Unpaid losses and loss expenses

ACE establishes reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. Reserves include estimates for both claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. Reserves are recorded in Unpaid losses and loss expenses in the consolidated balance sheets. The process of establishing loss and loss expense reserves for P&C claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as laws change. We continually evaluate our estimate of reserves in light of developing information and in light of discussions and negotiations with our insureds. While we believe that our reserves for unpaid losses and loss expenses at December 31, 2013 are adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserves provided. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed.

The following table presents a reconciliation of unpaid losses and loss expenses:



	Years Ended December 31
(in millions of U.S. dollars)	2013				2012				2011
Gross unpaid losses and loss expenses, beginning of year		$	37,946			$	37,477			$	37,391
Reinsurance recoverable on unpaid losses⁽¹⁾		(11,399		)		(11,602		)		(12,149		)
Net unpaid losses and loss expenses, beginning of year		26,547				25,875				25,242
Acquisition of subsidiaries		86				14				92
Total		26,633				25,889				25,334
Net losses and loss expenses incurred in respect of losses occurring in:
Current year		9,878				10,132				10,076
Prior years		(530		)		(479		)		(556		)
Total		9,348				9,653				9,520
Net losses and loss expenses paid in respect of losses occurring in:
Current year		3,942				4,325				4,209
Prior years		5,035				4,894				4,657
Total		8,977				9,219				8,866
Foreign currency revaluation and other		(173		)		224				(113		)
Net unpaid losses and loss expenses, end of year		26,831				26,547				25,875
Reinsurance recoverable on unpaid losses⁽¹⁾		10,612				11,399				11,602
Gross unpaid losses and loss expenses, end of year		$	37,443			$	37,946			$	37,477
⁽¹⁾ Net of provision for uncollectible reinsurance.

Net losses and loss expenses incurred includes $530 million, $479 million, and $556 million, of net favorable prior period development in the years ended December 31, 2013, 2012, and 2011, respectively. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability; while short-tail lines include lines such as most property lines, energy, personal accident, aviation, marine (including associated liability-related exposures) and agriculture. Significant prior period movements by segment, principally driven by reserve reviews completed during each respective period, are discussed in more detail below. The remaining net development for long-tail and short-tail business for each segment comprises numerous favorable and adverse movements across a number of lines and accident years, none of which is significant individually or in the aggregate.

Insurance – North American P&C

Insurance – North American P&C's active operations experienced net favorable prior period development of $327 million in 2013 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:


•	Net favorable development of $221 million in long-tail business, including:


•	Favorable development of $72 million in our retail D&O portfolios, primarily impacting the 2008 and prior accident years. Favorable settlements on several large claims drove the favorable development in 2004 and prior accident years, while favorable action in 2008 is primarily due to an increase in weighting applied to experience-based and simulation methods;


•	Favorable development of $63 million in our medical risk operations, primarily impacting the 2007 to 2009 accident years. Paid and reported loss activity for this business in these accident years continued to be lower than expected and we have increased our weighting applied to experience-based methods; and


•	Favorable development of $50 million in our U.S. excess casualty and umbrella businesses primarily affecting the 2007 and prior accident years. Reported activity on loss and allocated loss adjustment expenses was lower than expected based on estimates from our prior review. In addition, increased weighting was applied to experience-based methods in the current review for these accident periods;


•	Net favorable development of $28 million in our national accounts portfolios which consist of commercial auto, general liability and workers' compensation lines of business. This favorable movement was the net impact of favorable and adverse movements, including:


•	Favorable development of $40 million related to our annual assessment of multi-claimant events including industrial accidents, impacting the 2012 accident year. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses;


•	Adverse development of $40 million predominantly in workers' compensation, primarily impacting the 2006 and prior accident years. The development was a function of higher than expected reported loss activity, higher allocated loss adjustment expenses, as well as an increase in weighting applied to experience-based methods; and


•	Net favorable development of $28 million across a number of lines and accident years, none of which was significant individually or in the aggregate.


•	Favorable development of $25 million in our foreign casualty Controlled Master Program and Cash Flow portfolios affecting the 2009 and prior accident years. Paid and reported loss activity for this business in these accident years continued to be lower than expected and we have increased our weighting applied to experience-based methods;


•	Favorable development of $106 million in short-tail business, primarily from:


•	Net favorable development of $45 million in our wholesale property and inland marine portfolios, primarily in accident years 2010 to 2012, due to favorable case incurred emergence and favorable settlements of several large claims; and


•	Favorable development of $29 million in our political risk business in the 2009 and 2010 accident years primarily due to favorable settlements of a few large claims;

Insurance – North American P&C's run-off operations incurred adverse prior period development of $193 million in our Westchester and Brandywine run-off operations during 2013, which was the net result of adverse and favorable movements impacting accident years 1996 and prior, driven by the following principal changes:

•

Adverse development of $161 million related to the completion of the reserve reviews during 2013. The development primarily arose from case specific asbestos and environmental claims related to increased loss and defense cost payment activity and the costs associated with certain case settlements in 2013. Further, we experienced higher than expected paid loss and case reserve activity in our assumed reinsurance portfolio; and


•	Adverse development of $27 million on unallocated loss adjustment expenses due to run-off operating expenses paid and incurred during 2013.

Insurance – North American P&C's active operations experienced net favorable prior period development of $348 million in 2012 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:


•	Net favorable development of $245 million in long-tail business, including:

•

Favorable development of $73 million in a collection of portfolios of umbrella and excess casualty business, primarily affecting the 2007 and prior accident years. The favorable development was the function of both the continuation of the lower than expected reported loss activity in the period since our last review and an increase in weighting applied to experience-based methods, particularly for the 2006 accident year, as these accident periods matured;


•	Favorable development of $67 million in our D&O portfolios primarily affecting the 2007 and prior accident years. Case loss activity was lower than expected during the 2012 calendar year, including reductions in our internal estimates of exposure on several potentially large claims. These reductions were a function of changes in account specific circumstances since our prior review;


•	Favorable development of $57 million in our medical risk operations, primarily in the 2007 and prior accident years. Reported and paid loss activity for these accident years were lower than expected since our prior review; and


•	Net favorable development of $39 million in our national accounts portfolios which consists of commercial auto liability, general liability, and workers' compensation lines of business. This favorable development was the net impact of favorable and adverse movements, including:


•	Favorable development of $41 million in the 2011 accident year related to our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses;


•	Favorable development of $34 million in the 2007 accident year, primarily in workers' compensation. The favorable development was the combined effect of lower than expected incurred loss activity and an increase in weighting applied to experience-based methods; and

•

Adverse development of $36 million affecting the 2006 and prior accident years largely in workers' compensation. The causes for this adverse movement were various and included adverse development on several specific large claims, higher than expected loss activity in certain accident years, an increase in weighting applied to experience-based methods, and a refinement of our treatment of ceded reinsurance recoveries on a few select treaties due to information which became known since our prior review.


•	Favorable development of $103 million in short-tail business, primarily from:


•	Favorable development of $88 million in our property, inland marine and commercial marine businesses primarily arising in the 2009 through 2011 accident years. Reported loss activity during the 2012 calendar was lower than expected, particularly in our high excess property portfolio; and


•	Favorable development of $27 million in our aviation product lines, primarily general aviation hull and liability, affecting the 2009 and prior accident years. Actual paid and incurred loss activity were lower than expected based on long-term historical averages leading to a reduction in our estimate of ultimate losses.

Insurance – North American P&C's run-off operations incurred net adverse prior period development of $168 million in our Westchester and Brandywine run-off operations during 2012, which was the net result of adverse and favorable movements impacting accident years 1996 and prior, driven by the following principal changes:

•

Adverse development of $150 million related to the completion of the reserve review during 2012. The development primarily arose from case specific asbestos and environmental claims related to increased loss and defense cost payment activity and the costs associated with certain case settlements made in 2012. Further, we experienced higher than expected paid loss and case reserve activity in our assumed reinsurance portfolio; and


•	Adverse development of $18 million on unallocated loss adjustment expenses due to run-off operating expenses paid during 2012.

Insurance – North American P&C active operations experienced net favorable prior period development of $289 million in 2011, representing 1.8 percent of its beginning of period net unpaid loss and loss expense reserves. Insurance – North American P&C run-off operations incurred net adverse prior period development of $102 million in 2011, representing 0.6 percent of its beginning of period net unpaid loss and loss expense reserves.

Insurance – North American Agriculture

Insurance – North American Agriculture experienced net favorable prior period development of $13 million, $12 million, and $8 million in 2013, 2012, and 2011, respectively, in short-tail business across a number of accident years, none of which was significant individually or in the aggregate.

Insurance – Overseas General

Insurance – Overseas General experienced net favorable prior period development of $299 million in 2013, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $127 million in long-tail business, including:

•

Favorable development of $92 million in casualty (primary and excess). Reserve reviews indicated favorable claim activity of $135 million in accident years 2009 and prior. These reviews reflected an increase in weighting applied to experience-based methods as these accident years continued to mature. Adverse development of $43 million in accident years 2010 to 2012 was primarily due to development in specific individual large claims and also in several accounts now exposed on an excess basis following adverse loss development of the underlying aggregate retention layer; and

•

Net favorable development of $35 million in financial lines. Reserve reviews indicated favorable claim activity of $63 million in accident years 2009 and prior. These reviews reflected an increase in weighting applied to experience-based methods as these accident years continued to mature. Adverse development of $28 million in accident year 2012 was incurred due to notifications on specific large claims.


•	Favorable development of $172 million in short-tail business, primarily from:


•	Favorable development of $104 million across property, technical lines and marine. Favorable development of $69 million in accident years 2010 to 2012 reflected lower than expected loss emergence. In addition, favorable development of $35 million in the property and marine liability lines in accident years 2009 and prior was primarily due to case specific developments;


•	Favorable development of $39 million across accident and health and personal lines primarily reflected lower than expected loss emergence, primarily in accident years 2010 to 2012; and


•	Favorable development of $29 million predominantly in the wholesale aviation business, primarily in accident years 2009 and prior, due to case specific developments.

Insurance – Overseas General experienced net favorable prior period development of $226 million in 2012, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $121 million in long-tail business, including:


•	Favorable development of $150 million in casualty (primary and excess) and financial lines for accident years 2008 and prior. We recognized the impact of favorable loss emergence since the prior study and increased the weighting applied to experience-based methods; and


•	Adverse development of $29 million in casualty (mainly primary) and financial lines for accident years 2009 to 2011 in response to claims emergence primarily in 2011. The adverse development was driven by changes in case specific circumstances on several specific larger claims and, to a lesser extent, increased frequency trends in primary European casualty impacting accident year 2011.


•	Favorable development of $105 million in short-tail business, including property, marine, A&H, and personal lines across multiple geographical regions, and in both retail and wholesale operations, principally as a result of lower than expected loss emergence, mostly in accident years 2009 and 2010.

Insurance – Overseas General experienced net favorable prior period development of $290 million in 2011, representing 4.2 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Global Reinsurance

Global Reinsurance experienced net favorable prior period development of $84 million in 2013, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $53 million in long-tail business, primarily including:


•	Favorable development of $25 million in professional liability lines, primarily in treaty years 2008 and prior, reflected favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods; and


•	Favorable development of $20 million in medical malpractice business, principally in treaty years 2009 and prior, reflected favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods.


•	Net favorable development of $31 million in short-tail business, primarily in treaty years 2007 to 2012 across property lines (including property catastrophe), trade credit, marine, and surety principally as a result of lower than expected loss emergence.

Global Reinsurance experienced net favorable prior period development of $61 million in 2012, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Favorable prior period development of $54 million in long-tail business primarily in treaty years 2008 and prior in casualty and medical malpractice lines. The lower loss estimates arose from a combination of favorable paid and incurred loss trends and increased weighting applied to experience-based methods; and


•	Net favorable development of $29 million in short-tail business, primarily in treaty years 2010 and prior across property lines (including property catastrophe), trade credit, marine, and surety principally as a result of lower than expected loss emergence.

Global Reinsurance experienced net favorable prior period development of $71 million in 2011, representing 3.1 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Asbestos and environmental (A&E) and other run-off liabilities

a) A&E liabilities

Included in liabilities for losses and loss expenses are amounts for A&E (A&E liabilities). The A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of A&E liabilities is particularly sensitive to future changes in the legal, social, and economic environments and legislative reforms. ACE has not assumed any such future changes in setting the value of its A&E reserves, which include provisions for both reported and IBNR claims. ACE's A&E reserves are not discounted for GAAP reporting.

The following table presents a roll-forward of consolidated A&E loss reserves (excluding other run-off liabilities), allocated loss expense reserves for A&E exposures, and the provision for uncollectible paid and unpaid reinsurance recoverables:



	Asbestos								Environmental								Total
(in millions of U.S. dollars)	Gross				Net				Gross				Net				Gross				Net
Balance at December 31, 2012 ⁽¹⁾		$	1,886			$	970			$	194			$	136			$	2,080			$	1,106
Incurred activity		125				96				119				75				244				171			⁽²⁾
Paid activity		(367		)		(140		)		(118		)		(86		)		(485		)		(226		)
Balance at December 31, 2013		$	1,644			$	926			$	195			$	125			$	1,839			$	1,051


⁽¹⁾	Balances at December 31, 2012 have been adjusted to present claims in a manner consistent with balances disclosed at December 31, 2013.


⁽²⁾	Excludes unallocated loss expenses.

The A&E net loss reserves including allocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2013, of $1.1 billion shown in the table above comprise $816 million in reserves in respect of Brandywine operations (see Brandywine run-off section below), $146 million of reserves held by Westchester Specialty (see Westchester Specialty section below), $79 million of reserves held by Insurance – Overseas General, $7 million of reserves held by ACE Bermuda, and $3 million of reserves held by Penn Millers. The incurred activity of $171 million is primarily the result of adverse activity in Brandywine and Westchester of $158 million and $14 million, respectively.

b) A&E and other run-off liabilities

The net figures in the above table (under A&E liabilities section) reflect third-party reinsurance other than reinsurance provided by National Indemnity Company (NICO) under two aggregate excess of loss contracts described below (collectively, the NICO contracts). ACE excludes the NICO contracts as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependent on the timing of the payment of the related claims. ACE's ability to make an estimate of this split is not practicable. ACE believes, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and other liabilities, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for the net incurred losses and allocated loss expenses within the limits of coverage and above ACE's retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participation by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.

ACE's exposure to A&E claims principally arises out of liabilities acquired when it purchased Westchester Specialty in 1998 and CIGNA's P&C business in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to ACE's acquisition of CIGNA's P&C business, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the Restructuring) which included the division of Insurance Company of North America (INA) into two separate corporations that ACE acquired as part of the CIGNA P&C business:

(1) An active insurance company that retained the INA name and continued to write P&C business; and

(2) An inactive run-off company, now called Century Indemnity Company (Century).

As a result of the division, predominantly all A&E and certain other liabilities of INA were ascribed to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA.

As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century. Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings. ACE acquired Brandywine Holdings and its various subsidiaries as part of the 1999 acquisition of CIGNA's P&C business. For additional information, refer to “Brandywine Run-Off Entities” below.

During 2013, we conducted our annual internal, ground-up review of our consolidated A&E liabilities as of December 31, 2012. As a result of the internal review, we increased our gross unpaid losses and loss expenses in 2013 for the Brandywine operations, including A&E, by $277 million, while the net unpaid losses and loss expenses increased by $166 million. In addition, we increased gross unpaid losses and loss expenses for Westchester Specialty's A&E and other liabilities by $3 million, while the net unpaid losses and loss expenses increased by $5 million.

An internal review was also conducted during 2012 of consolidated A&E liabilities as of December 31, 2011. As a result of that internal review, we increased gross unpaid losses and loss expenses in 2012 for the Brandywine operations, including A&E, by $275 million while the net unpaid losses and loss expenses increased by $146 million. In addition, we increased gross unpaid losses and loss expenses for Westchester Specialty's A&E and other liabilities by $17 million, while the net unpaid losses and loss expenses increased by $4 million.

In 2012, in addition to our annual internal review, a team of external actuaries performed an evaluation as to the adequacy of Century's reserves. This external review was conducted in accordance with the Brandywine Restructuring Order, which requires that an independent actuarial review of Century's reserves be completed every two years. Management takes full responsibility for the estimation of its A&E liabilities.

Brandywine run-off – impact of NICO contracts on ACE's run-off liabilities

As part of the acquisition of CIGNA's P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and allocated loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO contract (the Brandywine NICO Agreement) flowed to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in 2002 and on a paid basis in 2013.

The following table presents a roll-forward of net loss reserves, allocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement:



	Brandywine													NICO Coverage				Net of NICO Coverage
(in millions of U.S. dollars)	A&E				Other				⁽¹⁾	Total				NICO Coverage				Net of NICO Coverage
Balance at December 31, 2012		$	852			$	421				$	1,273			$	18		$	1,255
Incurred activity		158				9					167				—			167			⁽²⁾
Paid activity		(194		)		(63		)			(257		)		(18		)	(239		)
Balance at December 31, 2013		$	816			$	367				$	1,183			$	—		$	1,183


⁽¹⁾	Other consists primarily of workers' compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business.


⁽²⁾	Excludes $(1) million of unallocated loss expenses (benefits).

The incurred activity of $167 million primarily relates to the internal reviews of consolidated A&E loss reserves.

Westchester Specialty – impact of NICO contracts on ACE's run-off liabilities

As part of the Westchester Specialty acquisition in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million. At December 31, 2013, the remaining unused incurred limit under the NICO Agreement was $490 million, which is only available for losses and loss adjustment expenses.

The following table presents a roll-forward of net loss reserves, allocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of 1996 and prior Westchester Specialty operations only, including the impact of the Westchester NICO Agreement:



	Westchester Specialty										NICO Coverage			Net of NICO Coverage
(in millions of U.S. dollars)	A&E			Other				Total			NICO Coverage			Net of NICO Coverage
Balance at December 31, 2012		$	151		$	44			$	195		$	158		$	37
Incurred activity		14			(11		)		3			2			1		⁽¹⁾
Paid activity		(19)			—				(19)			(19)			—
Balance at December 31, 2013		$	146		$	33			$	179		$	141		$	38


⁽¹⁾	Excludes $4 million of unallocated loss expenses.

The incurred activity of $1 million primarily relates to the internal reviews of consolidated A&E loss reserves.

Brandywine run-off entities

In addition to housing a significant portion of ACE's A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. ACE's Brandywine insurance companies are Century (a Pennsylvania insurer) and Century International Reinsurance Company Ltd., a Bermuda insurer (CIRC). The Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.

The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of the excess of loss (XOL) agreement.

INA Financial Corporation established and funded a dividend retention fund (the Dividend Retention Fund) consisting of $50 million plus investment earnings. Pursuant to an interpretation of the Brandywine Restructuring Order, the full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. Under the Restructuring Order, while any obligation to maintain the Dividend Retention Fund is in effect, to the extent dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million. Effective January 28, 2011, the Pennsylvania Insurance Department clarified the scope of the Dividend Retention Fund that capital contributions from the Dividend Retention Fund to Century shall not be required until the XOL Agreement has less than $200 million of capacity remaining on an incurred basis for statutory reporting purposes. The amount of the capital contribution shall be the lesser of the amount necessary to restore the XOL Agreement remaining capacity to $200 million or the Dividend Retention Fund balance. The Dividend Retention Fund may not be terminated without prior written approval from the Pennsylvania Insurance Commissioner.

In addition, an ACE INA insurance subsidiary provided reinsurance coverage to Century in the amount of $800 million under an XOL, triggered if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due.

Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at December 31, 2013 was $25 million and approximately $232 million in statutory-basis losses have been ceded to the XOL on an inception-to-date basis. Century reports the amount ceded under the XOL in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its liabilities, including certain asbestos related and environmental pollution liabilities and Century's reinsurance payable to active companies. For GAAP reporting purposes, intercompany reinsurance recoverables related to the XOL are eliminated upon consolidation.

While ACE believes it has no legal obligation to fund losses above the XOL limit of coverage, ACE's consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine companies remain consolidated subsidiaries of ACE.

Uncertainties relating to ACE's ultimate Brandywine exposure

In addition to the Dividend Retention Fund and XOL commitments described above, certain ACE entities are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. At December 31, 2013 and 2012, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $929 million and $958 million, respectively. At December 31, 2013 and 2012, Century's carried gross reserves (including reserves ceded by the active ACE companies to Century) were $2.3 billion and $2.1 billion, respectively. ACE believes the intercompany reinsurance recoverables, which relate to liabilities payable over many years, are not impaired. Should Century's loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables.