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Investments | 9 Months Ended
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Sep. 30, 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
September 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 | $ | 2,627 |  |  | $ | 70 |  |  | $ | (19 | ) |  | $ | 2,678 |  |  | $ | — |
Foreign | 14,741 |  |  | 542 |  |  | (52 | ) |  | 15,231 |  |  | (1 | )
Corporate securities | 16,715 |  |  | 716 |  |  | (93 | ) |  | 17,338 |  |  | (2 | )
Mortgage-backed securities | 10,159 |  |  | 237 |  |  | (72 | ) |  | 10,324 |  |  | (1 | )
States, municipalities, and political subdivisions | 3,446 |  |  | 138 |  |  | (7 | ) |  | 3,577 |  |  | — |
| $ | 47,688 |  |  | $ | 1,703 |  |  | $ | (243 | ) |  | $ | 49,148 |  |  | $ | (4 | )
Held to maturity |  |  |  |  |  |  |  |  |
U.S. Treasury and agency | $ | 804 |  |  | $ | 16 |  |  | $ | (3 | ) |  | $ | 817 |  |  | $ | — |
Foreign | 937 |  |  | 42 |  |  | (1 | ) |  | 978 |  |  | — |
Corporate securities | 2,443 |  |  | 86 |  |  | (4 | ) |  | 2,525 |  |  | — |
Mortgage-backed securities | 2,087 |  |  | 46 |  |  | (3 | ) |  | 2,130 |  |  | — |
States, municipalities, and political subdivisions | 1,277 |  |  | 38 |  |  | (2 | ) |  | 1,313 |  |  | — |
| $ | 7,548 |  |  | $ | 228 |  |  | $ | (13 | ) |  | $ | 7,763 |  |  | $ | — |
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 three and nine months ended September 30, 2014, $1 million and $6 million, respectively, of net unrealized appreciation related to such securities is included in OCI. For the three and nine months ended September 30, 2013, $1 million of net unrealized depreciation and $24 million of net unrealized appreciation, respectively, related to such securities is included in OCI. There was no non-credit OTTI recognized in AOCI at September 30, 2014. At December 31, 2013, AOCI included cumulative net unrealized depreciation of $4 million 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 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent of the total mortgage-backed securities at September 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:
|  |  | September 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 | $ | 2,292 |  |  | $ | 2,316 |  |  | $ | 2,387 |  |  | $ | 2,411 |
Due after 1 year through 5 years | 14,833 |  |  | 15,310 |  |  | 14,139 |  |  | 14,602 |
Due after 5 years through 10 years | 15,872 |  |  | 16,323 |  |  | 16,200 |  |  | 16,535 |
Due after 10 years | 4,532 |  |  | 4,875 |  |  | 4,743 |  |  | 4,812 |
| 37,529 |  |  | 38,824 |  |  | 37,469 |  |  | 38,360 |
Mortgage-backed securities | 10,159 |  |  | 10,324 |  |  | 10,937 |  |  | 10,894 |
| $ | 47,688 |  |  | $ | 49,148 |  |  | $ | 48,406 |  |  | $ | 49,254 |
Held to maturity |  |  |  |  |  |  |
Due in 1 year or less | $ | 417 |  |  | $ | 421 |  |  | $ | 401 |  |  | $ | 405 |
Due after 1 year through 5 years | 2,670 |  |  | 2,763 |  |  | 2,284 |  |  | 2,363 |
Due after 5 years through 10 years | 1,401 |  |  | 1,443 |  |  | 1,686 |  |  | 1,723 |
Due after 10 years | 973 |  |  | 1,006 |  |  | 386 |  |  | 393 |
| 5,461 |  |  | 5,633 |  |  | 4,757 |  |  | 4,884 |
Mortgage-backed securities | 2,087 |  |  | 2,130 |  |  | 1,341 |  |  | 1,379 |
| $ | 7,548 |  |  | $ | 7,763 |  |  | $ | 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
| September 30 |  |  | December 31 |
(in millions of U.S. dollars) | 2014 |  |  | 2013 |
Cost | $ | 480 |  |  | $ | 841 |
Gross unrealized appreciation | 71 |  |  | 63 |
Gross unrealized depreciation | (5 | ) |  | (67 | )
Fair value | $ | 546 |  |  | $ | 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. 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 nine months ended September 30, 2014, credit losses recognized in Net income for corporate securities were $4 million and $14 million, respectively. For the three and nine months ended September 30, 2013, credit losses recognized in Net income for corporate securities were $1 million and $8 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 nine months ended September 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 |  |  | Nine Months Ended |
| September 30 |  |  | September 30 |
(in millions of U.S. dollars) | 2014 |  |  | 2013 |  |  | 2014 |  |  | 2013 |
Fixed maturities: |  |  |  |  |  |  |
OTTI on fixed maturities, gross | $ | (5 | ) |  | $ | (4 | ) |  | $ | (20 | ) |  | $ | (11 | )
OTTI on fixed maturities recognized in OCI (pre-tax) | 1 |  |  | — |  |  | 3 |  |  | — |
OTTI on fixed maturities, net | (4 | ) |  | (4 | ) |  | (17 | ) |  | (11 | )
Gross realized gains excluding OTTI | 73 |  |  | 37 |  |  | 163 |  |  | 163 |
Gross realized losses excluding OTTI | (51 | ) |  | (16 | ) |  | (97 | ) |  | (68 | )
Total fixed maturities | 18 |  |  | 17 |  |  | 49 |  |  | 84 |
Equity securities: |  |  |  |  |  |  |
OTTI on equity securities | — |  |  | — |  |  | (7 | ) |  | (1 | )
Gross realized gains excluding OTTI | 4 |  |  | 8 |  |  | 8 |  |  | 18 |
Gross realized losses excluding OTTI | (60 | ) |  | (1 | ) |  | (61 | ) |  | (4 | )
Total equity securities | (56 | ) |  | 7 |  |  | (60 | ) |  | 13 |
OTTI on other investments | — |  |  | — |  |  | (3 | ) |  | (2 | )
Foreign exchange gains (losses) | (19 | ) |  | (26 | ) |  | (42 | ) |  | 45 |
Investment and embedded derivative instruments | (13 | ) |  | 4 |  |  | (53 | ) |  | 62 |
Fair value adjustments on insurance derivative | (80 | ) |  | 134 |  |  | (126 | ) |  | 563 |
S&P put options and futures | (15 | ) |  | (95 | ) |  | (106 | ) |  | (413 | )
Other derivative instruments | 45 |  |  | (1 | ) |  | 52 |  |  | (2 | )
Other | — |  |  | — |  |  | (8 | ) |  | — |
Net realized gains (losses) | $ | (120 | ) |  | $ | 40 |  |  | $ | (297 | ) |  | $ | 350 |
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 |  |  | Nine Months Ended |
| September 30 |  |  | September 30 |
(in millions of U.S. dollars) | 2014 |  |  | 2013 |  |  | 2014 |  |  | 2013 |
Balance of credit losses related to securities still held – beginning of period | $ | 24 |  |  | $ | 40 |  |  | $ | 37 |  |  | $ | 43 |
Additions where no OTTI was previously recorded | 2 |  |  | 1 |  |  | 9 |  |  | 5 |
Additions where an OTTI was previously recorded | 2 |  |  | — |  |  | 5 |  |  | 3 |
Reductions for securities sold during the period | (11 | ) |  | (3 | ) |  | (34 | ) |  | (13 | )
Balance of credit losses related to securities still held – end of period | $ | 17 |  |  | $ | 38 |  |  | $ | 17 |  |  | $ | 38 |
e) Gross unrealized loss At September 30, 2014, there were 5,799 fixed maturities out of a total of 25,735 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $3 million. There were 64 equity securities out of a total of 238 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 September 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. 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 |
September 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 | $ | 439 |  |  | $ | (2 | ) |  | $ | 943 |  |  | $ | (20 | ) |  | $ | 1,382 |  |  | $ | (22 | )
Foreign | 2,420 |  |  | (34 | ) |  | 916 |  |  | (19 | ) |  | 3,336 |  |  | (53 | )
Corporate securities | 4,943 |  |  | (72 | ) |  | 854 |  |  | (25 | ) |  | 5,797 |  |  | (97 | )
Mortgage-backed securities | 2,206 |  |  | (11 | ) |  | 2,050 |  |  | (64 | ) |  | 4,256 |  |  | (75 | )
States, municipalities, and political subdivisions | 311 |  |  | (1 | ) |  | 673 |  |  | (8 | ) |  | 984 |  |  | (9 | )
Total fixed maturities | 10,319 |  |  | (120 | ) |  | 5,436 |  |  | (136 | ) |  | 15,755 |  |  | (256 | )
Equity securities | 67 |  |  | (5 | ) |  | — |  |  | — |  |  | 67 |  |  | (5 | )
Other investments | 78 |  |  | (3 | ) |  | — |  |  | — |  |  | 78 |  |  | (3 | )
Total | $ | 10,464 |  |  | $ | (128 | ) |  | $ | 5,436 |  |  | $ | (136 | ) |  | $ | 15,900 |  |  | $ | (264 | )
| 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 | )
f) 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, which represent ACE's agreement to sell securities and repurchase them at a future date for a predetermined price. 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 September 30, 2014 and December 31, 2013, are investments, primarily fixed maturities, totaling $15.7 billion and $16.3 billion, respectively, and cash of $72 million and $162 million, respectively. The following table presents the components of restricted assets:
| September 30 |  |  | December 31 |
(in millions of U.S. dollars) | 2014 |  |  | 2013 |
Trust funds | $ | 10,497 |  |  | $ | 11,315 |
Deposits with non-U.S. regulatory authorities | 2,014 |  |  | 1,970 |
Assets pledged under repurchase agreements | 1,454 |  |  | 1,435 |
Deposits with U.S. regulatory authorities | 1,324 |  |  | 1,334 |
Other pledged assets | 435 |  |  | 391 |
| $ | 15,724 |  |  | $ | 16,445 |

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- Definition The entire disclosure for investments, including all tables. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Article 6 -Section 10 -Paragraph (c) -Subparagraph (1) + Details
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