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Note 2 Investments

Investment income

Net investment income by source (excluding unit-linked and with-profit business) was as follows:

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USD millions

2011

2012

Fixed income securities

3 637

3 063

Equity securities

78

91

Policy loans, mortgages and other loans

405

313

Investment real estate

134

134

Short-term investments

103

102

Other current investments

15

78

Share in earnings of equity-accounted investees

286

508

Cash and cash equivalents

100

79

Net result from deposit-accounted contracts

145

166

Deposits with ceding companies

339

430

Gross investment income

5 242

4 964

Investment expenses

–511

–464

Interest charged for funds held

–105

–27

Net investment income – non-participating

4 626

4 473

Dividends received from investments accounted for using the equity method were USD 64 million and USD 128 million for 2011 and 2012, respectively.

Realised gains and losses

Realised gains and losses for fixed income, equity securities and other investments (excluding unit-linked and with-profit business) were as follows:

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USD millions

2011

2012

1

Refer to Note 6 for more information.

Fixed income securities available-for-sale:

 

 

Gross realised gains

2 607

2 336

Gross realised losses

–612

–383

Equity securities available-for-sale:

 

 

Gross realised gains

96

181

Gross realised losses

–234

–77

Other-than-temporary impairments

–254

–162

Net realised investment gains/losses on trading securities

575

58

Change in net unrealised investment gains/losses on trading securities

71

67

Other investments:

 

 

Net realised/unrealised gains/losses

–881

–230

Net realised/unrealised gains/losses on insurance-related derivatives

–67

–189

Gain/loss related to sale of Admin Re® US operations1

 

–399

Foreign exchange gains/losses

333

–255

Net realised investment gains/losses – non-participating

1 634

947

Proceeds from sales of fixed income securities available-for-sale amounted to USD 115 775 million and USD 101 046 million for 2011 and 2012, respectively. Sales of equity securities available-for-sale were USD 2 389 million and USD 1 494 million for 2011 and 2012, respectively.

Investment result – unit-linked and with-profit business

Net investment result on unit-linked and with-profit business credited to policyholders was as follows:

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2011

 

2012

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Investment income – fixed income securities

119

95

128

97

Investment income – equity securities

545

39

531

32

Investment income – other

21

24

18

24

Total investment income –
unit-linked and with-profit business

685

158

677

153

Realised gains/losses – fixed income securities

109

99

65

88

Realised gains/losses – equity securities

–1 364

–73

1 679

89

Realised gains/losses – other

–17

 

–149

–32

Total realised gains/losses –
unit-linked and with-profit business

–1 272

26

1 595

145

Total net investment result –
unit-linked and with-profit business

–587

184

2 272

298

Impairment on fixed income securities related to credit losses

Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a security’s amortised cost basis and expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.

For securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and similar hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and net present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.

A reconciliation of other-than-temporary impairment related to credit losses recognised in earnings was as follows:

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USD millions

2011

2012

Balance as of 1 January

829

515

Credit losses for which an other-than-temporary impairment was not previously recognised

141

14

Reductions for securities sold during the period

–418

–237

Increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery

54

54

Impact of increase in cash flows expected to be collected

–85

–61

Impact of foreign exchange movements

–6

6

Balance as of 31 December 

515

291

Investments available-for-sale

Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale as of 31 December were as follows:

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2011
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments
recognised in other comprehensive income

Estimated
fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

20 387

1 881

–1

 

22 267

US Agency securitised products

3 866

144

–3

 

4 007

States of the United States and political subdivisions of the states

245

24

–6

 

263

United Kingdom

15 182

1 865

–51

 

16 996

Canada

3 078

806

–2

 

3 882

Germany

4 791

200

–51

 

4 940

France

3 068

45

–52

 

3 061

Other

6 849

453

–56

–1

7 245

Total

57 466

5 418

–222

–1

62 661

Corporate debt securities

21 467

2 065

–265

–13

23 254

Residential mortgage-backed securities

2 119

30

–154

–110

1 885

Commercial mortgage-backed securities

3 820

222

–141

–38

3 863

Other asset-backed securities

2 112

64

–54

–15

2 107

Fixed income securities available-for-sale

86 984

7 799

–836

–177

93 770

Equity securities
available-for-sale

1 907

201

–148

 

1 960

 

 

 

 

 

 

 

 

 

 

 

 

2012
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments
recognised in other comprehensive income

Estimated
fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

13 375

746

–26

 

14 095

US Agency securitised products

4 063

114

–7

 

4 170

States of the United States and political subdivisions of the states

85

19

 

 

104

United Kingdom

14 820

1 268

–48

 

16 040

Canada

3 556

760

–2

 

4 314

Germany

5 963

273

–7

 

6 229

France

3 201

255

–6

 

3 450

Other

7 627

514

–37

 

8 104

Total

52 690

3 949

–133

 

56 506

Corporate debt securities

21 347

2 369

–46

–18

23 652

Residential mortgage-backed securities

911

46

–23

–14

920

Commercial mortgage-backed securities

2 894

245

–33

–2

3 104

Other asset-backed securities

2 752

56

–9

–7

2 792

Fixed income securities available-for-sale

80 594

6 665

–244

–41

86 974

Equity securities
available-for-sale

2 789

373

–60

 

3 102

The “Other-than-temporary impairments recognised in other comprehensive income” column includes only securities with a credit-related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is presented in the “Other-than-temporary impairments recognised in other comprehensive income” column.

Investments trading

Fixed income securities and equity securities classified as trading (excluding unit-linked and with-profit business) as of 31 December were as follows:

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USD millions

2011

2012

Debt securities issued by governments and government agencies

2 957

1 506

Corporate debt securities

214

182

Mortgage- and asset-backed securities

282

186

Fixed income securities trading – non-participating

3 453

1 874

Equity securities trading – non-participating

571

672

Investments held for unit-linked and with-profit business

Investments held for unit-linked and with-profit business as of 31 December were as follows:

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2011

2012

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Fixed income securities trading

2 354

1 741

2 559

2 071

Equity securities trading

15 231

951

17 686

931

Investment real estate

828

510

636

489

Short-term investments

734

 

1 129

 

Total investments for unit-linked
and with-profit business

19 147

3 202

22 010

3 491

Maturity of fixed income securities available-for-sale

The amortised cost or cost and estimated fair values of investments in fixed income securities AFS by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2011 and 2012, USD 10 274 million and USD 9 958 million, respectively, of fixed income securities AFS were callable.

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2011

 

2012

USD millions

Amortised cost or cost

Estimated fair value

Amortised cost or cost

Estimated fair value

Due in one year or less

3 020

3 040

2 746

2 768

Due after one year through five years

19 696

20 156

20 799

21 452

Due after five years through ten years

17 955

19 072

14 928

16 183

Due after ten years

38 594

43 977

35 855

40 048

Mortgage- and asset-backed securities
with no fixed maturity

7 719

7 525

6 266

6 523

Total fixed income securities available-for-sale

86 984

93 770

80 594

86 974

Assets pledged

As of 31 December 2012, investments with a carrying value of USD 9 731 million were on deposit with regulatory agencies in accordance with local requirements. As of 31 December 2012, investments with a carrying value of USD 12 644 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.

As of 31 December 2011 and 2012, securities of USD 7 823 million and USD 12 994 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of USD 6 349 million and USD 2 612 million, respectively, were recognised in accrued expenses and other liabilities.

A real estate portfolio with a carrying value of USD 258 million serves as collateral for short-term senior operational debt of USD 710 million.

Collateral accepted which the Group has the right to sell or repledge

As of 31 December 2011 and 2012, the fair value of the government and corporate bond securities received as collateral was USD 4 241 million and USD 4 329 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2011 and 2012 was nil and USD 1 195 million, respectively. The sources of the collateral are reverse repurchase agreements and derivative transactions.

Unrealised losses on securities available-for-sale

The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2011 and 2012. As of 31 December 2011 and 2012, USD 144 million and USD 32 million, respectively, of the gross unrealised loss on equity securities AFS relates to declines in value for less than 12 months and USD 4 million and USD 28 million, respectively, to declines in value for more than 12 months.

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Less than 12 months

12 months or more

Total

2011
USD millions

Fair value

Unrealised losses

Fair value

Unrealised losses

Fair value

Unrealised losses

Debt securities issued by governments and government agencies:

 

 

 

 

 

 

US Treasury and other US government corporations and agencies

337

1

 

 

337

1

US Agency securitised products

500

3

 

 

500

3

States of the United States and political subdivisions of the states

37

1

40

5

77

6

United Kingdom

2 832

50

47

1

2 879

51

Canada

79

1

2

1

81

2

Germany

1 027

50

10

1

1 037

51

France

1 133

52

4

 

1 137

52

Other

1 210

44

142

13

1 352

57

Total

7 155

202

245

21

7 400

223

Corporate debt securities

2 760

145

700

133

3 460

278

Residential mortgage-backed securities

829

111

702

153

1 531

264

Commercial mortgage-backed securities

812

123

342

56

1 154

179

Other asset-backed securities

662

15

184

54

846

69

Total

12 218

596

2 173

417

14 391

1 013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

12 months or more

Total

2012
USD millions

Fair value

Unrealised losses

Fair value

Unrealised losses

Fair value

Unrealised losses

Debt securities issued by governments and government agencies:

 

 

 

 

 

 

US Treasury and other US government corporations and agencies

2 766

26

 

 

2 766

26

US Agency securitised products

734

7

 

 

734

7

States of the United States and political subdivisions of the states

4

 

 

 

4

0

United Kingdom

3 316

48

 

 

3 316

48

Canada

291

2

2

 

293

2

Germany

524

6

32

1

556

7

France

147

6

5

 

152

6

Other

1 846

33

37

4

1 883

37

Total

9 628

128

76

5

9 704

133

Corporate debt securities

1 845

32

318

32

2 163

64

Residential mortgage-backed securities

56

2

424

35

480

37

Commercial mortgage-backed securities

190

14

347

21

537

35

Other asset-backed securities

547

9

98

7

645

16

Total

12 266

185

1 263

100

13 529

285

Mortgages, loans and real estate

As of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate (excluding unit-linked and with-profit business) were as follows:

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USD millions

2011

2012

Policy loans

3 664

284

Mortgage loans

1 336

1 362

Other loans

640

653

Investment real estate

645

777

The fair value of the real estate as of 31 December 2011 and 2012 was USD 2 215 million and USD 2 536 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.

As of 31 December 2011 and 2012, the Group’s investment in mortgages and other loans included USD 270 million and USD 282 million, respectively, of loans due from employees, and USD 357 million and USD 390 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.

As of 31 December 2011 and 2012, investments in real estate included USD 6 million and USD 5 million, respectively, of real estate held for sale.

Depreciation expense related to income-producing properties was USD 21 million and USD 24 million for 2011 and 2012, respectively. Accumulated depreciation on investment real estate totalled USD 460 million and USD 549 million as of 31 December 2011 and 2012, respectively.

Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies.