INSURANCE LIABILITIES

12 Months Ended

Dec. 31, 2014

LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS

LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS

13. INSURANCE LIABILITIES

Liability for Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses represents the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and claim adjustments expenses, less applicable discount for future investment income. We continually review and update the methods used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected currently in pre-tax income. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.4 billion and $12.0 billion at December 31, 2014 and 2013, respectively. These recoverable amounts are related to certain policies with high deductibles (primarily for U.S. commercial casualty business)where we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2014 and 2013, we held collateral totaling $9.4 billion and $9.0 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and trust agreements.

The following table presents the reconciliation of activity in the Liability for unpaid losses and loss adjustment expenses:

Years Ended December 31,
(in millions)		2014		2013		2012
Liability for unpaid losses and loss adjustment expenses, beginning of year	$	81,547	$	87,991	$	91,145
Reinsurance recoverable		(17,231)		(19,209)		(20,320)
Net liability for unpaid losses and loss adjustment expenses, beginning of year		64,316		68,782		70,825
Foreign exchange effect(a)		(1,061)		(617)		(90)
Dispositions		-		(79)		(11)
Changes in net loss reserves due to retroactive asbestos reinsurance transaction		141		22		90
Total		63,396		68,108		70,814
Losses and loss adjustment expenses incurred:
Current year		21,279		22,171		25,385
Prior years, excluding discount(b)		703		557		421
Prior years, discount charge (benefit)		478		(309)		(63)
Total		22,460		22,419		25,743
Losses and loss adjustment expenses paid(c):
Current year		6,358		7,431		8,450
Prior years		17,886		18,780		19,325
Total		24,244		26,211		27,775
Balance, end of year:
Net liability for unpaid losses and loss adjustment expenses		61,612		64,316		68,782
Reinsurance recoverable		15,648		17,231		19,209
Total	$	77,260	$	81,547	$	87,991

(a)For the 2012 amounts, $847 million was reclassified from "Foreign exchange effect" to "Losses and loss adjustment expenses paid (current year)". The impact of this reclassification was a decrease of $847 million for foreign exchange and loss expenses paid (current year), with no income statement or balance sheet impact.

(b)In 2014, included $545 million, $381 million, $(195)million, $135 million and $109 million related to primary casualty, environmental and asbestos, natural catastrophes, financial lines and healthcare, respectively. In 2013, included $(144)million, $269 million, $498 million and $(54)million related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively. In 2012, includes $157 million, $200 million, $531 million and $68 million related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively.

(c)Includes amounts related to dispositions through the date of disposition.

The net adverse development includes loss-sensitive business, for which we recognized $105 million, $89 million and $54 million loss-sensitive premium adjustments for the years ended December 31, 2014, 2013 and 2012, respectively.

Discounting of Reserves

At December 31,2014, the liability for unpaid losses and loss adjustment expenses reflects a net loss reserve discount of $3.1 billion, including tabular and non-tabular calculations based upon the following assumptions:

• Certain asbestos business that was written by Non-Life Insurance Companies is discounted, when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for this business.
• The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the 1999 U.S. Decennial Life Table.
• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a five percent interest rate and the companies’ own payout patterns. In 2012, for Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a six percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.
• Effective for the fourth quarter of 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all ofour workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. Prior to this change, workers’ compensation reserves held by a Pennsylvania-domiciled insurer were discounted as follows: i) For loss reserves associated with accident year 2001 and prior accident years, a prescribed discount factor based on a rate of 6percent and industry payout patterns, were applied, ii) For loss reserves associated with accident year 2002 and subsequent accident years, a rate of 4.25 percent and our own payout patterns were applied; and iii) For a portion of loss reserves comprising excess workers' compensation reservesthat were assumed into a Pennsylvania-domiciled insurer from New York-domiciled insurers during 2011, we applied New York discounting rules, which include a prescribed rate of fivepercent on case reserves only (no discounting of IBNR reserves).
• In the fourth quarter of 2014, our Pennsylvania and Delaware regulators approved an updated discount rate that we applied to our workers’ compensation loss reserves for the legal entities domiciled in those states.

The discount consists of the following: $852 million of tabular discount for workers’ compensation in the domestic operations of Non-Life Insurance Companies and $2.2 billion of non-tabular discount for workers’ compensation in the domestic operations of Non-Life Insurance Companies; and $11 million — non-tabular discount for asbestos for Non-Life Insurance Companies.

Future Policy Benefits

Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. Included in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature.

Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded derivatives, primarily guaranteed minimum death benefits. See Note 14 for additional information on guaranteed death benefits.

The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by year of issuance and product, and range from approximately 1 percent to 12 percent. Mortality and surrender rate assumptions are generally based on actual experience when the liability is established.

For universal life policies with secondary guarantees, we recognize a future policy benefit reserve, in addition to policyholder contract deposits, based on a benefit ratio of (a) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after contract inception, we establish future policy benefit reserves, in addition to policyholder contract deposits, so that expected future losses are recognized in proportion to the emergence of profits in the earlier (profitable) years.

Policyholder Contract Deposits

The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net transfers from separate accounts, plus accrued interest credited at rates ranging from 0.3% to 8.4% at December 31,2014, less withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, because they are recorded directly to Policyholder contract deposits upon receipt. Amounts assessed against the contract holders for mortality, administrative, and other services are included in revenues.

In addition to liabilities for universal life, fixed annuities, fixed options within variable annuities, annuities without life contingencies, funding agreements and GICs, policyholder contract deposits also include our liability for (a)certain guaranteed benefits and indexed features accounted for as embedded derivatives at fair value, (b)annuities issued in a structured settlement arrangement with no life contingency and (c)certain contracts we have elected to account for at fair value. See Note 14 herein for additional information on guaranteed benefits accounted for as embedded derivatives.

Under a funding agreement-backed notes issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term notes to investors, which are secured by GICs issued to the trust by one of our Life Insurance Companies through our Institutional Markets operating segment. During the year ended December 31,2014, a $450 million GIC was issued in conjunction with the funding agreement-backed notes program.

The following table presents Policyholder contract deposits of the domestic Life Insurance Companies by product line:

At December 31,
(in millions)		2014		2013
Policyholder contract deposits:
Fixed Annuities	$	53,370	$	54,515
Group Retirement		37,693		37,695
Life		13,717		13,644
Retirement Income Solutions		10,040		6,729
Institutional Markets		9,793		9,433
Total Policyholder contract deposits	$	124,613	$	122,016

Other Policyholder Funds

Other policyholder funds includeunearned revenue reserves (URR). URR consists of front-end loads on investment-oriented contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for investment-orientedcontracts are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits (EGPs) to be realized over the estimated lives of the contracts and are subject to the same adjustments due to changes in the assumptions underlying EGPs as DAC. Amortization of URR is recorded in Policy Fees.

Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Participating life business represented approximately 1.9 percent of the gross insurance in force at December 31,2014 and 3.7 percent of gross Premiums and other considerations in 2014. The amount of annual dividends to be paid is approved locally by the boards of directors of the insurance companies. Provisions for future dividend payments are computed by jurisdiction, reflecting local regulations. The portions of current and prior net income and of current unrealized appreciation of investments that can inure to our benefit are restricted in some cases by the insurance contracts and by the local insurance regulations of the jurisdictions in which the policies are in force.

Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue with the unearned portions of the premiums recorded as liabilities in Other policyholder funds. Experience adjustments vary according to the type of contract and the territory in which the policy is in force and are subject to local regulatory guidance.