 | $ | (350 | ) | $ | 3,335 | |||||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||||||
Purchases of fixed maturities available for sale |
– | (16,877 | ) | (20,383 | ) | – | (37,260 | ) | ||||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (457 | ) | (15 | ) | – | (472 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (186 | ) | (168 | ) | – | (354 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
88 | 12,650 | 16,916 | – | 29,654 | |||||||||||||||||||||||
Sales of fixed maturities held to maturity |
– | 10 | 1 | – | 11 | |||||||||||||||||||||||
Sales of equity securities |
– | 544 | 728 | – | 1,272 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,792 | 1,612 | – | 3,404 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 410 | 104 | – | 514 | |||||||||||||||||||||||
Net derivative instruments settlements |
– | (6 | ) | (86 | ) | – | (92 | ) | ||||||||||||||||||||
Capital contribution to subsidiaries |
(90 | ) | – | – | 90 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
(174 | ) | – | – | 174 | – | ||||||||||||||||||||||
Other |
(4 | ) | (14 | ) | 117 | – | 99 | |||||||||||||||||||||
Net cash flows used for investing activities |
(180 | ) | (2,134 | ) | (1,174 | ) | 264 | (3,224 | ) | |||||||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||||||
Dividends paid on Common Shares |
(388 | ) | – | – | – | (388 | ) | |||||||||||||||||||||
Net repayment of short-term debt |
– | (466 | ) | – | – | (466 | ) | |||||||||||||||||||||
Net proceeds from issuance of long-term debt |
– | 500 | – | – | 500 | |||||||||||||||||||||||
Proceeds from share-based compensation plans |
25 | – | – | – | 25 | |||||||||||||||||||||||
Advances from (to) affiliates |
– | 156 | 18 | (174 | ) | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (350 | ) | 350 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 90 | (90 | ) | – | ||||||||||||||||||||||
Tax benefit on share-based compensation expense |
– | 6 | 2 | – | 8 | |||||||||||||||||||||||
Net cash flows from (used for) financing activities |
(363 | ) | 196 | (240 | ) | 86 | (321 | ) | ||||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | 8 | 4 | – | 12 | |||||||||||||||||||||||
Net increase (decrease) in cash |
51 | (42 | ) | (207 | ) | – | (198 | ) | ||||||||||||||||||||
Cash – beginning of year(3) |
(52 | ) | 442 | 477 | – | 867 | ||||||||||||||||||||||
Cash – end of year(3) |
$ | (1 | ) | $ | 400 | $ | 270 | $ | – | $ | 669 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2009, and 2008, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
|
20. Condensed unaudited quarterly financial data
Three Months Ended | ||||||||||||||||||||||
(in millions of U.S. dollars, except per share data) |
March 31 2011 |
June 30 2011 |
September 30 2011 |
December 31 2011 |
||||||||||||||||||
Net premiums earned |
$ | 3,309 | $ | 3,757 | $ | 4,490 | $ | 3,831 | ||||||||||||||
Net investment income |
544 | 569 | 564 | 565 | ||||||||||||||||||
Net realized gains (losses) including OTTI |
(45 | ) | (73 | ) | (760 | ) | 83 | |||||||||||||||
Total revenues |
$ | 3,808 | $ | 4,253 | $ | 4,294 | $ | 4,479 | ||||||||||||||
Losses and loss expenses |
$ | 2,263 | $ | 2,226 | $ | 2,745 | $ | 2,286 | ||||||||||||||
Policy benefits |
$ | 91 | $ | 108 | $ | 83 | $ | 119 | ||||||||||||||
Net income (loss) |
$ | 259 | $ | 607 | $ | (31 | ) | $ | 750 | |||||||||||||
Basic earnings per share |
$ | 0.77 | $ | 1.79 | $ | (0.09 | ) | $ | 2.22 | |||||||||||||
Diluted earnings per share |
$ | 0.76 | $ | 1.77 | $ | (0.09 | ) | $ | 2.20 | |||||||||||||
Three Months Ended | ||||||||||||||||||||||
(in millions of U.S. dollars, except per share data) |
March 31 2010 |
June 30 2010 |
September 30 2010 |
December 31 2010 |
||||||||||||||||||
Net premiums earned |
$ | 3,277 | $ | 3,233 | $ | 3,422 | $ | 3,572 | ||||||||||||||
Net investment income |
504 | 518 | 516 | 532 | ||||||||||||||||||
Net realized gains (losses) including OTTI |
168 | 9 | (50 | ) | 305 | |||||||||||||||||
Total revenues |
$ | 3,949 | $ | 3,760 | $ | 3,888 | $ | 4,409 | ||||||||||||||
Losses and loss expenses |
$ | 1,921 | $ | 1,800 | $ | 1,887 | $ | 1,971 | ||||||||||||||
Policy benefits |
$ | 87 | $ | 87 | $ | 93 | $ | 90 | ||||||||||||||
Net income |
$ | 755 | $ | 677 | $ | 675 | $ | 1,001 | ||||||||||||||
Basic earnings per share |
$ | 2.23 | $ | 1.99 | $ | 1.98 | $ | 2.94 | ||||||||||||||
Diluted earnings per share |
$ | 2.22 | $ | 1.98 | $ | 1.97 | $ | 2.92 |
|
ACE Limited and Subsidiaries
SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2011 (in millions of U.S. dollars) |
Cost or Amortized Cost |
Fair Value | Amount at Which Shown in the Balance Sheet |
|||||||||||||
Fixed maturities available for sale |
||||||||||||||||
U.S. Treasury and agency |
$ | 2,774 | $ | 2,960 | $ | 2,960 | ||||||||||
Foreign |
12,025 | 12,401 | 12,401 | |||||||||||||
Corporate securities |
14,055 | 14,693 | 14,693 | |||||||||||||
Mortgage-backed securities |
9,979 | 10,201 | 10,201 | |||||||||||||
States, municipalities, and political subdivisions |
1,617 | 1,712 | 1,712 | |||||||||||||
Total fixed maturities available for sale |
40,450 | 41,967 | 41,967 | |||||||||||||
Fixed maturities held to maturity |
||||||||||||||||
U.S. Treasury and agency |
1,078 | 1,126 | 1,078 | |||||||||||||
Foreign |
935 | 930 | 935 | |||||||||||||
Corporate securities |
2,338 | 2,337 | 2,338 | |||||||||||||
Mortgage-backed securities |
2,949 | 3,036 | 2,949 | |||||||||||||
States, municipalities, and political subdivisions |
1,147 | 1,176 | 1,147 | |||||||||||||
Total fixed maturities held to maturity |
8,447 | 8,605 | 8,447 | |||||||||||||
Equity securities |
||||||||||||||||
Industrial, miscellaneous, and all other |
671 | 647 | 647 | |||||||||||||
Short-term investments |
2,301 | 2,301 | 2,301 | |||||||||||||
Other investments |
2,112 | 2,314 | 2,314 | |||||||||||||
4,413 | 4,615 | 4,615 | ||||||||||||||
Total investments – other than investments in related parties |
$ | 53,981 | $ | 55,834 | $ | 55,676 |
|
ACE Limited and Subsidiaries
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (Parent Company Only)
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Assets |
||||||||||
Investments in subsidiaries and affiliates on equity basis |
$ | 24,055 | $ | 22,529 | ||||||
Short-term investments |
1 | 10 | ||||||||
Other investments, at cost |
32 | 37 | ||||||||
Total investments |
24,088 | 22,576 | ||||||||
Cash |
106 | 308 | ||||||||
Due from subsidiaries and affiliates, net |
498 | 564 | ||||||||
Other assets |
8 | 14 | ||||||||
Total assets |
$ | 24,700 | $ | 23,462 | ||||||
Liabilities |
||||||||||
Accounts payable, accrued expenses, and other liabilities |
$ | 65 | $ | 76 | ||||||
Dividends payable |
119 | 112 | ||||||||
Short-term debt |
– | 300 | ||||||||
Total liabilities |
184 | 488 | ||||||||
Shareholders' equity |
||||||||||
Common Shares |
10,095 | 10,161 | ||||||||
Common Shares in treasury |
(327 | ) | (330 | ) | ||||||
Additional paid-in capital |
5,326 | 5,623 | ||||||||
Retained earnings |
7,511 | 5,926 | ||||||||
Deferred compensation obligation |
– | 2 | ||||||||
Accumulated other comprehensive income |
1,911 | 1,594 | ||||||||
Common Shares issued to employee trust |
– | (2 | ) | |||||||
Total shareholders' equity |
24,516 | 22,974 | ||||||||
Total liabilities and shareholders' equity |
$ | 24,700 | $ | 23,462 |
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (Parent Company Only)
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Revenues |
||||||||||||||||
Investment income, including intercompany interest income |
$ | 39 | $ | 38 | $ | 44 | ||||||||||
Equity in net income of subsidiaries and affiliates |
1,504 | 3,066 | 2,636 | |||||||||||||
Net realized gains (losses) |
(4 | ) | (42 | ) | (75 | ) | ||||||||||
1,539 | 3,062 | 2,605 | ||||||||||||||
Expenses |
||||||||||||||||
Administrative and other (income) expense |
(56 | ) | (53 | ) | 61 | |||||||||||
Income tax expense (benefit) |
10 | 7 | (5 | ) | ||||||||||||
(46 | ) | (46 | ) | 56 | ||||||||||||
Net income |
$ | 1,585 | $ | 3,108 | $ | 2,549 |
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (Parent Company Only)
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Net cash flows from operating activities |
$ | 762 | $ | (176 | ) | $ | 594 | |||||||||
Cash flows from investing activities |
||||||||||||||||
Purchases of fixed maturities available for sale |
– | (1 | ) | – | ||||||||||||
Sales of fixed maturities available for sale |
9 | – | 88 | |||||||||||||
Net derivative instruments settlements |
(3 | ) | (3 | ) | – | |||||||||||
Capital contribution to subsidiaries |
(385 | ) | (290 | ) | (90 | ) | ||||||||||
Advances (to) from affiliates |
41 | 851 | (174 | ) | ||||||||||||
Other |
– | – | (4 | ) | ||||||||||||
Net cash flows from (used for) investing activities |
(338 | ) | 557 | (180 | ) | |||||||||||
Cash flows from financing activities |
||||||||||||||||
Dividends paid on Common Shares |
(459 | ) | (435 | ) | (388 | ) | ||||||||||
Net proceeds from issuance (repayment) of short-term debt |
(300 | ) | 300 | – | ||||||||||||
Proceeds from share-based compensation plans |
133 | 63 | 25 | |||||||||||||
Net cash flows used for financing activities |
(626 | ) | (72 | ) | (363 | ) | ||||||||||
Net increase (decrease) in cash |
(202 | ) | 309 | 51 | ||||||||||||
Cash – beginning of year |
308 | (1 | ) | (52 | ) | |||||||||||
Cash – end of year |
$ | 106 | $ | 308 | $ | (1 | ) |
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
|
ACE Limited and Subsidiaries
SUPPLEMENTAL INFORMATION CONCERNING REINSURANCE
Premiums Earned
For the years ended December 31, 2011, 2010, and 2009 (in millions of U.S. dollars, except for percentages) |
Direct Amount |
Ceded To Other Companies |
Assumed From Other Companies |
Net Amount | Percentage of Amount Assumed to Net |
|||||||||||||||||||||||
2011 |
$ | 17,534 | $ | 5,496 | $ | 3,349 | $ | 15,387 | 22% | |||||||||||||||||||
2010 |
$ | 15,780 | $ | 5,792 | $ | 3,516 | $ | 13,504 | 26% | |||||||||||||||||||
2009 |
$ | 15,415 | $ | 5,943 | $ | 3,768 | $ | 13,240 | 28% |
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ACE Limited and Subsidiaries
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY AND CASUALTY OPERATIONS
As of and for the years ended December 31, 2011, 2010, and 2009 (in millions of U.S. dollars) |
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Deferred Policy Acquisition Costs |
Net Reserves for Unpaid Losses and Loss Expenses |
Unearned Premiums |
Net Premiums Earned |
Net |
Net Losses and Loss Expenses Incurred Related to |
Amortization of Deferred Policy Acquisition Costs |
Net Paid Losses and Loss Expenses |
Net Premiums Written |
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Current Year |
Prior Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 |
$ | 1,668 | $ | 25,875 | $ | 6,334 | $ | 14,645 | $ | 2,108 | $ | 10,076 | $ | (556 | ) | $ | 2,347 | $ | 8,866 | $ | 14,582 | |||||||||||||||||||||||||||||||||||||
2010 |
$ | 1,581 | $ | 25,242 | $ | 6,330 | $ | 12,981 | $ | 1,996 | $ | 8,082 | $ | (503 | ) | $ | 2,252 | $ | 7,413 | $ | 13,166 | |||||||||||||||||||||||||||||||||||||
2009 |
$ | 1,396 | $ | 25,038 | $ | 6,067 | $ | 12,713 | $ | 1,940 | $ | 7,998 | $ | (576 | ) | $ | 2,076 | $ | 6,948 | $ | 12,735 |
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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.
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 and 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 underwriting and other costs that vary with, and are primarily related to, the production of premium. 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. Policy acquisition costs on P&C contracts are generally amortized ratably over the period in which premiums are earned. Policy acquisition costs on long duration contracts are amortized over the estimated life of the contracts, generally in proportion to premium revenue recognized. 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, principally related to A&H business produced by the Insurance – Overseas General segment, which are deferred and recognized over the expected future benefit period. 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 and amortized over five years, 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 was $236 million and $253 million at December 31, 2011 and 2010, respectively. The amortization expense for deferred marketing costs was $128 million, $115 million, and $103 million for the years ended December 31, 2011, 2010, and 2009, 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 obtain reinsurance status for accounting purposes, 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 25 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 $35 million and $92 million at December 31, 2011 and 2010, 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 maturity investments 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 its 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 it earns 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 $350 million in the aggregate). Our revolving 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 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 $59 million net of discount held at December 31, 2011, representing structured settlements for which the timing and amount of future claim payments are reliably determinable, ACE does not discount its P&C loss reserves. 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, 2011, the gross liability for the amount due to claimants was $644 million and reinsurance recoverables for amounts due from the life insurance companies was $585 million. For structured settlement contracts where payments are guaranteed regardless of claimant life expectancy, the amounts recoverable from the life insurance companies are included in Other assets, as they do not meet the requirements for reinsurance accounting. At December 31, 2011, there was $59 million included in Other assets in the consolidated balance sheets relating to structured settlements.
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. Commencing with the quarter ended September 30, 2009, prior period development for the crop business includes adjustments to both crop losses and loss expenses and the related crop profit share commission.
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 and 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 one percent to six percent and one percent to seven percent at December 31, 2011 and 2010, 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 have assets that do not qualify for separate account reporting under GAAP (failed separate accounts). The assets related to failed separate accounts are 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 failed separate account assets are reported in Other income (expense) and the offsetting movements in the failed separate account 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 fees 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 ceded 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 $133 million and $144 million at December 31, 2011 and 2010, 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 $318 million and $351 million and contract holder deposit funds of $345 million and $70 million at December 31, 2011 and 2010, respectively. 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 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 $21 million, $85 million, and $26 million for the years ended December 31, 2011, 2010, and 2009, 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 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 2011 and 2010, 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 2011, 2010, or 2009.
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.
|
December 31, 2011 (in millions of U.S. dollars) |
Amortized Cost |
Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Fair Value | OTTI Recognized in AOCI |
|||||||||||||||||||||||
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 | $ | – |
December 31, 2010 (in millions of U.S. dollars) |
Amortized Cost |
Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Fair Value | OTTI Recognized in AOCI |
|||||||||||||||||||||||
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 subdivisions |
1,302 | 15 | (30 | ) | 1,287 | – | ||||||||||||||||||||||
$ | 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 subdivisions |
1,175 | 5 | (18 | ) | 1,162 | – | ||||||||||||||||||||||
$ | 9,501 | $ | 112 | $ | (152 | ) | $ | 9,461 | $ | – |
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
Available for sale |
||||||||||||||||||||||
Due in 1 year or less |
$ | 2,321 | $ | 2,349 | $ | 1,846 | $ | 1,985 | ||||||||||||||
Due after 1 year through 5 years |
12,325 | 12,722 | 13,094 | 13,444 | ||||||||||||||||||
Due after 5 years through 10 years |
12,379 | 12,995 | 10,276 | 10,782 | ||||||||||||||||||
Due after 10 years |
3,446 | 3,700 | 2,818 | 2,812 | ||||||||||||||||||
30,471 | 31,766 | 28,034 | 29,023 | |||||||||||||||||||
Mortgage-backed securities |
9,979 | 10,201 | 8,508 | 8,516 | ||||||||||||||||||
$ | 40,450 | $ | 41,967 | $ | 36,542 | $ | 37,539 | |||||||||||||||
Held to maturity |
||||||||||||||||||||||
Due in 1 year or less |
$ | 393 | $ | 396 | $ | 400 | $ | 404 | ||||||||||||||
Due after 1 year through 5 years |
2,062 | 2,090 | 1,983 | 2,010 | ||||||||||||||||||
Due after 5 years through 10 years |
2,376 | 2,399 | 2,613 | 2,524 | ||||||||||||||||||
Due after 10 years |
667 | 684 | 694 | 677 | ||||||||||||||||||
5,498 | 5,569 | 5,690 | 5,615 | |||||||||||||||||||
Mortgage-backed securities |
2,949 | 3,036 | 3,811 | 3,846 | ||||||||||||||||||
$ | 8,447 | $ | 8,605 | $ | 9,501 | $ | 9,461 |
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Cost |
$ | 671 | $ | 666 | ||||||
Gross unrealized appreciation |
18 | 28 | ||||||||
Gross unrealized depreciation |
(42 | ) | (2 | ) | ||||||
Fair value |
$ | 647 | $ | 692 |
Moody's Rating Category | 1-in-100 Year Default Rate |
Historical Mean Default Rate |
||||||||
Investment Grade: |
||||||||||
Aaa-Baa |
0.0-1.4% | 0.0-0.3% | ||||||||
Below Investment Grade: |
||||||||||
Ba |
4.8% | 1.1% | ||||||||
B |
12.8% | 3.4% | ||||||||
Caa-C |
53.5% | 13.9% |
Range of Significant Assumptions Used | ||||||||||||||||
Sector(1) | Vintage | Default Rate(2) | Loss Severity Rate(2) |
|||||||||||||
Prime |
2003 and prior | 16% | 29% | |||||||||||||
2004 | 17-42% | 31-49% | ||||||||||||||
2005 | 25-45% | 44-58% | ||||||||||||||
2006-2007 | 26-53% | 43-58% | ||||||||||||||
ALT-A |
2003 and prior | 23% | 48% | |||||||||||||
2004 | 33% | 53% | ||||||||||||||
2005 | 30-47% | 54-67% | ||||||||||||||
2006-2007 | 57-66% | 61-72% | ||||||||||||||
Sub-prime |
2003 and prior | 45% | 62% | |||||||||||||
2004 | 49% | 76% | ||||||||||||||
2005 | 58% | 78% | ||||||||||||||
2006-2007 | 70-78% | 70-86% |
(1) Prime, ALT-A, and Sub-prime sector bonds are categorized based on creditworthiness of the borrower.
(2) Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Fixed maturities: |
||||||||||||||||
OTTI on fixed maturities, gross |
$ | (61 | ) | $ | (115 | ) | $ | (536 | ) | |||||||
OTTI on fixed maturities recognized in OCI (pre-tax) |
15 | 69 | 302 | |||||||||||||
OTTI on fixed maturities, net |
(46 | ) | (46 | ) | (234 | ) | ||||||||||
Gross realized gains excluding OTTI |
410 | 569 | 591 | |||||||||||||
Gross realized losses excluding OTTI |
(200 | ) | (143 | ) | (398 | ) | ||||||||||
Total fixed maturities |
164 | 380 | (41 | ) | ||||||||||||
Equity securities: |
||||||||||||||||
OTTI on equity securities |
(1 | ) | – | (26 | ) | |||||||||||
Gross realized gains excluding OTTI |
15 | 86 | 105 | |||||||||||||
Gross realized losses excluding OTTI |
(5 | ) | (2 | ) | (224 | ) | ||||||||||
Total equity securities |
9 | 84 | (145 | ) | ||||||||||||
OTTI on other investments |
(3 | ) | (13 | ) | (137 | ) | ||||||||||
Foreign exchange losses |
(13 | ) | (54 | ) | (21 | ) | ||||||||||
Investment and embedded derivative instruments |
(143 | ) | 58 | 68 | ||||||||||||
Fair value adjustments on insurance derivative |
(779 | ) | (28 | ) | 368 | |||||||||||
S&P put options and futures |
(4 | ) | (150 | ) | (363 | ) | ||||||||||
Other derivative instruments |
(4 | ) | (19 | ) | (93 | ) | ||||||||||
Other |
(22 | ) | 174 | 168 | ||||||||||||
Net realized gains (losses) |
(795 | ) | 432 | (196 | ) | |||||||||||
Change in net unrealized appreciation (depreciation) on investments: |
||||||||||||||||
Fixed maturities available for sale |
569 | 451 | 2,723 | |||||||||||||
Fixed maturities held to maturity |
(89 | ) | 522 | (6 | ) | |||||||||||
Equity securities |
(47 | ) | (44 | ) | 213 | |||||||||||
Other |
40 | (35 | ) | 162 | ||||||||||||
Income tax expense |
(157 | ) | (152 | ) | (481 | ) | ||||||||||
Change in net unrealized appreciation on investments |
316 | 742 | 2,611 | |||||||||||||
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments |
$ | (479 | ) | $ | 1,174 | $ | 2,415 |
Years Ended December 31 |
Nine Months Ended 2009 |
|||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | ||||||||||||||
Balance of credit losses related to securities still held-beginning of period |
$ | 137 | $ | 174 | $ | 130 | ||||||||||
Additions where no OTTI was previously recorded |
12 | 34 | 104 | |||||||||||||
Additions where an OTTI was previously recorded |
8 | 12 | 11 | |||||||||||||
Reductions reflecting amounts previously recorded in OCI but subsequently reflected in net income |
– | – | (2 | ) | ||||||||||||
Reductions for securities sold during the period |
(83 | ) | (83 | ) | (69 | ) | ||||||||||
Balance of credit losses related to securities still held-end of period |
$ | 74 | $ | 137 | $ | 174 |
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Fair Value | Cost | Fair Value | Cost | ||||||||||||||||||
Investment funds |
$ | 378 | $ | 277 | $ | 329 | $ | 232 | ||||||||||||||
Limited partnerships |
531 | 429 | 438 | 356 | ||||||||||||||||||
Partially-owned investment companies |
904 | 904 | 688 | 688 | ||||||||||||||||||
Life insurance policies |
127 | 127 | 118 | 118 | ||||||||||||||||||
Policy loans |
143 | 143 | 54 | 54 | ||||||||||||||||||
Trading securities |
194 | 195 | 37 | 35 | ||||||||||||||||||
Other |
37 | 37 | 28 | 28 | ||||||||||||||||||
Total |
$ | 2,314 | $ | 2,112 | $ | 1,692 | $ | 1,511 |
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||||||||||||||
(in millions of U.S. dollars, except percentages) |
Carrying Value |
Issued Share Capital |
Ownership Percentage |
Carrying Value |
Issued Share Capital |
Ownership Percentage |
Domicile | |||||||||||||||||||||||||||||||||
Freisenbruch-Meyer |
$ | 8 | $ | 5 | 40.0% | $ | 8 | $ | 5 | 40.0% | Bermuda | |||||||||||||||||||||||||||||
ACE Cooperative Ins. Co. – Saudi Arabia |
7 | 27 | 30.0% | 7 | 27 | 30.0% | Saudi Arabia | |||||||||||||||||||||||||||||||||
Huatai Insurance Company |
241 | 457 | 20.0% | 229 | 207 | 21.3% | China | |||||||||||||||||||||||||||||||||
Huatai Life Insurance Company |
118 | 196 | 20.0% | 112 | 179 | 20.0% | China | |||||||||||||||||||||||||||||||||
Russian Reinsurance Company |
2 | 4 | 23.3% | – | – | – | Russia | |||||||||||||||||||||||||||||||||
Island Heritage |
4 | 27 | 10.8% | 4 | 27 | 10.8% | Cayman Islands | |||||||||||||||||||||||||||||||||
Total |
$ | 380 | $ | 716 | $ | 360 | $ | 445 |
0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||||||||||||
December 31, 2011 (in millions of U.S. dollars) |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
||||||||||||||||||||||||||||
Foreign |
$ | 1,801 | $ | (82.2 | ) | $ | 529 | $ | (40.0 | ) | $ | 2,330 | $ | (122.2 | ) | |||||||||||||||||||
Corporate securities |
3,084 | (148.2 | ) | 268 | (32.2 | ) | 3,352 | (180.4 | ) | |||||||||||||||||||||||||
Mortgage-backed securities |
440 | (7.5 | ) | 586 | (170.2 | ) | 1,026 | (177.7 | ) | |||||||||||||||||||||||||
States, municipalities, and political subdivisions |
30 | (0.4 | ) | 98 | (3.5 | ) | 128 | (3.9 | ) | |||||||||||||||||||||||||
Total fixed maturities |
5,355 | (238.3 | ) | 1,481 | (245.9 | ) | 6,836 | (484.2 | ) | |||||||||||||||||||||||||
Equity securities |
484 | (42.3 | ) | – | – | 484 | (42.3 | ) | ||||||||||||||||||||||||||
Other investments |
88 | (8.3 | ) | – | – | 88 | (8.3 | ) | ||||||||||||||||||||||||||
Total |
$ | 5,927 | $ | (288.9 | ) | $ | 1,481 | $ | (245.9 | ) | $ | 7,408 | $ | (534.8 | ) |
0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||||||||||||
December 31, 2010 (in millions of U.S. dollars) |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
Fair Value | Gross Unrealized Loss |
||||||||||||||||||||||||||||
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 | ) |
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Fixed maturities |
$ | 2,196 | $ | 2,071 | $ | 1,985 | ||||||||||
Short-term investments |
43 | 34 | 38 | |||||||||||||
Equity securities |
36 | 26 | 54 | |||||||||||||
Other |
62 | 44 | 48 | |||||||||||||
Gross investment income |
2,337 | 2,175 | 2,125 | |||||||||||||
Investment expenses |
(95 | ) | (105 | ) | (94 | ) | ||||||||||
Net investment income |
$ | 2,242 | $ | 2,070 | $ | 2,031 |
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Trust funds |
$ | 9,940 | $ | 8,200 | ||||||
Deposits with non-U.S. regulatory authorities |
2,240 | 2,289 | ||||||||
Deposits with U.S. regulatory authorities |
1,307 | 1,384 | ||||||||
Other pledged assets(1) |
1,615 | 1,190 | ||||||||
$ | 15,102 | $ | 13,063 |
(1) Includes restricted assets of $1.3 billion and $1.0 billion at December 31, 2011 and 2010, respectively, pledged under reverse repurchase agreements.
|
December 31, 2011 (in millions of U.S. dollars) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||
Fixed maturities available for sale |
||||||||||||||||||||||
U.S. Treasury and agency |
$ | 1,691 | $ | 1,264 | $ | 5 | $ | 2,960 | ||||||||||||||
Foreign |
212 | 12,156 | 33 | 12,401 | ||||||||||||||||||
Corporate securities |
20 | 14,539 | 134 | 14,693 | ||||||||||||||||||
Mortgage-backed securities |
– | 10,173 | 28 | 10,201 | ||||||||||||||||||
States, municipalities, and political subdivisions |
– | 1,711 | 1 | 1,712 | ||||||||||||||||||
1,923 | 39,843 | 201 | 41,967 | |||||||||||||||||||
Equity securities |
632 | 2 | 13 | 647 | ||||||||||||||||||
Short-term investments |
1,246 | 1,055 | – | 2,301 | ||||||||||||||||||
Other investments |
208 | 229 | 1,877 | 2,314 | ||||||||||||||||||
Securities lending collateral |
– | 1,375 | – | 1,375 | ||||||||||||||||||
Investment derivative instruments |
10 | – | – | 10 | ||||||||||||||||||
Other derivative instruments |
(16 | ) | 54 | 3 | 41 | |||||||||||||||||
Separate account assets |
607 | 53 | – | 660 | ||||||||||||||||||
Total assets measured at fair value |
$ | 4,610 | $ | 42,611 | $ | 2,094 | $ | 49,315 | ||||||||||||||
Liabilities: |
||||||||||||||||||||||
GLB(1) |
$ | – | $ | – | $ | 1,319 | $ | 1,319 |
(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 5 c) for additional information.
There were no significant gross transfers between Level 1 and Level 2 during the year ended December 31, 2011.
December 31, 2010 (in millions of U.S. dollars) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
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 | |||||||||||||||||
Separate account assets |
308 | – | – | 308 | ||||||||||||||||||
Total assets measured at fair value |
$ | 3,694 | $ | 38,420 | $ | 1,631 | $ | 43,745 | ||||||||||||||
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 5 c) for additional information.
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||
(in millions of U.S. dollars) |
Expected Liquidation Period |
Fair Value | Maximum Future Funding Commitments |
Fair Value | Maximum Future Funding Commitments |
|||||||||||||||||||||||
Financial |
5 to 9 Years | $ | 205 | $ | 141 | $ | 192 | $ | 151 | |||||||||||||||||||
Real estate |
3 to 9 Years | 270 | 96 | 163 | 92 | |||||||||||||||||||||||
Distressed |
6 to 9 Years | 182 | 57 | 243 | 43 | |||||||||||||||||||||||
Mezzanine |
6 to 9 Years | 195 | 282 | 125 | 173 | |||||||||||||||||||||||
Traditional |
3 to 8 Years | 565 | 200 | 376 | 291 | |||||||||||||||||||||||
Vintage |
1 to 3 Years | 18 | 1 | 27 | 3 | |||||||||||||||||||||||
Investment funds |
Not Applicable | 378 | – | 329 | – | |||||||||||||||||||||||
$ | 1,813 | $ | 777 | $ | 1,455 | $ | 753 |
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011 (in millions of U.S. dollars) |
U.S. Treasury and agency |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | |||||||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | – | $ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | $ | 507 | ||||||||||||||||||||||||||||||||||
Transfers into Level 3 |
– | 9 | 42 | 4 | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||
Transfers out of Level 3 |
– | (18 | ) | (4 | ) | (48 | ) | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
– | (1 | ) | (2 | ) | – | – | (1 | ) | 93 | – | – | ||||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
– | – | (3 | ) | – | – | 4 | (3 | ) | 2 | 812 | |||||||||||||||||||||||||||||||||||||||||
Purchases |
5 | 23 | 32 | 59 | – | 5 | 602 | – | – | |||||||||||||||||||||||||||||||||||||||||||
Sales |
– | (3 | ) | (27 | ) | (17 | ) | – | (8 | ) | (55 | ) | – | – | ||||||||||||||||||||||||||||||||||||||
Settlements |
– | (3 | ) | (19 | ) | (9 | ) | (1 | ) | – | (192 | ) | (3 | ) | – | |||||||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 5 | $ | 33 | $ | 134 | $ | 28 | $ | 1 | $ | 13 | $ | 1,877 | $ | 3 | $ | 1,319 | ||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | (3 | ) | $ | (1 | ) | $ | 812 |
(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 5c) for additional information.
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2010 (in millions of U.S. dollars) |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | ||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | ||||||||||||||||||||||||||||||
Transfers into (Out of) Level 3 |
(14 | ) | (25 | ) | (1 | ) | – | 1 | – | – | – | |||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
1 | 9 | – | – | – | 53 | – | – | ||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
1 | (3 | ) | – | – | 1 | (7 | ) | 2 | 64 | ||||||||||||||||||||||||||||||||||||
Purchases, Sales, Issuances, and Settlements, Net |
(21 | ) | (34 | ) | 19 | (1 | ) | (1 | ) | 237 | (12 | ) | – | |||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 26 | $ | 115 | $ | 39 | $ | 2 | $ | 13 | $ | 1,432 | $ | 4 | $ | 507 | ||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | – | $ | – | $ | – | $ | – | $ | – | $ | (7 | ) | $ | 1 | $ | 64 |
(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 $648 million at December 31, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $507 million and $443 million, respectively.
Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-Sale Debt Securities | ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2009 (in millions of U.S. dollars) |
Foreign | Corporate securities |
MBS | States, municipalities, and political subdivisions |
Equity securities |
Other investments |
Other derivative instruments |
GLB(1) | ||||||||||||||||||||||||||||||||||||||
Balance-Beginning of year |
$ | 45 | $ | 117 | $ | 109 | $ | 3 | $ | 21 | $ | 1,099 | $ | 87 | $ | 811 | ||||||||||||||||||||||||||||||
Transfers into (Out of) Level 3 |
4 | 8 | (37 | ) | – | – | (30 | ) | – | – | ||||||||||||||||||||||||||||||||||||
Change in Net Unrealized Gains (Losses) included in OCI |
5 | 17 | 12 | – | 9 | 191 | – | – | ||||||||||||||||||||||||||||||||||||||
Net Realized Gains/Losses |
(1 | ) | 1 | (2 | ) | – | – | (149 | ) | (71 | ) | (368 | ) | |||||||||||||||||||||||||||||||||
Purchases, Sales, Issuances, and Settlements, Net |
6 | 25 | (61 | ) | – | (18 | ) | 38 | (2 | ) | – | |||||||||||||||||||||||||||||||||||
Balance-End of year |
$ | 59 | $ | 168 | $ | 21 | $ | 3 | $ | 12 | $ | 1,149 | $ | 14 | $ | 443 | ||||||||||||||||||||||||||||||
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date |
$ | 2 | $ | 1 | $ | – | $ | – | $ | – | $ | (149 | ) | $ | (71 | ) | $ | (368 | ) |
(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 $559 million at December 31, 2009, and $910 million at December 31, 2008, which includes a fair value derivative adjustment of $443 million and $811 million, respectively.
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||
(in millions of U.S. dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||
Assets: |
||||||||||||||||||||||
Fixed maturities held to maturity |
||||||||||||||||||||||
U.S. Treasury and agency |
$ | 1,078 | $ | 1,126 | $ | 1,105 | $ | 1,127 | ||||||||||||||
Foreign |
935 | 930 | 1,049 | 1,013 | ||||||||||||||||||
Corporate securities |
2,338 | 2,337 | 2,361 | 2,313 | ||||||||||||||||||
Mortgage-backed securities |
2,949 | 3,036 | 3,811 | 3,846 | ||||||||||||||||||
States, municipalities, and political subdivisions |
1,147 | 1,176 | 1,175 | 1,162 | ||||||||||||||||||
Total fixed maturities held to maturity |
8,447 | 8,605 | 9,501 | 9,461 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||
Short-term debt |
1,251 | 1,251 | 1,300 | 1,300 | ||||||||||||||||||
Long-term debt |
3,360 | 3,823 | 3,358 | 3,690 | ||||||||||||||||||
Trust preferred securities |
309 | 404 | 309 | 364 | ||||||||||||||||||
Total liabilities |
$ | 4,920 | $ | 5,478 | $ | 4,967 | $ | 5,354 |
|
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Premiums written |
||||||||||||||||
Direct |
$ | 17,626 | $ | 15,887 | $ | 15,467 | ||||||||||
Assumed |
3,205 | 3,624 | 3,697 | |||||||||||||
Ceded |
(5,459 | ) | (5,803 | ) | (5,865 | ) | ||||||||||
Net |
$ | 15,372 | $ | 13,708 | $ | 13,299 | ||||||||||
Premiums earned |
||||||||||||||||
Direct |
$ | 17,534 | $ | 15,780 | $ | 15,415 | ||||||||||
Assumed |
3,349 | 3,516 | 3,768 | |||||||||||||
Ceded |
(5,496 | ) | (5,792 | ) | (5,943 | ) | ||||||||||
Net |
$ | 15,387 | $ | 13,504 | $ | 13,240 |
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance |
$ | 11,602 | $ | 12,149 | ||||||
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance |
787 | 722 | ||||||||
Net reinsurance recoverable on losses and loss expenses |
$ | 12,389 | $ | 12,871 |
(in millions of U.S. dollars, except percentages) | 2011 | Provision | % of Gross |
|||||||||||||
Categories |
||||||||||||||||
Largest reinsurers |
$ | 6,230 | $ | 109 | 1.7% | |||||||||||
Other reinsurers balances rated A- or better |
3,109 | 57 | 1.8% | |||||||||||||
Other reinsurers balances with ratings lower than A- or not rated |
667 | 108 | 16.2% | |||||||||||||
Other pools and government agencies |
122 | 8 | 6.6% | |||||||||||||
Structured settlements |
585 | 22 | 3.8% | |||||||||||||
Other captives |
1,842 | 37 | 2.0% | |||||||||||||
Other |
313 | 138 | 44.1% | |||||||||||||
Total |
$ | 12,868 | $ | 479 | 3.7% |
Largest Reinsurers |
||||
Berkshire Hathaway Insurance Group |
Munich Re Group | Swiss Re Group | ||
Everest Re Group |
National Workers Compensation | Transatlantic Holdings | ||
HDI Re Group (Hanover Re) |
Reinsurance Pool |
XL Capital Group | ||
Lloyd's of London |
Partner Re |
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
GMDB |
||||||||||||||||
Net premiums earned |
$ | 98 | $ | 109 | $ | 104 | ||||||||||
Policy benefits and other reserve adjustments |
$ | 59 | $ | 99 | $ | 111 | ||||||||||
GLB |
||||||||||||||||
Net premiums earned |
$ | 163 | $ | 164 | $ | 159 | ||||||||||
Policy benefits and other reserve adjustments |
47 | 29 | 20 | |||||||||||||
Net realized gains (losses) |
(812 | ) | (64 | ) | 368 | |||||||||||
(Loss) gain recognized in income |
$ | (696 | ) | $ | 71 | $ | 507 | |||||||||
Net cash received |
$ | 161 | $ | 160 | $ | 156 | ||||||||||
Net (increase) decrease in liability |
$ | (857 | ) | $ | (89 | ) | $ | 351 |
|
(in millions of U.S. dollars) | Insurance - North American |
Insurance - Overseas General |
Global Reinsurance |
Life | ACE Consolidated |
|||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,205 | $ | 1,497 | $ | 365 | $ | 747 | $ | 3,814 | ||||||||||||||||||
Acquisition of Rain and Hail |
135 | – | – | – | 135 | |||||||||||||||||||||||
Acquisition of Jerneh |
– | 94 | – | – | 94 | |||||||||||||||||||||||
Purchase price allocation adjustment |
– | – | – | 3 | 3 | |||||||||||||||||||||||
Foreign exchange revaluation and other |
11 | (27 | ) | – | – | (16 | ) | |||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,351 | $ | 1,564 | $ | 365 | $ | 750 | $ | 4,030 | ||||||||||||||||||
Purchase price allocation adjustment |
(12 | ) | 5 | – | – | (7 | ) | |||||||||||||||||||||
Acquisition of New York Life's Korea operations and Hong Kong operations |
– | – | – | 121 | 121 | |||||||||||||||||||||||
Acquisition of PMHC |
11 | – | – | – | 11 | |||||||||||||||||||||||
Acquisition of Rio Guayas |
– | 31 | – | – | 31 | |||||||||||||||||||||||
Foreign exchange revaluation and other |
– | 3 | – | (9 | ) | (6 | ) | |||||||||||||||||||||
Balance at December 31, 2011 |
$ | 1,350 | $ | 1,603 | $ | 365 | $ | 862 | $ | 4,180 |
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Balance, beginning of year |
$ | 634 | $ | 748 | $ | 823 | ||||||||||
Acquisition of New York Life's Korea operations and Hong Kong operations |
120 | – | – | |||||||||||||
Amortization expense |
(105 | ) | (111 | ) | (130 | ) | ||||||||||
Foreign exchange revaluation |
(1 | ) | (3 | ) | 55 | |||||||||||
Balance, end of year |
$ | 648 | $ | 634 | $ | 748 |
For the Year Ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 96 | ||
2013 |
86 | |||
2014 |
77 | |||
2015 |
70 | |||
2016 |
65 | |||
Total |
$ | 394 |
|
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Gross unpaid losses and loss expenses, beginning of year |
$ | 37,391 | $ | 37,783 | $ | 37,176 | ||||||||||
Reinsurance recoverable on unpaid losses(1) |
(12,149 | ) | (12,745 | ) | (12,935 | ) | ||||||||||
Net unpaid losses and loss expenses, beginning of year |
25,242 | 25,038 | 24,241 | |||||||||||||
Acquisition of subsidiaries |
92 | 145 | – | |||||||||||||
Total |
25,334 | 25,183 | 24,241 | |||||||||||||
Net losses and loss expenses incurred in respect of losses occurring in: |
||||||||||||||||
Current year |
10,076 | 8,082 | 7,998 | |||||||||||||
Prior years |
(556 | ) | (503 | ) | (576 | ) | ||||||||||
Total |
9,520 | 7,579 | 7,422 | |||||||||||||
Net losses and loss expenses paid in respect of losses occurring in: |
||||||||||||||||
Current year |
4,209 | 2,689 | 2,493 | |||||||||||||
Prior years |
4,657 | 4,724 | 4,455 | |||||||||||||
Total |
8,866 | 7,413 | 6,948 | |||||||||||||
Foreign currency revaluation and other |
(113 | ) | (107 | ) | 323 | |||||||||||
Net unpaid losses and loss expenses, end of year |
25,875 | 25,242 | 25,038 | |||||||||||||
Reinsurance recoverable on unpaid losses(1) |
11,602 | 12,149 | 12,745 | |||||||||||||
Gross unpaid losses and loss expenses, end of year |
$ | 37,477 | $ | 37,391 | $ | 37,783 |
(1) Net of provision for uncollectible reinsurance.
Asbestos | Environmental | Total | ||||||||||||||||||||||||||||||||
(in millions of U.S. dollars) | Gross | Net | Gross | Net | Gross | Net | ||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 2,130 | $ | 1,120 | $ | 316 | $ | 215 | $ | 2,446 | $ | 1,335 | ||||||||||||||||||||||
Incurred activity |
148 | 67 | 66 | 37 | 214 | 104 | ||||||||||||||||||||||||||||
Payment activity |
(311 | ) | (168 | ) | (99 | ) | (75 | ) | (410 | ) | (243 | ) | ||||||||||||||||||||||
Balance at December 31, 2011 |
$ | 1,967 | $ | 1,019 | $ | 283 | $ | 177 | $ | 2,250 | $ | 1,196 |
Brandywine | NICO Coverage | Net of NICO Coverage |
||||||||||||||||||||||||||
(in millions of U.S. dollars) | A&E | Other(1) | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,044 | $ | 881 | $ | 1,925 | $ | 928 | $ | 997 | ||||||||||||||||||
Incurred activity |
59 | 9 | 68 | |
– |
|
68 | |||||||||||||||||||||
Paid activity |
(194 | ) | (98 | ) | (292 | ) | (304 | ) | 12 | |||||||||||||||||||
Balance at December 31, 2011 |
$ | 909 | $ | 792 | $ | 1,701 | $ | 624 | $ | 1,077 |
(1) Other consists primarily of workers' compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business.
Westchester Specialty | NICO Coverage | Net of NICO Coverage |
||||||||||||||||||||||||||
(in millions of U.S. dollars) | A&E | Other | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 122 | $ | 87 | $ | 209 | $ | 186 | $ | 23 | ||||||||||||||||||
Incurred activity |
48 | (29 | ) | 19 | 14 | 5 | ||||||||||||||||||||||
Paid activity |
(27 | ) | (4 | ) | (31 | ) | (35 | ) | 4 | |||||||||||||||||||
Balance at December 31, 2011 |
$ | 143 | $ | 54 | $ | 197 | $ | 165 | $ | 32 |
|
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Current tax expense |
$ | 485 | $ | 443 | $ | 547 | ||||||||||
Deferred tax expense (benefit) |
21 | 116 | (19 | ) | ||||||||||||
Provision for income taxes |
$ | 506 | $ | 559 | $ | 528 |
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) |
2011 | 2010 | 2009 | |||||||||||||
Expected tax provision at Swiss statutory tax rate |
$ | 164 | $ | 287 | $ | 241 | ||||||||||
Permanent differences: |
||||||||||||||||
Taxes on earnings subject to rate other than Swiss statutory tax rate |
323 | 327 | 319 | |||||||||||||
Tax-exempt interest and dividends received deduction, net of proration |
(21 | ) | (20 | ) | (25 | ) | ||||||||||
Net withholding taxes |
19 | 15 | 14 | |||||||||||||
Change in valuation allowance |
(2 | ) | (3 | ) | (48 | ) | ||||||||||
Non-taxable acquisition gain |
– | (61 | ) | – | ||||||||||||
Other |
23 | 14 | 27 | |||||||||||||
Total provision for income taxes |
$ | 506 | $ | 559 | $ | 528 |
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Deferred tax assets: |
||||||||||
Loss reserve discount |
$ | 933 | $ | 852 | ||||||
Unearned premiums reserve |
85 | 87 | ||||||||
Foreign tax credits |
1,074 | 952 | ||||||||
Investments |
67 | 51 | ||||||||
Provision for uncollectible balances |
113 | 132 | ||||||||
Loss carry-forwards |
43 | 57 | ||||||||
Other, net |
31 | 114 | ||||||||
Cumulative translation adjustment |
5 | 2 | ||||||||
Total deferred tax assets |
2,351 | 2,247 | ||||||||
Deferred tax liabilities: |
||||||||||
Deferred policy acquisition costs |
107 | 100 | ||||||||
VOBA and other intangible assets |
373 | 367 | ||||||||
Un-remitted foreign earnings |
810 | 718 | ||||||||
Unrealized appreciation on investments |
392 | 262 | ||||||||
Total deferred tax liabilities |
1,682 | 1,447 | ||||||||
Valuation allowance |
57 | 31 | ||||||||
Net deferred tax assets |
$ | 612 | $ | 769 |
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Balance, beginning of year |
$ | 139 | $ | 155 | ||||||
Additions based on tax positions related to the current year |
1 | 1 | ||||||||
Reductions for tax positions of prior years |
(6 | ) | (17 | ) | ||||||
Balance, end of year |
$ | 134 | $ | 139 |
|
(in millions of U.S. dollars) |
December 31 2011 |
December 31 2010 |
||||||||
Short-term debt |
||||||||||
ACE Limited revolving credit facility |
$ | – | $ | 300 | ||||||
Reverse repurchase agreements |
1,251 | 1,000 | ||||||||
$ | 1,251 | $ | 1,300 | |||||||
Long-term debt |
||||||||||
ACE INA senior notes due 2014 |
$ | 500 | $ | 500 | ||||||
ACE INA senior notes due 2015 |
449 | 447 | ||||||||
ACE INA senior notes due 2015 |
699 | 699 | ||||||||
ACE INA senior notes due 2017 |
500 | 500 | ||||||||
ACE INA senior notes due 2018 |
300 | 300 | ||||||||
ACE INA senior notes due 2019 |
500 | 500 | ||||||||
ACE INA debentures due 2029 |
100 | 100 | ||||||||
ACE INA senior notes due 2036 |
299 | 299 | ||||||||
Other |
13 | 13 | ||||||||
$ | 3,360 | $ | 3,358 | |||||||
Trust Preferred Securities |
||||||||||
ACE INA capital securities due 2030 |
$ | 309 | $ | 309 |
|
December 31 2011 |
December 31 2010 |
|||||||||||||||||||||||||||
(in millions of U.S. dollars) | Consolidated Balance Sheet Location |
Fair Value | Notional Value/ Payment Provision |
Fair Value | Notional Value/ Payment Provision |
|||||||||||||||||||||||
Investment and embedded derivative instruments |
||||||||||||||||||||||||||||
Foreign currency forward contracts |
AP | $ | 7 | $ | 674 | $ | 3 | $ | 729 | |||||||||||||||||||
Futures contracts on money market instruments |
AP | 7 | 10,476 | 3 | 4,297 | |||||||||||||||||||||||
Futures contracts on notes and bonds |
AP | (4 | ) | 1,055 | 5 | 676 | ||||||||||||||||||||||
Options on money market instruments |
AP | – | 292 | – | 1 | |||||||||||||||||||||||
Convertible bonds |
FM AFS | 357 | 353 | 416 | 382 | |||||||||||||||||||||||
TBAs |
FM AFS | 60 | 56 | 101 | 98 | |||||||||||||||||||||||
$ | 427 | $ | 12,906 | $ | 528 | $ | 6,183 | |||||||||||||||||||||
Other derivative instruments |
||||||||||||||||||||||||||||
Futures contracts on equities(1) |
AP | $ | (16 | ) | $ | 1,367 | $ | (25 | ) | $ | 1,069 | |||||||||||||||||
Options on equity market indices(1) |
AP | 54 | 250 | 46 | 250 | |||||||||||||||||||||||
Credit default swaps |
AP | 3 | 350 | 4 | 350 | |||||||||||||||||||||||
Other |
AP | – | 6 | – | 17 | |||||||||||||||||||||||
$ | 41 | $ | 1,973 | $ | 25 | $ | 1,686 | |||||||||||||||||||||
GLB(2) |
AP/FPB | $ | (1,505 | ) | $ | 1,378 | $ | (648 | ) | $ | 649 |
(1) Related to GMDB and GLB blocks of business.
(2) Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 5 c) 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.
Years Ended December 31 | ||||||||||
(in millions of U.S. dollars) |
2011 |
2010 |
||||||||
Investment and embedded derivative instruments |
||||||||||
Foreign currency forward contracts |
$ | 6 | $ | 21 | ||||||
All other futures contracts and options |
(98 | ) | 29 | |||||||
Convertible bonds |
(50 | ) | 7 | |||||||
TBAs |
(1 | ) | 1 | |||||||
Total investment and embedded derivative instruments |
$ | (143 | ) | $ | 58 | |||||
GLB and other derivative instruments |
||||||||||
GLB(1) |
$ | (779 | ) | $ | (28 | ) | ||||
Futures contracts on equities(2) |
(12 | ) | (140 | ) | ||||||
Options on equity market indices(2) |
8 | (10 | ) | |||||||
Interest rate swaps |
– | (21 | ) | |||||||
Credit default swaps |
(4 | ) | 1 | |||||||
Other |
– | 1 | ||||||||
Total GLB and other derivative instruments |
$ | (787 | ) | $ | (197 | ) | ||||
$ | (930 | ) | $ | (139 | ) |
(1) Excludes foreign exchange gains (losses) related to GLB.
(2) Related to GMDB and GLB blocks of business.
For the year ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 93 | ||
2013 |
72 | |||
2014 |
60 | |||
2015 |
54 | |||
2016 |
52 | |||
Thereafter |
166 | |||
Total minimum future lease commitments |
$ | 497 |
|
For the year ending December 31 (in millions of U.S. dollars) |
||||
2012 |
$ | 22 | ||
2013 |
23 | |||
2014 |
22 | |||
2015 |
24 | |||
2016 |
25 | |||
2017-2021 |
131 |
|
Years Ended December 31 | ||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||
Losses from separate account assets |
$ | 36 | $ | – | $ | – | ||||||||||
Equity in net (income) loss of partially-owned entities |
(40 | ) | (81 | ) | 39 | |||||||||||
Federal excise and capital taxes |
20 | 19 | 16 | |||||||||||||
Amortization of intangible assets |
29 | 9 | 11 | |||||||||||||
Noncontrolling interest expense |
2 | 14 | 3 | |||||||||||||
Other(1) |
26 | 23 | 16 | |||||||||||||
Other (income) expense |
$ | 73 | $ | (16 | ) | $ | 85 |
(1) Included in Other are acquisition-related costs of $5 million and $14 million in 2011 and 2010, respectively. Acquisition-related costs were immaterial in 2009.
|
Statement of Operations by Segment
For the year ended December 31, 2011 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 6,851 | $ | 5,756 | $ | 979 | $ | 1,786 | $ | – | $ | 15,372 | ||||||||||||||||||||||
Net premiums earned |
6,911 | 5,737 | 1,003 | 1,736 | – | 15,387 | ||||||||||||||||||||||||||||
Losses and loss expenses |
5,276 | 3,073 | 621 | 549 | 1 | 9,520 | ||||||||||||||||||||||||||||
Policy benefits |
– | – | – | 401 | – | 401 | ||||||||||||||||||||||||||||
Policy acquisition costs |
613 | 1,393 | 185 | 255 | 1 | 2,447 | ||||||||||||||||||||||||||||
Administrative expenses |
592 | 945 | 52 | 295 | 168 | 2,052 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
430 | 326 | 145 | 236 | (170 | ) | 967 | |||||||||||||||||||||||||||
Net investment income |
1,170 | 548 | 287 | 224 | 13 | 2,242 | ||||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
34 | 33 | (50 | ) | (806 | ) | (6 | ) | (795 | ) | ||||||||||||||||||||||||
Interest expense |
15 | 5 | 2 | 11 | 217 | 250 | ||||||||||||||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||||||||||||
Losses from separate account assets |
– | – | – | 36 | – | 36 | ||||||||||||||||||||||||||||
Other |
5 | – | (1 | ) | 18 | 15 | 37 | |||||||||||||||||||||||||||
Income tax expense (benefit) |
394 | 169 | 30 | 50 | (137 | ) | 506 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,220 | $ | 733 | $ | 351 | $ | (461 | ) | $ | (258 | ) | $ | 1,585 |
Statement of Operations by Segment
For the year ended December 31, 2010 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 5,797 | $ | 5,280 | $ | 1,075 | $ | 1,556 | $ | – | $ | 13,708 | ||||||||||||||||||||||
Net premiums earned |
5,651 | 5,240 | 1,071 | 1,542 | – | 13,504 | ||||||||||||||||||||||||||||
Losses and loss expenses |
3,918 | 2,647 | 518 | 496 | – | 7,579 | ||||||||||||||||||||||||||||
Policy benefits |
– | 4 | – | 353 | – | 357 | ||||||||||||||||||||||||||||
Policy acquisition costs |
625 | 1,251 | 204 | 257 | – | 2,337 | ||||||||||||||||||||||||||||
Administrative expenses |
561 | 840 | 55 | 228 | 174 | 1,858 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
547 | 498 | 294 | 208 | (174 | ) | 1,373 | |||||||||||||||||||||||||||
Net investment income |
1,138 | 475 | 288 | 172 | (3 | ) | 2,070 | |||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
417 | 123 | 93 | (192 | ) | (9 | ) | 432 | ||||||||||||||||||||||||||
Interest expense |
9 | 1 | – | 3 | 211 | 224 | ||||||||||||||||||||||||||||
Other (income) expense |
(22 | ) | (13 | ) | (23 | ) | 20 | 22 | (16 | ) | ||||||||||||||||||||||||
Income tax expense (benefit) |
436 | 173 | 42 | 62 | (154 | ) | 559 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,679 | $ | 935 | $ | 656 | $ | 103 | $ | (265 | ) | $ | 3,108 |
Statement of Operations by Segment
For the year ended December 31, 2009 (in millions of U.S. dollars) |
Insurance – North American |
Insurance – Overseas General |
Global Reinsurance |
Life | Corporate and Other |
ACE Consolidated |
||||||||||||||||||||||||||||
Net premiums written |
$ | 5,641 | $ | 5,145 | $ | 1,038 | $ | 1,475 | $ | – | $ | 13,299 | ||||||||||||||||||||||
Net premiums earned |
5,684 | 5,147 | 979 | 1,430 | – | 13,240 | ||||||||||||||||||||||||||||
Losses and loss expenses |
4,013 | 2,597 | 330 | 482 | – | 7,422 | ||||||||||||||||||||||||||||
Policy benefits |
– | 4 | – | 321 | – | 325 | ||||||||||||||||||||||||||||
Policy acquisition costs |
517 | 1,202 | 195 | 216 | – | 2,130 | ||||||||||||||||||||||||||||
Administrative expenses |
572 | 783 | 55 | 243 | 158 | 1,811 | ||||||||||||||||||||||||||||
Underwriting income (loss) |
582 | 561 | 399 | 168 | (158 | ) | 1,552 | |||||||||||||||||||||||||||
Net investment income |
1,094 | 479 | 278 | 176 | 4 | 2,031 | ||||||||||||||||||||||||||||
Net realized gains (losses) including OTTI |
10 | (20 | ) | (17 | ) | (15 | ) | (154 | ) | (196 | ) | |||||||||||||||||||||||
Interest expense |
1 | – | – | – | 224 | 225 | ||||||||||||||||||||||||||||
Other (income) expense |
36 | 20 | 2 | 2 | 25 | 85 | ||||||||||||||||||||||||||||
Income tax expense (benefit) |
384 | 186 | 46 | 48 | (136 | ) | 528 | |||||||||||||||||||||||||||
Net income (loss) |
$ | 1,265 | $ | 814 | $ | 612 | $ | 279 | $ | (421 | ) | $ | 2,549 |
For the year ended December 31, 2011
(in millions of U.S. dollars) |
Property & All Other |
Casualty | Life, Accident & Health |
ACE Consolidated |
||||||||||||||||||
Insurance – North American |
$ | 3,174 | $ | 3,380 | $ | 357 | $ | 6,911 | ||||||||||||||
Insurance – Overseas General |
2,080 | 1,415 | 2,242 | 5,737 | ||||||||||||||||||
Global Reinsurance |
458 | 545 | – | 1,003 | ||||||||||||||||||
Life |
– | – | 1,736 | 1,736 | ||||||||||||||||||
$ | 5,712 | $ | 5,340 | $ | 4,335 | $ | 15,387 | |||||||||||||||
For the year ended December 31, 2010 | ||||||||||||||||||||||
Insurance – North American |
$ | 1,578 | $ | 3,777 | $ | 296 | $ | 5,651 | ||||||||||||||
Insurance – Overseas General |
1,800 | 1,424 | 2,016 | 5,240 | ||||||||||||||||||
Global Reinsurance |
520 | 551 | – | 1,071 | ||||||||||||||||||
Life |
– | – | 1,542 | 1,542 | ||||||||||||||||||
$ | 3,898 | $ | 5,752 | $ | 3,854 | $ | 13,504 | |||||||||||||||
For the year ended December 31, 2009 | ||||||||||||||||||||||
Insurance – North American |
$ | 1,690 | $ | 3,734 | $ | 260 | $ | 5,684 | ||||||||||||||
Insurance – Overseas General |
1,787 | 1,420 | 1,940 | 5,147 | ||||||||||||||||||
Global Reinsurance |
546 | 433 | – | 979 | ||||||||||||||||||
Life |
– | – | 1,430 | 1,430 | ||||||||||||||||||
$ | 4,023 | $ | 5,587 | $ | 3,630 | $ | 13,240 |
Year ended | North America | Europe | Asia Pacific/Far East |
Latin America | ||||||||||||||||||
2011 |
61% | 18% | 14% | 7% | ||||||||||||||||||
2010 |
61% | 20% | 13% | 6% | ||||||||||||||||||
2009 |
63% | 20% | 12% | 5% |
|
Bermuda Subsidiaries | ||||||||||||||||||
(in millions of U.S. dollars) | 2011 | 2010 | 2009 | |||||||||||||||
Statutory capital and surplus |
$ | 11,786 | $ | 11,484 | $ | 9,164 | ||||||||||||
Statutory net income |
$ | 713 | $ | 2,175 | $ | 2,369 | ||||||||||||
U.S. Subsidiaries | ||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||
Statutory capital and surplus |
$ | 5,851 | $ | 6,279 | $ | 5,885 | ||||||||||||
Statutory net income |
$ | 693 | $ | 1,025 | $ | 904 | ||||||||||||
Swiss Subsidiaries | ||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||
Statutory capital and surplus |
$ | 578 | $ | 518 | $ | 468 | ||||||||||||
Statutory net income (loss) |
$ | 20 | $ | 35 | $ | (12 | ) |
|
Condensed Consolidating Balance Sheet at December 31, 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 |
$ | 33 | $ | 28,848 | $ | 26,795 | $ | – | $ | 55,676 | ||||||||||||||||||
Cash |
106 | 382 | 126 | – | 614 | |||||||||||||||||||||||
Insurance and reinsurance balances receivable |
– | 3,944 | 443 | – | 4,387 | |||||||||||||||||||||||
Reinsurance recoverable on losses and loss expenses |
– | 17,146 | (4,757 | ) | – | 12,389 | ||||||||||||||||||||||
Reinsurance recoverable on policy benefits |
– | 941 | (692 | ) | – | 249 | ||||||||||||||||||||||
Value of business acquired |
– | 648 | – | – | 648 | |||||||||||||||||||||||
Goodwill and other intangible assets |
– | 4,280 | 551 | – | 4,831 | |||||||||||||||||||||||
Investments in subsidiaries |
24,055 | – | – | (24,055 | ) | – | ||||||||||||||||||||||
Due from subsidiaries and affiliates, net |
498 | – | – | (498 | ) | – | ||||||||||||||||||||||
Other assets |
8 | 7,181 | 1,522 | – | 8,711 | |||||||||||||||||||||||
Total assets |
$ | 24,700 | $ | 63,370 | $ | 23,988 | $ | (24,553 | ) | $ | 87,505 | |||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||
Unpaid losses and loss expenses |
$ | – | $ | 30,837 | $ | 6,640 | $ | – | $ | 37,477 | ||||||||||||||||||
Unearned premiums |
– | 5,416 | 918 | – | 6,334 | |||||||||||||||||||||||
Future policy benefits |
– | 3,673 | 601 | – | 4,274 | |||||||||||||||||||||||
Due to subsidiaries and affiliates, net |
– | 316 | 182 | (498 | ) | – | ||||||||||||||||||||||
Short-term debt |
– | 850 | 401 | – | 1,251 | |||||||||||||||||||||||
Long-term debt |
– | 3,360 | – | – | 3,360 | |||||||||||||||||||||||
Trust preferred securities |
– | 309 | – | – | 309 | |||||||||||||||||||||||
Other liabilities |
184 | 7,769 | 2,031 | – | 9,984 | |||||||||||||||||||||||
Total liabilities |
184 | 52,530 | 10,773 | (498 | ) | 62,989 | ||||||||||||||||||||||
Total shareholders' equity |
24,516 | 10,840 | 13,215 | (24,055 | ) | 24,516 | ||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ | 24,700 | $ | 63,370 | $ | 23,988 | $ | (24,553 | ) | $ | 87,505 |
(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(3) |
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 subsidiaries and affiliates, net |
564 | – | – | (564 | ) | – | ||||||||||||||||||||||
Other assets |
14 | 7,045 | 1,434 | – | 8,493 | |||||||||||||||||||||||
Total assets |
$ | 23,462 | $ | 60,629 | $ | 22,357 | $ | (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 | |||||||||||||||||||||||
Due to subsidiaries and affiliates, net |
– | 555 | 9 | (564 | ) | – | ||||||||||||||||||||||
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 | 50,920 | 9,537 | (564 | ) | 60,381 | ||||||||||||||||||||||
Total shareholders' equity |
22,974 | 9,709 | 12,820 | (22,529 | ) | 22,974 | ||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ | 23,462 | $ | 60,629 | $ | 22,357 | $ | (23,093 | ) | $ | 83,355 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools (Pools) with a third-party bank. At December 31, 2010, the cash balance of one or more entities was negative; however, the overall Pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Operations
For the year ended December 31, 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 |
$ | – | $ | 9,081 | $ | 6,291 | $ | – | $ | 15,372 | ||||||||||||||||||
Net premiums earned |
– | 9,082 | 6,305 | – | 15,387 | |||||||||||||||||||||||
Net investment income |
2 | 1,096 | 1,144 | – | 2,242 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
1,504 | – | – | (1,504 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(4 | ) | 62 | (853 | ) | – | (795 | ) | ||||||||||||||||||||
Losses and loss expenses |
– | 5,889 | 3,631 | – | 9,520 | |||||||||||||||||||||||
Policy benefits |
– | 192 | 209 | – | 401 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
69 | 2,520 | 1,910 | – | 4,499 | |||||||||||||||||||||||
Interest (income) expense |
(37 | ) | 267 | 20 | – | 250 | ||||||||||||||||||||||
Other (income) expense |
(125 | ) | 135 | 63 | – | 73 | ||||||||||||||||||||||
Income tax expense |
10 | 422 | 74 | – | 506 | |||||||||||||||||||||||
Net income |
$ | 1,585 | $ | 815 | $ | 689 | $ | (1,504 | ) | $ | 1,585 |
Condensed Consolidating Statement of Operations
For the year ended 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 |
|||||||||||||||||||||||
Net premiums written |
$ | – | $ | 8,195 | $ | 5,513 | $ | – | $ | 13,708 | ||||||||||||||||||
Net premiums earned |
– | 7,940 | 5,564 | – | 13,504 | |||||||||||||||||||||||
Net investment income |
1 | 1,011 | 1,058 | – | 2,070 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
3,066 | – | – | (3,066 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(42 | ) | 303 | 171 | – | 432 | ||||||||||||||||||||||
Losses and loss expenses |
– | 4,910 | 2,669 | – | 7,579 | |||||||||||||||||||||||
Policy benefits |
– | 148 | 209 | – | 357 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
70 | 2,372 | 1,753 | – | 4,195 | |||||||||||||||||||||||
Interest (income) expense |
(37 | ) | 251 | 10 | – | 224 | ||||||||||||||||||||||
Other (income) expense |
(123 | ) | 95 | 12 | – | (16 | ) | |||||||||||||||||||||
Income tax expense |
7 | 447 | 105 | – | 559 | |||||||||||||||||||||||
Net income |
$ | 3,108 | $ | 1,031 | $ | 2,035 | $ | (3,066 | ) | $ | 3,108 |
(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 year ended December 31, 2009 (in millions of U.S. dollars) |
ACE Limited (Parent Guarantor) |
ACE INA Holdings, Inc. (Subsidiary Issuer) |
Other ACE Limited Subsidiaries and Eliminations(1) |
Consolidating Adjustments(2) |
ACE Limited Consolidated |
|||||||||||||||||||||||
Net premiums written |
$ | – | $ | 7,407 | $ | 5,892 | $ | – | $ | 13,299 | ||||||||||||||||||
Net premiums earned |
– | 7,411 | 5,829 | – | 13,240 | |||||||||||||||||||||||
Net investment income |
1 | 1,003 | 1,027 | – | 2,031 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
2,636 | – | – | (2,636 | ) | – | ||||||||||||||||||||||
Net realized gains (losses) including OTTI |
(75 | ) | 75 | (196 | ) | – | (196 | ) | ||||||||||||||||||||
Losses and loss expenses |
– | 4,620 | 2,802 | – | 7,422 | |||||||||||||||||||||||
Policy benefits |
– | 84 | 241 | – | 325 | |||||||||||||||||||||||
Policy acquisition costs and administrative expenses |
54 | 2,180 | 1,707 | – | 3,941 | |||||||||||||||||||||||
Interest (income) expense |
(43 | ) | 261 | 7 | – | 225 | ||||||||||||||||||||||
Other (income) expense |
7 | 44 | 34 | – | 85 | |||||||||||||||||||||||
Income tax expense (benefit) |
(5 | ) | 395 | 138 | – | 528 | ||||||||||||||||||||||
Net income |
$ | 2,549 | $ | 905 | $ | 1,731 | $ | (2,636 | ) | $ | 2,549 |
(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 year ended December 31, 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 |
$ | 762 | $ | 1,053 | $ | 2,395 | $ | (740 | ) | $ | 3,470 | |||||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||||||
Purchases of fixed maturities available for sale |
– | (12,203 | ) | (12,375 | ) | – | (24,578 | ) | ||||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (338 | ) | (2 | ) | – | (340 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (157 | ) | (152 | ) | – | (309 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
9 | 9,718 | 8,244 | – | 17,971 | |||||||||||||||||||||||
Sales of equity securities |
– | 354 | 22 | – | 376 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,784 | 1,936 | – | 3,720 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 933 | 346 | – | 1,279 | |||||||||||||||||||||||
Net derivative instruments settlements |
(3 | ) | (24 | ) | (40 | ) | – | (67 | ) | |||||||||||||||||||
Capital contribution to subsidiaries |
(385 | ) | – | – | 385 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
41 | – | – | (41 | ) | – | ||||||||||||||||||||||
Acquisition of subsidiaries (net of cash acquired of $91) |
– | (569 | ) | (37 | ) | – | (606 | ) | ||||||||||||||||||||
Other |
– | (420 | ) | (62 | ) | – | (482 | ) | ||||||||||||||||||||
Net cash flows used for investing activities |
(338 | ) | (922 | ) | (2,120 | ) | 344 | (3,036 | ) | |||||||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||||||
Dividends paid on Common Shares |
(459 | ) | – | – | – | (459 | ) | |||||||||||||||||||||
Common Shares repurchased |
– | – | (195 | ) | – | (195 | ) | |||||||||||||||||||||
Net proceeds from issuance (repayment) of short-term debt |
(300 | ) | (150 | ) | 400 | – | (50 | ) | ||||||||||||||||||||
Proceeds from share-based compensation plans |
133 | – | – | – | 133 | |||||||||||||||||||||||
Advances (to) from affiliates |
– | (149 | ) | 108 | 41 | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (740 | ) | 740 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 385 | (385 | ) | – | ||||||||||||||||||||||
Tax benefit on share-based compensation expense |
– | 3 | 3 | – | 6 | |||||||||||||||||||||||
Net cash flows used for financing activities |
(626 | ) | (296 | ) | (39 | ) | 396 | (565 | ) | |||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | (26 | ) | (1 | ) | – | (27 | ) | ||||||||||||||||||||
Net increase (decrease) in cash |
(202 | ) | (191 | ) | 235 | – | (158 | ) | ||||||||||||||||||||
Cash – beginning of period(3) |
308 | 573 | (109 | ) | – | 772 | ||||||||||||||||||||||
Cash – end of period |
$ | 106 | $ | 382 | $ | 126 | $ | – | $ | 614 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2010, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Cash Flows
For the year ended 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 |
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Net cash flows from operating activities |
$ | (176 | ) | $ | 1,798 | $ | 2,124 | $ | (200 | ) | $ | 3,546 | ||||||||||||||||
Cash flows from investing activities |
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Purchases of fixed maturities available for sale |
(1 | ) | (13,785 | ) | (17,470 | ) | – | (31,256 | ) | |||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (615 | ) | (1 | ) | – | (616 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (107 | ) | (687 | ) | – | (794 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
– | 10,225 | 14,054 | – | 24,279 | |||||||||||||||||||||||
Sales of equity securities |
– | 17 | 757 | – | 774 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,845 | 1,815 | – | 3,660 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 1,142 | 211 | – | 1,353 | |||||||||||||||||||||||
Net derivative instruments settlements |
(3 | ) | (10 | ) | (96 | ) | – | (109 | ) | |||||||||||||||||||
Capital contribution to subsidiaries |
(290 | ) | – | – | 290 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
851 | – | – | (851 | ) | – | ||||||||||||||||||||||
Acquisition of subsidiaries (net of cash acquired of $80) |
– | (1,139 | ) | – | – | (1,139 | ) | |||||||||||||||||||||
Other |
– | (253 | ) | (80 | ) | – | (333 | ) | ||||||||||||||||||||
Net cash flows from (used for) investing activities |
557 | (2,680 | ) | (1,497 | ) | (561 | ) | (4,181 | ) | |||||||||||||||||||
Cash flows from financing activities |
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Dividends paid on Common Shares |
(435 | ) | – | – | – | (435 | ) | |||||||||||||||||||||
Common shares repurchased |
– | – | (235 | ) | – | (235 | ) | |||||||||||||||||||||
Proceeds from share-based compensation plans |
63 | – | – | – | 63 | |||||||||||||||||||||||
Net proceeds from issuance of short-term debt |
300 | 841 | – | – | 1,141 | |||||||||||||||||||||||
Net proceeds from issuance of long-term debt |
– | 199 | – | – | 199 | |||||||||||||||||||||||
Advances (to) from affiliates |
– | 3 | (854 | ) | 851 | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (200 | ) | 200 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 290 | (290 | ) | – | ||||||||||||||||||||||
Tax expense on share-based compensation expense |
– | – | (1 | ) | – | (1 | ) | |||||||||||||||||||||
Net cash flows from (used for) financing activities |
(72 | ) | 1,043 | (1,000 | ) | 761 | 732 | |||||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | 12 | (6 | ) | – | 6 | ||||||||||||||||||||||
Net increase (decrease) in cash |
309 | 173 | (379 | ) | – | 103 | ||||||||||||||||||||||
Cash – beginning of period(3) |
(1 | ) | 400 | 270 | – | 669 | ||||||||||||||||||||||
Cash – end of period(3) |
$ | 308 | $ | 573 | $ | (109 | ) | $ | – | $ | 772 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2010 and 2009, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2009 (in millions of U.S. dollars) |
ACE Limited (Parent Guarantor) |
ACE INA Holdings, Inc. (Subsidiary Issuer) |
Other ACE Limited Subsidiaries and Eliminations(1) |
Consolidating Adjustments(2) |
ACE Limited Consolidated |
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Net cash flows from operating activities |
$ | 594 | $ | 1,888 | $ | 1,203 | $ | (350 | ) | $ | 3,335 | |||||||||||||||||
Cash flows from investing activities |
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Purchases of fixed maturities available for sale |
– | (16,877 | ) | (20,383 | ) | – | (37,260 | ) | ||||||||||||||||||||
Purchases of fixed maturities held to maturity |
– | (457 | ) | (15 | ) | – | (472 | ) | ||||||||||||||||||||
Purchases of equity securities |
– | (186 | ) | (168 | ) | – | (354 | ) | ||||||||||||||||||||
Sales of fixed maturities available for sale |
88 | 12,650 | 16,916 | – | 29,654 | |||||||||||||||||||||||
Sales of fixed maturities held to maturity |
– | 10 | 1 | – | 11 | |||||||||||||||||||||||
Sales of equity securities |
– | 544 | 728 | – | 1,272 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities available for sale |
– | 1,792 | 1,612 | – | 3,404 | |||||||||||||||||||||||
Maturities and redemptions of fixed maturities held to maturity |
– | 410 | 104 | – | 514 | |||||||||||||||||||||||
Net derivative instruments settlements |
– | (6 | ) | (86 | ) | – | (92 | ) | ||||||||||||||||||||
Capital contribution to subsidiaries |
(90 | ) | – | – | 90 | – | ||||||||||||||||||||||
Advances (to) from affiliates |
(174 | ) | – | – | 174 | – | ||||||||||||||||||||||
Other |
(4 | ) | (14 | ) | 117 | – | 99 | |||||||||||||||||||||
Net cash flows used for investing activities |
(180 | ) | (2,134 | ) | (1,174 | ) | 264 | (3,224 | ) | |||||||||||||||||||
Cash flows from financing activities |
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Dividends paid on Common Shares |
(388 | ) | – | – | – | (388 | ) | |||||||||||||||||||||
Net repayment of short-term debt |
– | (466 | ) | – | – | (466 | ) | |||||||||||||||||||||
Net proceeds from issuance of long-term debt |
– | 500 | – | – | 500 | |||||||||||||||||||||||
Proceeds from share-based compensation plans |
25 | – | – | – | 25 | |||||||||||||||||||||||
Advances from (to) affiliates |
– | 156 | 18 | (174 | ) | – | ||||||||||||||||||||||
Dividends to parent company |
– | – | (350 | ) | 350 | – | ||||||||||||||||||||||
Capital contribution from parent |
– | – | 90 | (90 | ) | – | ||||||||||||||||||||||
Tax benefit on share-based compensation expense |
– | 6 | 2 | – | 8 | |||||||||||||||||||||||
Net cash flows from (used for) financing activities |
(363 | ) | 196 | (240 | ) | 86 | (321 | ) | ||||||||||||||||||||
Effect of foreign currency rate changes on cash and cash equivalents |
– | 8 | 4 | – | 12 | |||||||||||||||||||||||
Net increase (decrease) in cash |
51 | (42 | ) | (207 | ) | – | (198 | ) | ||||||||||||||||||||
Cash – beginning of year(3) |
(52 | ) | 442 | 477 | – | 867 | ||||||||||||||||||||||
Cash – end of year(3) |
$ | (1 | ) | $ | 400 | $ | 270 | $ | – | $ | 669 |
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(3) ACE maintains two notional multi-currency cash pools with a third-party bank. At December 31, 2009, and 2008, the cash balance of one or more entities was negative; however, the overall notional multi-currency cash pool balances were positive. Refer to Note 1 f) for additional information.
|
Three Months Ended | ||||||||||||||||||||||
(in millions of U.S. dollars, except per share data) |
March 31 2011 |
June 30 2011 |
September 30 2011 |
December 31 2011 |
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Net premiums earned |
$ | 3,309 | $ | 3,757 | $ | 4,490 | $ | 3,831 | ||||||||||||||
Net investment income |
544 | 569 | 564 | 565 | ||||||||||||||||||
Net realized gains (losses) including OTTI |
(45 | ) | (73 | ) | (760 | ) | 83 | |||||||||||||||
Total revenues |
$ | 3,808 | $ | 4,253 | $ | 4,294 | $ | 4,479 | ||||||||||||||
Losses and loss expenses |
$ | 2,263 | $ | 2,226 | $ | 2,745 | $ | 2,286 | ||||||||||||||
Policy benefits |
$ | 91 | $ | 108 | $ | 83 | $ | 119 | ||||||||||||||
Net income (loss) |
$ | 259 | $ | 607 | $ | (31 | ) | $ | 750 | |||||||||||||
Basic earnings per share |
$ | 0.77 | $ | 1.79 | $ | (0.09 | ) | $ | 2.22 | |||||||||||||
Diluted earnings per share |
$ | 0.76 | $ | 1.77 | $ | (0.09 | ) | $ | 2.20 | |||||||||||||
Three Months Ended | ||||||||||||||||||||||
(in millions of U.S. dollars, except per share data) |
March 31 2010 |
June 30 2010 |
September 30 2010 |
December 31 2010 |
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Net premiums earned |
$ | 3,277 | $ | 3,233 | $ | 3,422 | $ | 3,572 | ||||||||||||||
Net investment income |
504 | 518 | 516 | 532 | ||||||||||||||||||
Net realized gains (losses) including OTTI |
168 | 9 | (50 | ) | 305 | |||||||||||||||||
Total revenues |
$ | 3,949 | $ | 3,760 | $ | 3,888 | $ | 4,409 | ||||||||||||||
Losses and loss expenses |
$ | 1,921 | $ | 1,800 | $ | 1,887 | $ | 1,971 | ||||||||||||||
Policy benefits |
$ | 87 | $ | 87 | $ | 93 | $ | 90 | ||||||||||||||
Net income |
$ | 755 | $ | 677 | $ | 675 | $ | 1,001 | ||||||||||||||
Basic earnings per share |
$ | 2.23 | $ | 1.99 | $ | 1.98 | $ | 2.94 | ||||||||||||||
Diluted earnings per share |
$ | 2.22 | $ | 1.98 | $ | 1.97 | $ | 2.92 |
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