Investments

12 Months Ended

Dec. 31, 2014

Investments, Debt and Equity Securities [Abstract]

Investments

Investments

a) Transfers of securities

During the third quarter of 2014, we decided to transfer securities, considered essential holdings in a diversified portfolio, with a total fair value of $2.0 billion from Fixed maturities available for sale to Fixed maturities held to maturity.  These securities, which we have the intent and ability to hold to maturity, were transferred given the growth in ACE’s investment portfolio over the last several years, as well as continued efforts to manage the diversification of our global portfolio. The net unrealized appreciation at the date of the transfer continues to be reported in the carrying value of the transferred investments and is being amortized through OCI over the remaining life of the securities using the effective interest method in a manner consistent with the amortization of any premium or discount. This transfer represents a non-cash transaction and does not impact the Consolidated Statements of Cash Flows.

b) Fixed maturities

December 31, 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	$	2,741	$	87	$	(8	)	$	2,820	$	—
Foreign	14,703		629		(90		)	15,242		—
Corporate securities	16,897		704		(170		)	17,431		(7		)
Mortgage-backed securities	10,011		304		(29		)	10,286		(1		)
States, municipalities, and political subdivisions	3,474		147		(5		)	3,616		—
	$	47,826	$	1,871	$	(302	)	$	49,395	$	(8	)
Held to maturity
U.S. Treasury and agency	$	832	$	20	$	(2	)	$	850	$	—
Foreign	916		47		—			963		—
Corporate securities	2,323		102		(2		)	2,423		—
Mortgage-backed securities	1,983		57		(1		)	2,039		—
States, municipalities, and political subdivisions	1,277		40		(3		)	1,314		—
	$	7,331	$	266	$	(8	)	$	7,589	$	—

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 d), if a credit loss is incurred 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 years ended December 31, 2014 and 2013, $4 million and $25 million of net unrealized appreciation, respectively, related to such securities is included in OCI. At December 31, 2014 and 2013, AOCI included cumulative net unrealized depreciation of $3 million and $4 million, respectively, related to securities remaining in the investment portfolio 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 10 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent of the total mortgage-backed securities at both December 31, 2014 and 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:

	December 31				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	$	2,187	$	2,206	$	2,387	$	2,411
Due after 1 year through 5 years	15,444		15,857		14,139		14,602
Due after 5 years through 10 years	15,663		16,089		16,200		16,535
Due after 10 years	4,521		4,957		4,743		4,812
	37,815		39,109		37,469		38,360
Mortgage-backed securities	10,011		10,286		10,937		10,894
	$	47,826	$	49,395	$	48,406	$	49,254
Held to maturity
Due in 1 year or less	$	353	$	355	$	401	$	405
Due after 1 year through 5 years	2,603		2,693		2,284		2,363
Due after 5 years through 10 years	1,439		1,489		1,686		1,723
Due after 10 years	953		1,013		386		393
	5,348		5,550		4,757		4,884
Mortgage-backed securities	1,983		2,039		1,341		1,379
	$	7,331	$	7,589	$	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. 

c) Equity securities

	December 31			December 31
(in millions of U.S. dollars)	2014			2013
Cost	$	440		$	841
Gross unrealized appreciation	83			63
Gross unrealized depreciation	(13		)	(67		)
Fair value	$	510		$	837

During the third quarter of 2014, we elected to exchange our interest in a strategic emerging debt portfolio, a mutual fund classified as an equity security investment, for direct ownership of certain of the underlying fixed maturities, and the remainder in cash. This transaction increased realized losses and decreased unrealized losses with no impact to shareholders' equity. The non-cash portion of the transaction was $219 million and does not impact the Consolidated Statements of Cash Flows.

d) 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 incurred, 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.

Evaluation of potential credit losses related to fixed maturities

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.

U.S. Treasury and agency obligations (including agency mortgage-backed securities); foreign government obligations; and states, municipalities, and political subdivisions obligations

U.S. Treasury and agency obligations (including agency mortgage-backed securities); foreign government obligations; and states, municipalities, and political subdivisions obligations represent $60 million of gross unrealized loss at December 31, 2014. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. ACE concluded that the high level of creditworthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in net income.

Corporate securities

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.

The following table presents default assumptions by Moody's rating category (historical mean default rate provided for comparison):

Moody's Rating Category	1-in-100 Year Default Rate		Historical Mean Default Rate
Investment Grade:
Aaa-Baa	0.0-1.3%		0.0-0.3%
Below Investment Grade:
Ba	4.9	%	1.1	%
B	12.7	%	3.4	%
Caa-C	50.5	%	13.1	%

Application of the methodology and assumptions described above resulted in credit losses recognized in Net income for corporate securities of $27 million, $11 million, and $14 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Mortgage-backed securities

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.

ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming lower loss severity for Prime sector bonds versus ALT-A and Sub-prime bonds.

These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then we do not expect to recover our amortized cost basis, and we recognize an estimated credit loss in Net income.

Application of the methodology and assumptions described above resulted in nil, $1 million, and $6 million of credit losses recognized in Net income for mortgage-backed securities for the years ended December 31, 2014, 2013 and 2012, respectively.

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” and the change in net unrealized appreciation (depreciation) of investments: 

	Years Ended December 31
(in millions of U.S. dollars)	2014			2013			2012
Fixed maturities:
OTTI on fixed maturities, gross	$	(64	)	$	(18	)	$	(26	)
OTTI on fixed maturities recognized in OCI (pre-tax)	7			—			1
OTTI on fixed maturities, net	(57		)	(18		)	(25		)
Gross realized gains excluding OTTI	213			237			388
Gross realized losses excluding OTTI	(133		)	(129		)	(133		)
Total fixed maturities	23			90			230
Equity securities:
OTTI on equity securities	(8		)	(2		)	(5		)
Gross realized gains excluding OTTI	22			21			11
Gross realized losses excluding OTTI	(61		)	(4		)	(2		)
Total equity securities	(47		)	15			4
OTTI on other investments	(3		)	(2		)	(7		)
Foreign exchange gains (losses)	(40		)	29			(16		)
Investment and embedded derivative instruments	(107		)	78			(6		)
Fair value adjustments on insurance derivative	(217		)	878			171
S&P put options and futures	(168		)	(579		)	(297		)
Other derivative instruments	50			(2		)	(4		)
Other	2			(3		)	3
Net realized gains (losses)	(507		)	504			78
Change in net unrealized appreciation (depreciation) on investments:
Fixed maturities available for sale	734			(1,798		)	1,099
Fixed maturities held to maturity	(2		)	(82		)	(94		)
Equity securities	77			(41		)	61
Other	35			54			50
Income tax (expense) benefit	(167		)	408			(198		)
Change in net unrealized appreciation (depreciation) on investments	677			(1,459		)	918
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments	$	170		$	(955	)	$	996

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: 

	Years Ended December 31
(in millions of U.S. dollars)	2014			2013			2012
Balance of credit losses related to securities still held – beginning of year	$	37		$	43		$	74
Additions where no OTTI was previously recorded	22			9			8
Additions where an OTTI was previously recorded	5			3			12
Reductions for securities sold during the period	(36		)	(18		)	(51		)
Balance of credit losses related to securities still held – end of year	$	28		$	37		$	43

e) Other investments

			December 31				December 31
			2014				2013
(in millions of U.S. dollars)	Fair Value		Cost		Fair Value		Cost
Investment funds	$	378	$	228	$	428	$	278
Limited partnerships	691		497		576		424
Partially-owned investment companies	1,492		1,492		1,284		1,284
Life insurance policies	205		205		180		180
Policy loans	187		187		179		179
Trading securities	290		287		276		273
Other	103		103		53		53
Total	$	3,346	$	2,999	$	2,976	$	2,671

Investment funds include one highly diversified fund investment as well as several direct funds that employ a variety of investment styles such as long/short equity and arbitrage/distressed. Included in limited partnerships and partially-owned investment companies are 62 individual limited partnerships covering a broad range of investment strategies including large cap buyouts, specialist buyouts, growth capital, distressed, mezzanine, real estate, and co-investments. The underlying portfolio consists of various public and private debt and equity securities of publicly traded and privately held companies and real estate assets.  The underlying investments across various partnerships, geographies, industries, asset types, and investment strategies provide risk diversification within the limited partnership portfolio and the overall investment portfolio.  Trading securities comprise $261 million of mutual funds supported by assets that do not qualify for separate account reporting under GAAP at December 31, 2014 compared with $246 million at December 31, 2013. Trading securities also includes assets held in rabbi trusts of $22 million of equity securities and $7 million of fixed maturities at December 31, 2014, compared with $23 million of equity securities and $7 million of fixed maturities at December 31, 2013.

f) Investments in partially-owned insurance companies

	December 31						December 31
	2014						2013
(in millions of U.S. dollars, except for percentages)	Carrying Value		Issued  Share Capital		Ownership Percentage		Carrying Value		Issued Share Capital		Ownership Percentage		Domicile
Huatai Group	$	397	$	638	20.0	%	$	365	$	631	20.0	%	China
Huatai Life Insurance Company	86		438		20.0	%	84		379		20.0	%	China
Freisenbruch-Meyer	9		5		40.0	%	9		5		40.0	%	Bermuda
ACE Cooperative Insurance Co. – Saudi Arabia	10		27		30.0	%	10		27		30.0	%	Saudi Arabia
Russian Reinsurance Company	2		4		23.3	%	2		4		23.3	%	Russia
Total	$	504	$	1,112			$	470	$	1,046

Huatai Group and Huatai Life Insurance Company provide a range of P&C, life, and investment products.

g) Gross unrealized loss

At December 31, 2014, there were 5,485 fixed maturities out of a total of 26,258 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $3 million. There were 93 equity securities out of a total of 282 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $1 million. Fixed maturities in an unrealized loss position at December 31, 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.

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
December 31, 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	$	350	$	(1	)	$	666	$	(9	)	$	1,016	$	(10	)
Foreign	2,262		(75		)	375		(15		)	2,637		(90		)
Corporate securities	4,684		(150		)	738		(22		)	5,422		(172		)
Mortgage-backed securities	704		(2		)	1,663		(28		)	2,367		(30		)
States, municipalities, and political subdivisions	458		(3		)	490		(5		)	948		(8		)
Total fixed maturities	8,458		(231		)	3,932		(79		)	12,390		(310		)
Equity securities	101		(13		)	—		—			101		(13		)
Total	$	8,559	$	(244	)	$	3,932	$	(79	)	$	12,491	$	(323	)

	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	)

h) Net investment income

	Years Ended December 31
(in millions of U.S. dollars)	2014			2013			2012
Fixed maturities	$	2,199		$	2,093		$	2,134
Short-term investments	45			29			28
Equity securities	33			37			34
Other	94			105			104
Gross investment income	2,371			2,264			2,300
Investment expenses	(119		)	(120		)	(119		)
Net investment income	$	2,252		$	2,144		$	2,181

i) 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 December 31, 2014 and 2013, are investments, primarily fixed maturities, totaling $16.3 billion, and cash of $117 million and $162 million, respectively.

The following table presents the components of restricted assets: 

	December 31		December 31
(in millions of U.S. dollars)	2014		2013
Trust funds	$	10,838	$	11,315
Deposits with non-U.S. regulatory authorities	2,305		1,970
Assets pledged under repurchase agreements	1,431		1,435
Deposits with U.S. regulatory authorities	1,345		1,334
Other pledged assets	457		391
	$	16,376	$	16,445