v2.4.0.6
INVESTMENTS
 12 Months Ended
Dec. 31, 2011
INVESTMENTS [Abstract]  
INVESTMENTS [Text Block]

5.       INVESTMENTS

a) Fixed Maturities and Equities             
                  
The amortized cost or cost and fair values of our fixed maturities and equities were as follows:
                  
    Amortized  Gross  Gross      Non-credit 
    Cost or   Unrealized  Unrealized  Fair   OTTI  
   Cost  Gains  Losses  Value  in AOCI(5) 
                  
 At December 31, 2011               
 Fixed maturities               
  U.S. government and agency $ 1,142,732 $ 5,669 $ (134) $ 1,148,267 $ - 
  Non-U.S. government   1,241,664   7,359   (36,572)   1,212,451   - 
  Corporate debt   3,581,320   85,766   (57,495)   3,609,591   - 
  Agency RMBS(1)  2,568,053   69,073   (492)   2,636,634   - 
  CMBS(2)  298,138   14,816   (263)   312,691   - 
  Non-Agency RMBS  177,529   1,431   (13,247)   165,713   (1,120) 
  ABS(3)  639,949   7,094   (15,001)   632,042   - 
  Municipals(4)  1,171,953   52,438   (1,680)   1,222,711   - 
   Total fixed maturities$ 10,821,338 $ 243,646 $ (124,884) $ 10,940,100 $ (1,120) 
                  
 Equity securities               
  Common stocks  341,603   25,143   (19,291)   347,455    
  Exchange-traded funds  239,411   77   (25,507)   213,981    
  Foreign bond mutual funds  118,552   -   (2,428)   116,124    
  Total equity securities$ 699,566 $ 25,220 $ (47,226) $ 677,560    
                  
 At December 31, 2010               
 Fixed maturities               
  U.S. government and agency $ 856,711 $ 7,101 $ (3,692) $ 860,120 $ - 
  Non-U.S. government   777,236   9,321   (13,759)   772,798   - 
  Corporate debt   4,054,048   144,956   (36,096)   4,162,908   - 
  Agency RMBS(1)  2,571,124   43,160   (20,702)   2,593,582   - 
  CMBS(2)  454,288   21,998   (1,501)   474,785   - 
  Non-Agency RMBS  252,460   3,287   (11,545)   244,202   (7,443) 
  ABS(3)  668,037   8,856   (15,050)   661,843   (1,275) 
  Municipals(4)  712,339   11,870   (11,550)   712,659   (350) 
   Total fixed maturities$ 10,346,243 $ 250,549 $ (113,895) $ 10,482,897 $ (9,068) 
                  
 Equity securities               
  Common stocks  247,693   26,761   (3,004)   271,450    
  Exchange-traded funds  -   -   -   -    
  Foreign bond mutual fund  79,514   -   (1,710)   77,804    
  Total equity securities$ 327,207 $ 26,761 $ (4,714) $ 349,254    
                  
(1) Residential mortgage-backed securities (RMBS) originated by U.S. agencies.
(2) Commercial mortgage-backed securities (CMBS).
(3) Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards, and other asset types. This asset class also includes an insignificant position in collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs).
                 
(4) Municipals include bonds issued by states, municipalities and political subdivisions.
(5) Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
                 

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge and credit funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 5(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities  
           
The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
           
   Amortized  Fair  % of Total 
   Cost  Value Fair Value 
           
 At December 31, 2011         
 Maturity         
 Due in one year or less$ 543,100 $ 539,009 4.9% 
 Due after one year through five years  4,694,832   4,685,866 42.8% 
 Due after five years through ten years  1,779,811   1,845,054 16.9% 
 Due after ten years  119,926   123,091 1.1% 
    7,137,669   7,193,020 65.7% 
 Agency RMBS  2,568,053   2,636,634 24.1% 
 CMBS  298,138   312,691 2.9% 
 Non-Agency RMBS  177,529   165,713 1.5% 
 ABS  639,949   632,042 5.8% 
  Total $ 10,821,338 $ 10,940,100 100.0% 
           
 At December 31, 2010         
 Maturity         
 Due in one year or less$ 476,807 $ 489,190 4.7% 
 Due after one year through five years  4,096,477   4,144,144 39.5% 
 Due after five years through ten years  1,605,419   1,655,061 15.8% 
 Due after ten years  221,631   220,090 2.1% 
    6,400,334   6,508,485 62.1% 
 Agency RMBS  2,571,124   2,593,582 24.7% 
 CMBS  454,288   474,785 4.5% 
 Non-Agency RMBS  252,460   244,202 2.4% 
 ABS  668,037   661,843 6.3% 
  Total $ 10,346,243 $ 10,482,897 100.0% 
           

Gross Unrealized Losses                  
                      
The following tables summarize fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
                      
     12 months or greater  Less than 12 months  Total 
     Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
     Value  Losses  Value  Losses  Value  Losses 
                      
 At December 31, 2011                   
 Fixed maturities                   
  U.S. government and agency $ - $ - $ 233,816 $ (134) $ 233,816 $ (134) 
  Non-U.S. government   -   -   786,034   (36,572)   786,034   (36,572) 
  Corporate debt  54,843   (2,437)   1,228,479   (55,058)   1,283,322   (57,495) 
  Agency RMBS  -   -   105,059   (492)   105,059   (492) 
  CMBS  5,155   (17)   11,243   (246)   16,398   (263) 
  Non-Agency RMBS 43,348   (8,127)   85,053   (5,120)   128,401   (13,247) 
  ABS   65,096   (9,497)   201,569   (5,504)   266,665   (15,001) 
  Municipals  8,450   (1,467)   38,590   (213)   47,040   (1,680) 
   Total fixed maturities$176,892 $(21,545) $2,689,843 $(103,339) $2,866,735 $(124,884) 
                      
 Equity securities                   
  Common stocks $ 4,445 $ (2,105) $ 124,481 $ (17,186) $ 128,926 $ (19,291) 
  Exchange-traded funds   -   -   212,050   (25,507)   212,050   (25,507) 
  Foreign bond mutual funds   -   -   116,124   (2,428)   116,124   (2,428) 
   Total equity securities$4,445 $(2,105) $452,655 $(45,121) $457,100 $(47,226) 
                      
 At December 31, 2010                  
 Fixed maturities                   
  U.S. government and agency $ - $ - $453,207 $(3,692) $453,207 $(3,692) 
  Non-U.S. government   83,572   (6,062)   302,431   (7,697)   386,003   (13,759) 
  Corporate debt 160,161  (13,123)  1,087,683  (22,973)  1,247,844  (36,096) 
  Agency RMBS 735  (42)  1,308,690  (20,660)  1,309,425  (20,702) 
  CMBS 1,164  (59)  48,701  (1,442)  49,865  (1,501) 
  Non-Agency RMBS  100,074  (10,030)  57,095  (1,515)  157,169  (11,545) 
  ABS  40,617  (12,871)  155,491  (2,179)  196,108  (15,050) 
  Municipals 23,681  (3,118)  288,130  (8,432)  311,811  (11,550) 
   Total fixed maturities$410,004 $(45,305) $3,701,428 $(68,590) $4,111,432 $(113,895) 
                      
 Equity securities                   
  Common stocks $ 4,347 $ (601) $ 44,513 $ (2,403) $ 48,860 $ (3,004) 
  Exchange-traded funds   -   -   -   -   -   - 
  Foreign bond mutual fund   -   -   77,804   (1,710)   77,804   (1,710) 
   Total equity securities$4,347 $(601) $122,317 $(4,113) $126,664 $(4,714) 
                      

Fixed Maturities

 

At December 31, 2011, 791 fixed maturities (2010: 1,150) were in an unrealized loss position of $125 million (2010: $114 million) of which $18 million (2010: $15 million) was related to securities below investment grade or not rated.

 

At December 31, 2011, 138 securities (2010: 206) have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $177 million (2010: $410 million). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily depressed at December 31, 2011, and are expected to recover in value as the securities approach maturity. Further, at December 31, 2011, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

 

Equity Securities

 

At December 31, 2011, 128 securities (2010: 71) were in an unrealized loss position of $47 million (2010: $5 million).

 

At December 31, 2011, 10 (2010: 12) securities have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $4 million (2010: $4 million). Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at December 31, 2011 and 2010.

b) Other Investments              
                
The following tables provide a breakdown of our investments in hedge and credit funds and CLO equity tranched securities (CLO Equities), together with additional information relating to the liquidity of each category:
               
                
         Redemption Frequency Redemption % Subject 
  Fair Value  (if currently eligible) Notice Period to Lockups 
                
 At December 31, 2011              
 Multi-strategy funds$ 230,750 33%  Quarterly, Semi-annually 60-95 days -% 
 Long/short equity funds  214,498 31%  Quarterly, Semi-annually 30-60 days 13% 
 Event-driven funds  118,380 17%  Quarterly, Annually 45-95 days -% 
 Leveraged bank loan funds  69,132 10%  Quarterly 65 days -% 
 CLO - Equities  66,560 9%  n/a n/a -% 
  Total other investments$ 699,320 100%      13% 
                
 At December 31, 2010              
 Multi-strategy funds$ 256,392 49%  Quarterly, Semi-annually 60-95 days 4% 
 Leveraged bank loan funds  82,761 16%  Quarterly, Semi-annually 65-75 days -% 
 Event-driven funds  73,096 14%  Quarterly, Annually 45-95 days 4% 
 Long/short equity funds  50,784 10%  Quarterly 45-60 days -% 
 CLO - Equities  56,263 11%  n/a n/a -% 
  Total other investments$ 519,296 100%      8% 
                
n/a - not applicable            

The investment strategies for the above funds are as follows:

 

  • Multi-strategy funds: Seek to achieve above-market returns by pursuing multiple investment strategies to diversify risks and reduce volatility. This category includes funds of hedge funds which invest in a large pool of hedge funds across a diversified range of hedge fund strategies.

     

  • Long/short equity funds: Seek to achieve attractive returns by executing an equity trading strategy involving both long and short investments in publicly-traded equities.

     

  • Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities.

     

  • Leveraged bank loan funds: Seek to achieve attractive returns by investing primarily in bank loan collateral that has limited interest duration exposure.

 

Two common redemption restrictions which may impact our ability to redeem our hedge and credit funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2011 and 2010, neither of these restrictions impacted our redemption requests.

 

At December 31, 2011, $45 million (2010: $58 million) of our hedge and credit fund investments were invested in funds currently in liquidation (a side pocket or otherwise not accepting redemption requests) or in a period of planned principal distributions.

 

At December 31, 2011 and 2010, we have no unfunded commitments relating to our investments in hedge and credit funds.

c) Net Investment Income            
              
Net investment income was derived from the following sources: 
              
      
 Year ended December 31,    2011  2010  2009 
              
 Fixed maturities    $337,616 $352,357 $385,418 
 Other investments    31,856  64,765  82,042 
 Equities    11,186  2,900  3,765 
 Cash and cash equivalents    5,697  5,836  8,302 
 Short-term investments    1,592  1,441  651 
 Gross investment income     387,947   427,299   480,178 
 Investment expenses     (25,517)   (20,407)   (15,700) 
  Net investment income   $362,430 $ 406,892 $ 464,478 
              

d) Net Realized Investment Gains (Losses)          
              
The following table provides an analysis of net realized investment gains (losses):
              
      
 Year ended December 31,   2011 2010 2009 
              
 Gross realized gains   $ 260,288 $ 326,930 $ 181,075 
 Gross realized losses     (123,016)   (116,082)   (157,102) 
 Net OTTI recognized in earnings     (15,861)   (17,932)   (337,435) 
 Net realized gains (losses) on fixed maturities and equities     121,411   192,916   (313,462) 
 Change in fair value of investment derivatives(1)     4,431   (3,641)   (1,032) 
 Fair value hedges(1)     (4,403)   5,823   2,910 
              
 Net realized investment gains (losses)   $ 121,439 $ 195,098 $ (311,584) 
              
(1) Refer to Note 7 – Derivative Instruments            

The following table summarizes the OTTI recognized in earnings by asset class:
               
       
 Year ended December 31,     2011  2010  2009 
               
 Fixed maturities:             
  Corporate debt    $ 1,954 $ 3,156 $ 277,979 
  Agency RMBS      -   -   345 
  CMBS      -   413   10,843 
  Non-Agency RMBS      717   4,715   24,249 
  ABS       61   1,126   2,384 
  Municipals      483   19   1,280 
        3,215   9,429   317,080 
               
 Equities      12,646   8,503   20,355 
  Total OTTI recognized in earnings    $ 15,861 $ 17,932 $ 337,435 
               

As disclosed in Note 2(a), we adopted an updated accounting standard related to the presentation and recognition of OTTI for fixed maturities in the second quarter of 2009. Because this standard does not allow for retrospective application, the $26 million of OTTI charge for the first quarter of 2009 was calculated based on the full difference between the fair value and carrying value of the impaired fixed maturities. The cumulative effect of the adoption resulted in a $38 million net after-tax increase to retained earnings with a corresponding decrease to AOCI, resulting in no change to our shareholders' equity.

 

Fixed Maturities

 

The following table provides a roll forward of the credit losses, ("credit loss table"), before income taxes, for which a portion of the OTTI was recognized in AOCI:
        
         
     
 Year ended December 31,  2011  2010 
         
 Balance at beginning of period $ 57,498 $ 162,390 
  Credit impairments recognized on securities not previously impaired   448   1,355 
  Additional credit impairments recognized on securities previously impaired   -   1,826 
  Change in timing of future cash flows on securities previously impaired   (101)   - 
  Intent to sell of securities previously impaired   -   (829) 
  Securities sold/redeemed/matured   (55,784)   (107,244) 
 Balance at end of period $ 2,061 $ 57,498 
         

Credit losses are calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment. The following provides a summary of the credit loss activities by asset class for the above table as well as the significant inputs and the methodology used to estimate these credit losses.

 

Non-U.S. Government:

Foreign government obligations are evaluated for credit loss primarily through qualitative assessments of the likelihood of credit loss using information such as credit ratings and yield. At December 31, 2011, our holdings in sovereign debt, including $634 million (2010: $451 million) relating to the eurozone countries, were all highly rated securities. The gross unrealized losses of $37 million at December 31, 2011 were due to foreign exchange losses, mainly on euro-denominated securities. We have concluded there were no credit losses anticipated for these securities at December 31, 2011.

 

Corporate Debt:

Certain previously impaired medium-term notes (MTNs) held matured during 2011, resulting in a $52 million (2010: $85 million) decrease in the accumulated credit loss impairments in the above credit loss table. These maturities also resulted in $15 million of realized gains (2010: $29 million of realized gains). At December 31, 2011, we no longer hold any MTNs.

 

To estimate credit losses for corporate debt securities, our projected cash flows are primarily driven by our assumptions regarding the probability of default and the severity associated with those defaults. Our default and loss severity rates are based on credit rating, credit analysis, industry analyst reports and forecasts, Moody's historical default data and any other data relevant to the recoverability of the security. In 2011, the OTTI charges on corporate debt securities were related to our intent to sell, as well as unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain. In 2010, the weighted average default rate and loss severity rate were 35% and 100%, respectively, for determining the credit losses on our impaired corporate debt securities.

 

Non-agency CMBS:

Our investments in CMBS are diversified and highly rated, with a weighted average estimated subordination percentage of 25% at December 31, 2011 (2010: 27%). Based on discounted cash flows at December 31, 2011, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS.

 

Non-agency RMBS:

For non-agency RMBS, our projected cash flows incorporated underlying data from widely accepted third-party data sources along with certain internal assumptions and judgments regarding the future performance of the security. These assumptions included the following: default, delinquency, loss severity and prepayment rates. The assumptions used to calculate the credit losses in 2011 have not changed significantly since December 31, 2010. At December 31, 2011, the fair value of our non-agency RMBS was $166 million (2010: $244 million), consisting primarily of $128 million (2010: $174 million) of Prime and $23 million (2010: $52 million) of Alt-A MBS. At December 31, 2011, we had gross unrealized losses of $13 million (2010: $12 million) on these securities.

 

ABS:

The majority of the unrealized losses on ABS at December 31, 2011, and 2010, were related to CLO debt tranched securities (“CLO Debt”) with a carrying value of $48 million (2010: $43 million). We used the following significant inputs to estimate the credit loss for these securities:

 

           
 At December 31,    2011 2010 
           
 Default rate4.0% 3.8% 
 Loss severity rate53.5% 65.0% 
 Collateral spreads2.6% - 3.8% 2.9% - 3.7% 
           
           
Our assumptions on default and loss severity rates are established based on an assessment of actual experience to date for each CLO Debt and review of recent credit rating agencies’ default and loss severity forecasts. Based on the underlying collateral values and our projected cash flows at December 31, 2011, our CLO Debt had sufficient credit protection levels to receive all contractually obligated principal and interest payments.

Equities

 

The OTTI losses on equities in 2011 and 2010 are primarily due to the severity and duration of their unrealized loss positions, for which we concluded the forecasted recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. At December 31, 2011, the fair value of our equities was $678 million (2010: $349 million), which included $47 million (2010: $5 million) of gross unrealized losses.

 

e)        Restricted Investments

 

To support our (re)insurance operations we provide collateral (fixed maturities and short-term investments) in various forms. We primarily utilize trust arrangements for U.S. insurance obligations and, to a lesser extent, issue letters of credit for reinsurance business. The letter of credit facility is secured with fixed maturity investments (see Note 10(b)). We are also required to maintain securities on deposit with various regulatory authorities. The fair value of our restricted investments was as follows:

 

        
 At December 31, 2011  2010 
        
 Collateral in Trust for inter-company agreements$ 1,921,586 $ 1,785,961 
 Collateral for secured letter of credit facility   441,229   405,037 
 Collateral in Trust for third party agreements  238,395   217,905 
 Securities on deposit with regulatory authorities  49,543   87,657 
  Total restricted investments$ 2,650,753 $ 2,496,560