Share-based compensation

ACE has share-based compensation plans which currently provide the Board the ability to grant awards of stock options, restricted stock, and restricted stock units to its employees, consultants, and members of the Board.

ACE principally issues restricted stock grants and stock options on a graded vesting schedule. ACE recognizes compensation cost for restricted stock and stock option grants with only service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. We incorporate an estimate of future forfeitures (6.5 percent assumption used for 2013, 2012, and 2011) into the determination of compensation cost for both grants of restricted stock and stock options.

During 2004, we established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP), which replaced our prior incentive plans except for outstanding awards. The 2004 LTIP will continue in effect until terminated by the Board. Under the 2004 LTIP, Common Shares of ACE are authorized to be issued pursuant to awards made as stock options, stock appreciation rights, performance shares, performance units, restricted stock, and restricted stock units.

ACE generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the day of grant. Each restricted stock unit represents our obligation to deliver to the holder one Common Share upon vesting.

In May 2013, our shareholders approved an increase of eight million shares authorized to be issued under the 2004 LTIP, bringing the total shares authorized (i.e., for grant since its inception) to the sum of: (i) 38,600,000 common shares; and (ii) any shares that are represented by awards granted under the prior plans that are forfeited, expired, or are canceled after the effective date of the 2004 LTIP, without delivery of shares or which result in the forfeiture of the shares back to ACE to the extent that such shares would have been added back to the reserve under the terms of the applicable prior plan. At December 31, 2013, a total of 11,231,423 shares remain available for future issuance under the 2004 LTIP.

In May 2012, our shareholders approved an increase of 1,500,000 shares authorized to be issued under the ESPP bringing the total shares authorized to 4,500,000 shares. At December 31, 2013, a total of 1,313,586 shares remain available for issuance under the ESPP.

ACE generally issues Common Shares for the exercise of stock options, restricted stock, and purchases under the ESPP from un-issued reserved shares (conditional share capital) and Common Shares in treasury.

The following table presents pre-tax and after-tax share-based compensation expense:



	Years Ended December 31
(in millions of U.S. dollars)	2013		2012		2011
Stock options and shares issued under ESPP:
Pre-tax	$	24	$	22	$	23
After-tax ⁽¹⁾	$	18	$	17	$	17
Restricted stock:
Pre-tax	$	153	$	109	$	108
After-tax	$	89	$	64	$	70


⁽¹⁾	Excludes windfall tax benefit for share-based compensation recognized as a direct adjustment to Additional paid-in capital of $36 million, $18 million and $6 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Unrecognized compensation expense related to the unvested portion of ACE's employee share-based awards was $107 million at December 31, 2013, and is expected to be recognized over a weighted-average period of approximately 1 year.

Stock options

ACE's 2004 LTIP permits grants of both incentive and non-qualified stock options principally at an option price per share equal to the grant date fair value of ACE's Common Shares. Stock options are generally granted with a 3-year vesting period and a 10-year term. Stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period.

ACE's 2013 share-based compensation expense includes a portion of the cost related to the 2010 through 2013 stock option grants. Stock option fair value was estimated on the grant date using the Black-Scholes option-pricing model that uses the weighted-average assumptions noted below:



	Years Ended December 31
	2013		2012		2011
Dividend yield	2.4	%	2.7	%	2.2	%
Expected volatility	27.8	%	29.8	%	28.8	%
Risk-free interest rate	1.0	%	1.1	%	2.3	%
Expected life	5.8 years		5.8 years		5.4 years

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time from grant to exercise date) was estimated using the historical exercise behavior of employees. Expected volatility was calculated as a blend of (a) historical volatility based on daily closing prices over a period equal to the expected life assumption, (b) long-term historical volatility based on daily closing prices over the period from ACE's initial public trading date through the most recent quarter, and (c) implied volatility derived from ACE's publicly traded options.

The following table presents a roll-forward of ACE's stock options:



(Intrinsic Value in millions of U.S. dollars)	Number of Options		Weighted-Average Exercise Price		Weighted-Average Fair Value		Total Intrinsic Value
Options outstanding, December 31, 2010	11,942,893		$	46.80
Granted	1,649,824		$	62.68	$	14.67
Exercised	(2,741,238	)	$	44.45			$	63
Forfeited	(271,972	)	$	51.33
Options outstanding, December 31, 2011	10,579,507		$	49.78
Granted	1,462,103		$	73.36	$	15.58
Exercised	(2,401,869	)	$	42.50			$	78
Forfeited	(190,082	)	$	61.87
Options outstanding, December 31, 2012	9,449,659		$	55.03
Granted	1,821,063		$	85.41	$	17.29
Exercised	(1,658,671	)	$	48.17			$	70
Forfeited	(115,195	)	$	72.50
Options outstanding, December 31, 2013	9,496,856		$	61.84			$	396
Options exercisable, December 31, 2013	6,330,456		$	53.52			$	317

The weighted-average remaining contractual term was 6.5 years for stock options outstanding and 4.8 years for stock options exercisable at December 31, 2013. Cash received from the exercise of stock options for the year ended December 31, 2013 was $85 million.

Restricted stock and restricted stock units

Grants of restricted stock and restricted stock units granted under the 2004 LTIP typically have a 4-year vesting period, based on a graded vesting schedule. ACE also grants restricted stock awards to non-management directors which vest at the following year's annual general meeting. The restricted stock is granted at market close price on the grant date. Each restricted stock unit represents our obligation to deliver to the holder one Common Share upon vesting. ACE's 2013 share-based compensation expense includes a portion of the cost related to the restricted stock granted in the years 2009 through 2013.

The following table presents a roll-forward of our restricted stock awards. Included in the roll-forward below are 20,969 restricted stock awards, 25,669 restricted stock awards, and 32,660 restricted stock awards that were granted to non-management directors during the years ended December 31, 2013, 2012, and 2011 respectively:



	Number of Restricted Stock		Weighted-Average Grant-Date Fair Value
Unvested restricted stock, December 31, 2010	5,305,732		$	48.74
Granted	1,808,745		$	60.01
Vested	(1,929,189	)	$	50.82
Forfeited	(333,798	)	$	47.46
Unvested restricted stock, December 31, 2011	4,851,490		$	52.20
Granted	1,589,178		$	73.46
Vested	(1,923,385	)	$	52.71
Forfeited	(262,436	)	$	58.40
Unvested restricted stock, December 31, 2012	4,254,847		$	59.53
Granted	1,544,485		$	86.07
Vested	(1,951,494	)	$	57.44
Forfeited	(139,651	)	$	67.72
Unvested restricted stock, December 31, 2013	3,708,187		$	71.38

During the years ended December 31, 2013, 2012, and 2011, ACE awarded 271,004 restricted stock units, 262,549 restricted stock units, and 261,214 restricted stock units, respectively, to employees and officers each with a weighted-average grant date fair value per share of $85.44, $73.41, and $62.85, respectively. At December 31, 2013, there were 617,893 unvested restricted stock units.

Prior to 2009, ACE granted restricted stock units with a 1-year vesting period to non-management directors. Delivery of Common Shares on account of these restricted stock units to non-management directors is deferred until after the date of the non-management directors' termination from the Board. At December 31, 2013, there were 196,622 deferred restricted stock units.

ESPP

The ESPP gives participating employees the right to purchase Common Shares through payroll deductions during consecutive subscription periods at a purchase price of 85 percent of the fair value of a Common Share on the exercise date (Purchase Price). Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $25,000, whichever is less. The ESPP has two six-month subscription periods each year, the first of which runs between January 1 and June 30 and the second of which runs between July 1 and December 31. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of Common Shares. An exercise date is generally the last trading day of a subscription period. The number of shares purchased is equal to the total amount, at the exercise date, collected from the participants through payroll deductions for that subscription period, divided by the Purchase Price, rounded down to the next full share. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Pursuant to the provisions of the ESPP, during the years ended December 31, 2013, 2012, and 2011, employees paid $14 million, $13 million, and $12 million to purchase 175,437 shares, 198,244 shares, and 205,812 shares, respectively.