5. Reinsurance

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

1.8%

Other reinsurers balances with ratings lower than A- or not rated

667

108

16.2%

Other pools and government agencies

122

6.6%

Structured settlements

585

3.8%

Other captives

1,842

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;

• 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.