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Investments
 6 Months Ended
Jun. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

a) Fixed maturities
 
June 30, 2014
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,806

 
$
80

 
$
(17
)
 
$
2,869

 
$
—

Foreign
15,084

 
563

 
(38
)
 
15,609

 
(1
)
Corporate securities
17,085

 
981

 
(36
)
 
18,030

 
(3
)
Mortgage-backed securities
11,185

 
308

 
(75
)
 
11,418

 
(10
)
States, municipalities, and political subdivisions
3,559

 
131

 
(15
)
 
3,675

 
—

 
$
49,719

 
$
2,063

 
$
(181
)
 
$
51,601

 
$
(14
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
779

 
$
18

 
$
(2
)
 
$
795

 
$
—

Foreign
809

 
44

 
—

 
853

 
—

Corporate securities
1,828

 
101

 
—

 
1,929

 
—

Mortgage-backed securities
1,187

 
54

 
—

 
1,241

 
—

States, municipalities, and political subdivisions
1,171

 
31

 
(5
)
 
1,197

 
—

 
$
5,774

 
$
248

 
$
(7
)
 
$
6,015

 
$
—


December 31, 2013
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,946

 
$
62

 
$
(59
)
 
$
2,949

 
$
—

Foreign
14,336

 
377

 
(122
)
 
14,591

 
—

Corporate securities
16,825

 
777

 
(132
)
 
17,470

 
(6
)
Mortgage-backed securities
10,937

 
184

 
(227
)
 
10,894

 
(34
)
States, municipalities, and political subdivisions
3,362

 
65

 
(77
)
 
3,350

 
—

 
$
48,406

 
$
1,465

 
$
(617
)
 
$
49,254

 
$
(40
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
820

 
$
16

 
$
(4
)
 
$
832

 
$
—

Foreign
864

 
33

 
—

 
897

 
—

Corporate securities
1,922

 
83

 
—

 
2,005

 
—

Mortgage-backed securities
1,341

 
39

 
(1
)
 
1,379

 
—

States, municipalities, and political subdivisions
1,151

 
16

 
(17
)
 
1,150

 
—

 
$
6,098

 
$
187

 
$
(22
)
 
$
6,263

 
$
—


As discussed in Note 3 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above are the cumulative amounts of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders’ equity. For the three and six months ended June 30, 2014, $1 million and $5 million, respectively, of net unrealized appreciation related to such securities is included in OCI. For the three and six months ended June 30, 2013, $1 million and $25 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At June 30, 2014 and December 31, 2013, AOCI includes cumulative net unrealized depreciation of $1 million and $4 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.

Mortgage-backed securities (MBS) issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent of the total mortgage-backed securities at June 30, 2014 and December 31, 2013 are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

The following table presents fixed maturities by contractual maturity:
 
 
 
June 30

 
 
 
December 31

 
 
 
2014

 
 
 
2013

(in millions of U.S. dollars)
Amortized Cost

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
2,513

 
$
2,537

 
$
2,387

 
$
2,411

Due after 1 year through 5 years
15,095

 
15,692

 
14,139

 
14,602

Due after 5 years through 10 years
15,917

 
16,575

 
16,200

 
16,535

Due after 10 years
5,009

 
5,379

 
4,743

 
4,812

 
38,534

 
40,183

 
37,469

 
38,360

Mortgage-backed securities
11,185

 
11,418

 
10,937

 
10,894

 
$
49,719

 
$
51,601

 
$
48,406

 
$
49,254

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
483

 
$
489

 
$
401

 
$
405

Due after 1 year through 5 years
2,590

 
2,693

 
2,284

 
2,363

Due after 5 years through 10 years
1,157

 
1,206

 
1,686

 
1,723

Due after 10 years
357

 
386

 
386

 
393

 
4,587

 
4,774

 
4,757

 
4,884

Mortgage-backed securities
1,187

 
1,241

 
1,341

 
1,379

 
$
5,774

 
$
6,015

 
$
6,098

 
$
6,263



Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. 

b) Equity securities
 
June 30


December 31

(in millions of U.S. dollars)
2014


2013

Cost
$
874

 
$
841

Gross unrealized appreciation
77

 
63

Gross unrealized depreciation
(44
)
 
(67
)
Fair value
$
907

 
$
837



c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in Net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in Net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.

Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.

For all non-fixed maturities, OTTI is evaluated based on the following:

•
the amount of time a security has been in a loss position and the magnitude of the loss position;
•
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
•
ACE’s ability and intent to hold the security to the expected recovery period.

As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired. For mutual funds included in equity securities in our consolidated balance sheet, we employ analysis similar to fixed maturities, when applicable.

We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in Net income, if any. In general, credit loss recognized in Net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. ACE developed projected cash flows for corporate securities using market observable data, issuer-specific information, and credit ratings. We use historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. Consistent with management's approach, ACE assumed a 32 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody's historical mean recovery rate of 42 percent. We believe that use of a default assumption in excess of the historical mean is conservative in light of current market conditions.

For the three and six months ended June 30, 2014, credit losses recognized in Net income for corporate securities were $6 million and $10 million, respectively. For the three and six months ended June 30, 2013, credit losses recognized in Net income for corporate securities were $6 million and $7 million, respectively.

For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.

For the three and six months ended June 30, 2014 and 2013, there were no credit losses recognized in Net income for mortgage-backed securities.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary”: 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(in millions of U.S. dollars)
2014

 
2013

 
2014

 
2013

Fixed maturities:
 
 
 
 
 
 
 
OTTI on fixed maturities, gross
$
(9
)
 
$
(6
)
 
$
(15
)
 
$
(7
)
OTTI on fixed maturities recognized in OCI (pre-tax)
1

 
—

 
2

 
—

OTTI on fixed maturities, net
(8
)
 
(6
)
 
(13
)
 
(7
)
Gross realized gains excluding OTTI
54

 
64

 
90

 
126

Gross realized losses excluding OTTI
(26
)
 
(27
)
 
(46
)
 
(52
)
Total fixed maturities
20

 
31

 
31

 
67

Equity securities:
 
 
 
 
 
 
 
OTTI on equity securities
(1
)
 
—

 
(7
)
 
(1
)
Gross realized gains excluding OTTI
2

 
8

 
4

 
10

Gross realized losses excluding OTTI
—

 
(1
)
 
(1
)
 
(3
)
Total equity securities
1

 
7

 
(4
)
 
6

OTTI on other investments
(3
)
 
(1
)
 
(3
)
 
(2
)
Foreign exchange gains (losses)
(14
)
 
(5
)
 
(23
)
 
71

Investment and embedded derivative instruments
(15
)
 
40

 
(40
)
 
58

Fair value adjustments on insurance derivative
2

 
101

 
(46
)
 
429

S&P put options and futures
(72
)
 
(68
)
 
(91
)
 
(318
)
Other derivative instruments
9

 
(1
)
 
7

 
(1
)
Other
(1
)
 
—

 
(8
)
 
—

Net realized gains (losses)
$
(73
)
 
$
104

 
$
(177
)
 
$
310


 
The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI: 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(in millions of U.S. dollars)
2014

 
2013

 
2014

 
2013

Balance of credit losses related to securities still held – beginning of period
$
35

 
$
35

 
$
37

 
$
43

Additions where no OTTI was previously recorded
5

 
4

 
7

 
4

Additions where an OTTI was previously recorded
1

 
2

 
3

 
3

Reductions for securities sold during the period
(17
)
 
(1
)
 
(23
)
 
(10
)
Balance of credit losses related to securities still held – end of period
$
24

 
$
40

 
$
24

 
$
40



d) Gross unrealized loss
At June 30, 2014, there were 3,253 fixed maturities out of a total of 25,285 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $3 million. There were 52 equity securities out of a total of 186 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $42 million. Fixed maturities in an unrealized loss position at June 30, 2014, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase. As of June 30, 2014, there was one mutual fund, classified as an equity security investment, that was in a continuous unrealized loss position for more than twelve months where an other-than-temporary loss was not recorded. The unrealized loss of $42 million was approximately 8 percent of the original cost of the related equity security. We believe the impairment was temporary based on the relative price decline of the security and our intent and ability to hold the investment to its anticipated recovery.

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
June 30, 2014
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
—

 
$
—

 
$
1,069

 
$
(19
)
 
$
1,069

 
$
(19
)
Foreign
1,274

 
(11
)
 
1,303

 
(27
)
 
2,577

 
(38
)
Corporate securities
1,118

 
(12
)
 
1,050

 
(24
)
 
2,168

 
(36
)
Mortgage-backed securities
486

 
(4
)
 
2,540

 
(71
)
 
3,026

 
(75
)
States, municipalities, and political subdivisions
366

 
(4
)
 
1,041

 
(16
)
 
1,407

 
(20
)
Total fixed maturities
3,244

 
(31
)
 
7,003

 
(157
)
 
10,247

 
(188
)
Equity securities
45

 
(2
)
 
462

 
(42
)
 
507

 
(44
)
Other investments
39

 
(1
)
 
—

 
—

 
39

 
(1
)
Total
$
3,328

 
$
(34
)
 
$
7,465

 
$
(199
)
 
$
10,793

 
$
(233
)
 
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2013
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
1,794

 
$
(57
)
 
$
31

 
$
(6
)
 
$
1,825

 
$
(63
)
Foreign
4,621

 
(114
)
 
201

 
(8
)
 
4,822

 
(122
)
Corporate securities
3,836

 
(118
)
 
194

 
(14
)
 
4,030

 
(132
)
Mortgage-backed securities
5,248

 
(197
)
 
384

 
(31
)
 
5,632

 
(228
)
States, municipalities, and political subdivisions
2,164

 
(90
)
 
84

 
(4
)
 
2,248

 
(94
)
Total fixed maturities
17,663

 
(576
)
 
894

 
(63
)
 
18,557

 
(639
)
Equity securities
498

 
(67
)
 
—

 
—

 
498

 
(67
)
Other investments
67

 
(9
)
 
—

 
—

 
67

 
(9
)
Total
$
18,228

 
$
(652
)
 
$
894

 
$
(63
)
 
$
19,122

 
$
(715
)


e) Restricted assets
ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. ACE is also required to restrict assets pledged under repurchase agreements. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOC and derivative transactions. Included in restricted assets at June 30, 2014 and December 31, 2013, are investments, primarily fixed maturities, totaling $15.7 billion and $16.3 billion, respectively, and cash of $84 million and $162 million, respectively.
The following table presents the components of restricted assets:
 
June 30

 
December 31

(in millions of U.S. dollars)
2014

 
2013

Trust funds
$
10,554

 
$
11,315

Deposits with non-U.S. regulatory authorities
1,969

 
1,970

Assets pledged under repurchase agreements
1,451

 
1,435

Deposits with U.S. regulatory authorities
1,336

 
1,334

Other pledged assets
459

 
391

 
$
15,769

 
$
16,445