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, 2014 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)	2014				2013				2012
Gross unpaid losses and loss expenses, beginning of year		$	37,443			$	37,946			$	37,477
Reinsurance recoverable on unpaid losses⁽¹⁾		(10,612		)		(11,399		)		(11,602		)
Net unpaid losses and loss expenses, beginning of year		26,831				26,547				25,875
Acquisition of subsidiaries		320				86				14
Total		27,151				26,633				25,889
Net losses and loss expenses incurred in respect of losses occurring in:
Current year		10,176				9,878				10,132
Prior years		(527		)		(530		)		(479		)
Total		9,649				9,348				9,653
Net losses and loss expenses paid in respect of losses occurring in:
Current year		3,975				3,942				4,325
Prior years		5,260				5,035				4,894
Total		9,235				8,977				9,219
Foreign currency revaluation and other		(557		)		(173		)		224
Net unpaid losses and loss expenses, end of year		27,008				26,831				26,547
Reinsurance recoverable on unpaid losses⁽¹⁾		11,307				10,612				11,399
Gross unpaid losses and loss expenses, end of year		$	38,315			$	37,443			$	37,946
⁽¹⁾ Net of provision for uncollectible reinsurance.

Net losses and loss expenses incurred includes $527 million, $530 million, and $479 million, of net favorable prior period development (PPD) in the years ended December 31, 2014, 2013, and 2012, 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 PPD of $354 million in 2014 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:


•	Net favorable development of $298 million in long-tail business, primarily from:


•	Favorable development of $104 million in our D&O portfolios, primarily impacting the 2009 and prior accident years. Case incurred loss emergence that was lower than expected combined with an increase in weighting applied to experience-based methods led to a reduction in the estimates of ultimate loss for those years;


•	Favorable development of $55 million in our excess casualty and umbrella businesses. Resolution of a disputed matter on an individual claim led to a release of $42 million in the 2003 accident year, and lower than expected reported activity across a number of accident years drove the remaining improvement;


•	Favorable development of $48 million on an older claim following recent legal developments, after which it was determined that the reserves were no longer required;


•	Favorable development of $40 million in our medical risk operations, primarily impacting the 2009 and 2010 accident years. Paid and case incurred loss emergence that was lower than expected combined with an increase in weighting applied to experience-based methods led to a reduction in the estimate of ultimate loss for those years;


•	Favorable development of $35 million in our financial solutions business, primarily in the 2010 and prior accident years. Net favorable development principally resulted from the recognition of lower than expected loss activity on two large excess liability transactions;


•	Favorable development of $27 million in our surety business, primarily from favorable claims emergence in the 2012 accident year;


•	Net adverse development of $32 million in our workers’ compensation lines, with adverse development in the 2013 accident year and mainly favorable development in accident years 2009 and 2010. Adverse development in the 2013 accident year is being driven by one large account which is experiencing higher than expected claims frequency and severity; and


•	Net favorable development of $21 million in our auto liability excess lines primarily impacting the 2009 accident year. Reported activity on loss and allocated loss expenses was lower than expected based on estimates from our prior review and original pricing assumptions.


•	Favorable development of $56 million in short-tail business, primarily driven by net favorable development of $20 million in our energy and technical risk property business, primarily impacting the 2012 and 2013 accident years. Across most lines, paid and reported loss activity was lower than expected.

Insurance – North American P&C's run-off operations incurred adverse PPD of $247 million in our Westchester and Brandywine run-off operations during 2014, which was a net result of adverse movements impacting accident years 1996 and prior, driven by the following principal changes:


•	Adverse development of $215 million related to the completion of reserve reviews during 2014. The development primarily arose from case specific asbestos and environmental claims related to increased payment activity and the costs associated with certain case settlements in 2014. Further, we experienced higher than expected case incurred activity in our assumed reinsurance portfolio; and


•	Adverse development of $32 million on unallocated loss adjustment expenses due to run-off operating expenses paid and incurred during 2014.

Insurance – North American P&C's active operations experienced net favorable PPD 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, primarily from:


•	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;

•

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; and


•	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 PPD of $193 million in our Westchester and Brandywine run-off operations during 2013, which was a net result of adverse 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 active operations experienced net favorable PPD of $348 million in 2012, representing 2.2 percent of its beginning of period net unpaid loss and loss expense reserves. Insurance – North American P&C run-off operations incurred net adverse PPD of $168 million in 2012, representing 1.1 percent of its beginning of period net unpaid loss and loss expense reserves.

Insurance – North American Agriculture

Insurance – North American Agriculture experienced net adverse PPD of $34 million in 2014, compared to net favorable development of $13 million, and $12 million in 2013 and 2012, respectively. Actual claim development in 2014 for the 2013 crop year for Multiple Peril Crop Insurance (MPCI) was adverse relative to the long-term historical averages used to estimate our reserves at year-end 2013. Net favorable development in 2013 and 2012 was 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 PPD of $391 million in 2014, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $181 million in long-tail business, primarily from:


•	Net favorable development of $102 million in casualty lines with favorable development of $148 million in accident years 2010 and prior, predominantly due to favorable loss experience in European primary and excess lines, and adverse development of $46 million in accident years 2011 to 2013, predominantly due to large loss experience in the U.K. primary and excess lines;


•	Favorable development of $52 million on an older liability case. This release follows discussions with defense counsel, a review of key legal briefing, and a coverage analysis, all of which was completed in 2014 and after which it was concluded that the reserves were no longer required; and


•	Net favorable development of $27 million in financial lines with favorable development of $98 million in accident years 2010 and prior due to favorable loss experience and adverse development of $71 million in accident years 2011 to 2013. The adverse development was primarily due to large loss experience in D&O and financial institutions.


•	Favorable development of $210 million in short-tail business, primarily from:


•	Favorable development of $136 million across property, technical and marine lines with favorable development of $44 million in accident year 2013 due to favorable large loss experience, and favorable development of $92 million in accident years 2012 and prior due to favorable development on specific claims and an increase in weighting applied to experience-based methods;


•	Favorable development of $30 million in aviation lines primarily in accident years 2010 and prior in the aviation products, airlines and airport liability lines; and


•	Favorable development of $25 million in personal lines primarily in accident years 2011 to 2013 across all Latin America personal lines and Asia Pacific personal automobile lines.

Insurance – Overseas General experienced net favorable PPD 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, primarily from:

•

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 PPD of $226 million in 2012, representing 3.1 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Global Reinsurance

Global Reinsurance experienced net favorable PPD of $63 million in 2014, which was the net result of several underlying favorable and adverse movements, driven by the following principal change:


•	Net favorable development of $52 million in long-tail business, primarily from:


•	Favorable development of $34 million in professional liability lines, including medical malpractice business, primarily in treaty years 2009 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods; and


•	Favorable development of $25 million in casualty lines, principally in treaty years 2009 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods.

Global Reinsurance experienced net favorable PPD 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 from:


•	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, primarily 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 PPD of $61 million in 2012, representing 2.7 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Asbestos and environmental (A&E)

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. The following table presents a roll-forward of consolidated A&E loss reserves, 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, 2013	$	1,644		$	926		$	195		$	125		$	1,839		$	1,051
Incurred activity	187			113			113			97			300			210			⁽¹⁾
Paid activity	(331		)	(147		)	(109		)	(73		)	(440		)	(220		)
Balance at December 31, 2014	$	1,500		$	892		$	199		$	149		$	1,699		$	1,041


⁽¹⁾	Excludes unallocated loss expenses and the net activity reflects third-party reinsurance other than the aggregate excess of loss reinsurance provided by National Indemnity Company (NICO) to Westchester Specialty (see Westchester Specialty section below).

The A&E net loss reserves including allocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2014 and 2013, of $1.0 billion and $1.1 billion shown in the table above comprise $837 million and $816 million, respectively, of reserves held by Brandywine operations, $119 million and $146 million, respectively, of reserves held by Westchester Specialty, and $85 million and $89 million, respectively, of reserves held by other operations, mainly Insurance – Overseas General. For 2014 and 2013, the incurred activity of $210 million and $171 million, respectively, were primarily the result of our annual internal, ground-up review of A&E liabilities.

Brandywine Run-off entities – The Restructuring Plan and uncertainties relating to ACE's ultimate Brandywine exposure

In 1996, 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:

(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.

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. 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. During 2011 and 2010, $35 million and $15 million, respectively, were withheld from such dividends and deposited into the Dividend Retention Fund as a result of dividends paid up to the INA Corporation. Capital contributions from the Dividend Retention Fund to Century are not 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, 2014 was $25 million and approximately $298 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.

Certain active ACE companies are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and placed into rehabilitation or liquidation, some or all of the recoverables due to these active ACE companies from Century could become uncollectible. At December 31, 2014 and 2013, the aggregate reinsurance recoverables owed by Century to the active ACE companies were approximately $1.1 billion and $929 million, respectively. ACE believes the active company intercompany reinsurance recoverables, which relate to direct liabilities payable over many years, are not impaired. At December 31, 2014 and 2013, Century's carried gross reserves (including reserves assumed from the active ACE companies) were $2.1 billion and $2.3 billion, respectively. 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 the active ACE companies 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.

Westchester Specialty – impact of NICO contracts on ACE’s run-off entities

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, 2014, the remaining unused incurred limit under the Westchester NICO agreement was $472 million.