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Investments
 6 Months Ended
Jun. 30, 2013
Investments, Debt and Equity Securities [Abstract]  
Investments
3. Investments

a) Fixed maturities
The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:
 
June 30, 2013
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,238

 
$
89

 
$
(39
)
 
$
3,288

 
$
—

Foreign
13,552

 
401

 
(112
)
 
13,841

 
—

Corporate securities
16,263

 
751

 
(150
)
 
16,864

 
(6
)
Mortgage-backed securities
9,719

 
225

 
(166
)
 
9,778

 
(37
)
States, municipalities, and political subdivisions
3,216

 
85

 
(56
)
 
3,245

 
—

 
$
45,988

 
$
1,551

 
$
(523
)
 
$
47,016

 
$
(43
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
858

 
$
22

 
$
(4
)
 
$
876

 
$
—

Foreign
873

 
32

 
—

 
905

 
—

Corporate securities
2,030

 
78

 
—

 
2,108

 
—

Mortgage-backed securities
1,615

 
52

 
—

 
1,667

 
—

States, municipalities, and political subdivisions
1,200

 
22

 
(16
)
 
1,206

 
—

 
$
6,576

 
$
206

 
$
(20
)
 
$
6,762

 
$
—

 
 
 
 
 
 
 
 
 
 
December 31, 2012
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

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

 
$
183

 
$
(1
)
 
$
3,735

 
$
—

Foreign
13,016

 
711

 
(14
)
 
13,713

 
—

Corporate securities
15,529

 
1,210

 
(31
)
 
16,708

 
(7
)
Mortgage-backed securities
10,051

 
458

 
(36
)
 
10,473

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

 
163

 
(3
)
 
2,677

 
—

 
$
44,666

 
$
2,725

 
$
(85
)
 
$
47,306

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

 
$
39

 
$
—

 
$
1,083

 
$
—

Foreign
910

 
54

 
—

 
964

 
—

Corporate securities
2,133

 
142

 
—

 
2,275

 
—

Mortgage-backed securities
2,028

 
88

 
—

 
2,116

 
—

States, municipalities, and political subdivisions
1,155

 
44

 
(4
)
 
1,195

 
—

 
$
7,270

 
$
367

 
$
(4
)
 
$
7,633

 
$
—


As discussed in Note 3 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” 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 three and six months ended June 30, 2013, $1 million and $25 million of net unrealized appreciation related to such securities is included in OCI. For the three and six months ended June 30, 2012, $16 million and $84 million of net unrealized appreciation related to such securities is included in OCI. At June 30, 2013 and December 31, 2012, AOCI includes net unrealized depreciation of $2 million and $25 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 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 85 percent of the total mortgage-backed securities at June 30, 2013 and December 31, 2012 are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

The following table presents fixed maturities by contractual maturity:
 
 
 
June 30

 
 
 
December 31

 
 
 
2013

 
 
 
2012

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

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
2,102

 
$
2,121

 
$
1,887

 
$
1,906

Due after 1 year through 5 years
14,042

 
14,493

 
13,411

 
14,010

Due after 5 years through 10 years
15,833

 
16,179

 
15,032

 
16,153

Due after 10 years
4,292

 
4,445

 
4,285

 
4,764

 
36,269

 
37,238

 
34,615

 
36,833

Mortgage-backed securities
9,719

 
9,778

 
10,051

 
10,473

 
$
45,988

 
$
47,016

 
$
44,666

 
$
47,306

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
447

 
$
451

 
$
656

 
$
659

Due after 1 year through 5 years
2,218

 
2,288

 
1,870

 
1,950

Due after 5 years through 10 years
1,833

 
1,878

 
2,119

 
2,267

Due after 10 years
463

 
478

 
597

 
641

 
4,961

 
5,095

 
5,242

 
5,517

Mortgage-backed securities
1,615

 
1,667

 
2,028

 
2,116

 
$
6,576

 
$
6,762

 
$
7,270

 
$
7,633



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

b) Equity securities
The following table presents the cost and fair value of equity securities: 
 
June 30


December 31

(in millions of U.S. dollars)
2013


2012

Cost
$
843

 
$
707

Gross unrealized appreciation
45

 
41

Gross unrealized depreciation
(51
)
 
(4
)
Fair value
$
837

 
$
744



c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in Net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in Net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.

Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.

For all non-fixed maturities, OTTI is evaluated based on the following:

•
the amount of time a security has been in a loss position and the magnitude of the loss position;

•
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and

•
ACE’s ability and intent to hold the security to the expected recovery period.

As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired.

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

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

For the three and six months ended June 30, 2013, credit losses recognized in Net income for corporate securities were $6 million and $7 million, respectively. For the three and six months ended June 30, 2012, credit losses recognized in Net income for corporate securities were $1 million and $4 million, respectively.

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

For the three and six months ended June 30, 2013, there were no credit losses recognized in Net income for mortgage-backed securities. For the three and six months ended June 30, 2012, credit losses recognized in Net income for mortgage-backed securities were nil and $3 million, respectively.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary”: 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(in millions of U.S. dollars)
2013

 
2012

 
2013

 
2012

Fixed maturities:
 
 
 
 
 
 
 
OTTI on fixed maturities, gross
$
(6
)
 
$
(1
)
 
$
(7
)
 
$
(8
)
OTTI on fixed maturities recognized in OCI (pre-tax)
—

 
—

 
—

 
—

OTTI on fixed maturities, net
(6
)
 
(1
)
 
(7
)
 
(8
)
Gross realized gains excluding OTTI
64

 
104

 
126

 
216

Gross realized losses excluding OTTI
(27
)
 
(35
)
 
(52
)
 
(106
)
Total fixed maturities
31

 
68

 
67

 
102

Equity securities:
 
 
 
 
 
 
 
OTTI on equity securities
—

 
(4
)
 
(1
)
 
(5
)
Gross realized gains excluding OTTI
8

 
—

 
10

 
2

Gross realized losses excluding OTTI
(1
)
 
(1
)
 
(3
)
 
(1
)
Total equity securities
7

 
(5
)
 
6

 
(4
)
OTTI on other investments
(1
)
 
(5
)
 
(2
)
 
(7
)
Foreign exchange gains (losses)
(5
)
 
(9
)
 
71

 
(14
)
Investment and embedded derivative instruments
40

 
(49
)
 
58

 
(7
)
Fair value adjustments on insurance derivative
101

 
(467
)
 
429

 
(39
)
S&P put options and futures
(68
)
 
70

 
(318
)
 
(161
)
Other derivative instruments
(1
)
 
1

 
(1
)
 
(4
)
Other
—

 
2

 
—

 
—

Net realized gains (losses)
$
104

 
$
(394
)
 
$
310

 
$
(134
)

 

The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI: 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(in millions of U.S. dollars)
2013

 
2012

 
2013

 
2012

Balance of credit losses related to securities still held – beginning of period
$
35

 
$
55

 
$
43

 
$
74

Additions where no OTTI was previously recorded
4

 
1

 
4

 
2

Additions where an OTTI was previously recorded
2

 
—

 
3

 
5

Reductions for securities sold during the period
(1
)
 
(9
)
 
(10
)
 
(34
)
Balance of credit losses related to securities still held – end of period
$
40

 
$
47

 
$
40

 
$
47



d) Gross unrealized loss
At June 30, 2013, there were 6,267 fixed maturities out of a total of 23,938 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $5 million. There were 74 equity securities out of a total of 188 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $40 million. Fixed maturities in an unrealized loss position at June 30, 2013 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 at June 30, 2013 included 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
 
June 30, 2013
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
1,670

 
$
(43
)
 
$
—

 
$
—

 
$
1,670

 
$
(43
)
Foreign
4,278

 
(108
)
 
76

 
(4
)
 
4,354

 
(112
)
Corporate securities
4,535

 
(140
)
 
77

 
(10
)
 
4,612

 
(150
)
Mortgage-backed securities
4,190

 
(153
)
 
125

 
(13
)
 
4,315

 
(166
)
States, municipalities, and political subdivisions
2,057

 
(72
)
 
2

 
—

 
2,059

 
(72
)
Total fixed maturities
16,730

 
(516
)
 
280

 
(27
)
 
17,010

 
(543
)
Equity securities
522

 
(51
)
 
—

 
—

 
522

 
(51
)
Other investments
37

 
(5
)
 
—

 
—

 
37

 
(5
)
Total
$
17,289

 
$
(572
)
 
$
280

 
$
(27
)
 
$
17,569

 
$
(599
)
 
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2012
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

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

 
$
(1
)
 
$
—

 
$
—

 
$
440

 
$
(1
)
Foreign
1,234

 
(8
)
 
88

 
(6
)
 
1,322

 
(14
)
Corporate securities
1,026

 
(23
)
 
85

 
(8
)
 
1,111

 
(31
)
Mortgage-backed securities
855

 
(4
)
 
356

 
(32
)
 
1,211

 
(36
)
States, municipalities, and political subdivisions
316

 
(3
)
 
48

 
(4
)
 
364

 
(7
)
Total fixed maturities
3,871

 
(39
)
 
577

 
(50
)
 
4,448

 
(89
)
Equity securities
29

 
(4
)
 
—

 
—

 
29

 
(4
)
Other investments
68

 
(5
)
 
—

 
—

 
68

 
(5
)
Total
$
3,968

 
$
(48
)
 
$
577

 
$
(50
)
 
$
4,545

 
$
(98
)


e) Restricted assets
ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. ACE is also required to restrict assets pledged under 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 June 30, 2013 and December 31, 2012, are fixed maturities and short-term investments totaling $16.0 billion and $16.6 billion, respectively, and cash of $71 million and $139 million, respectively.

The following table presents the components of restricted assets:
 
June 30

 
December 31

(in millions of U.S. dollars)
2013

 
2012

Trust funds
$
10,909

 
$
11,389

Deposits with non-U.S. regulatory authorities
1,989

 
2,133

Assets pledged under repurchase agreements
1,458

 
1,401

Deposits with U.S. regulatory authorities
1,335

 
1,338

Other pledged assets
395

 
456

 
$
16,086

 
$
16,717