ACE LTD, 10-K filed on 2/27/2015
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Feb. 13, 2015
Jun. 29, 2014
Document Documentand Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ACE 
 
 
Entity Registrant Name
ACE Ltd 
 
 
Entity Central Index Key
0000896159 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
327,341,997 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 35 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Assets
 
 
Fixed maturities available for sale, at fair value (amortized cost - $47,826 and $48,406) (includes hybrid financial instruments of $274 and $302)
$ 49,395 
$ 49,254 
Fixed maturities held to maturity, at amortized cost (fair value – $7,589 and $6,263)
7,331 
6,098 
Equity securities, at fair value (cost – $440 and $841)
510 
837 
Short-term investments, at fair value and amortized cost
2,322 
1,763 
Other investments (cost – $2,999 and $2,671)
3,346 
2,976 
Total investments
62,904 
60,928 
Cash
655 1 2
579 1 3 4
Securities lending collateral
1,330 
1,632 
Accrued investment income
552 
556 
Insurance and reinsurance balances receivable
5,426 
5,026 
Reinsurance recoverable on losses and loss expenses
11,992 
11,227 
Reinsurance recoverable on policy benefits
217 
218 
Deferred policy acquisition costs
2,601 
2,313 
Value of business acquired
466 
536 
Goodwill and other intangible assets
5,724 
5,404 
Prepaid reinsurance premiums
2,026 
1,675 
Deferred tax assets
295 
616 
Investments in partially-owned insurance companies
504 
470 
Other assets
3,556 
3,330 
Total assets
98,248 
94,510 
Liabilities
 
 
Unpaid losses and loss expenses
38,315 
37,443 
Unearned premiums
8,222 
7,539 
Future policy benefits
4,754 
4,615 
Insurance and reinsurance balances payable
4,095 
3,628 
Securities lending payable
1,331 
1,633 
Accounts payable, accrued expenses, and other liabilities
5,726 
4,810 
Short-term debt
2,552 
1,901 
Long-term debt
3,357 
3,807 
Trust preferred securities
309 
309 
Total liabilities
68,661 
65,685 
Commitments and contingencies
   
   
Shareholders' equity
 
 
Common Shares (CHF 24.77 and CHF 27.04 par value; 342,832,412 shares issued; 328,659,686 and 339,793,935 shares outstanding)
8,055 
8,899 
Common Shares in treasury (14,172,726 and 3,038,477 shares)
(1,448)
(255)
Additional paid-in capital
5,145 
5,238 
Retained earnings
16,644 
13,791 
Accumulated other comprehensive income (AOCI)
1,191 
1,152 
Total shareholders’ equity
29,587 
28,825 
Total liabilities and shareholders’ equity
$ 98,248 
$ 94,510 
Consolidated Balance Sheets (Parenthetical)(USD ($))
In Millions, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Fixed maturities available for sale, at amortized cost
$ 47,826 
$ 48,406 
Fixed maturities available for sale, hybrid financial instruments
274 
302 
Fixed maturities held to maturity, at fair value
7,589 
6,263 
Equity securities, at cost
440 
841 
Other investments, cost
$ 2,999 
$ 2,671 
Common Shares, shares issued
342,832,412 
342,832,412 
Common Shares, shares outstanding
328,659,686 
339,793,935 
Common Shares in treasury, shares
14,172,726 
3,038,477 
Consolidated Statements Of Operations and Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues
 
 
 
Net premiums written
$ 17,799 
$ 17,025 
$ 16,075 
Increase in unearned premiums
(373)
(412)
(398)
Net premiums earned
17,426 
16,613 
15,677 
Net investment income
2,252 
2,144 
2,181 
Net realized gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses gross
(75)
(22)
(38)
Portion of OTTI losses recognized in other comprehensive income (OCI)
 
Net OTTI losses recognized in income
(68)
(22)
(37)
Net realized gains (losses) excluding OTTI losses
(439)
526 
115 
Total net realized gains (losses)
(507)
504 
78 
Total revenues
19,171 
19,261 
17,936 
Expenses
 
 
 
Losses and loss expenses
9,649 
9,348 
9,653 
Policy benefits
517 
515 
521 
Policy acquisition costs
3,075 
2,659 
2,446 
Administrative expenses
2,245 
2,211 
2,096 
Interest expense
280 
275 
250 
Other (income) expense
(82)
15 
(6)
Total expenses
15,684 
15,023 
14,960 
Income before income tax
3,487 
4,238 
2,976 
Income tax expense
634 
480 
270 
Net income
2,853 
3,758 
2,706 
Other comprehensive income (loss)
 
 
 
Unrealized appreciation (depreciation)
820 
(1,762)
1,350 
Reclassification adjustment for net realized (gains) losses included in net income
24 
(105)
(234)
Other comprehensive income (loss)after reclassification for net realized gains included in net income
844 
(1,867)
1,116 
Change in:
 
 
 
Cumulative translation adjustment
(632)
(339)
116 
Pension liability
 
(35)
Other comprehensive income (loss), before income tax
214 
(2,206)
1,197 
Income tax benefit (expense) related to OCI items
(175)
471 
(221)
Other comprehensive income (loss)
39 
(1,735)
976 
Comprehensive income
$ 2,892 
$ 2,023 
$ 3,682 
Earnings per share
 
 
 
Basic earnings per share
$ 8.50 
$ 11.02 
$ 7.96 
Diluted earnings per share
$ 8.42 
$ 10.92 
$ 7.89 
Consolidated Statements of Operations and Comprehensive Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Income tax expense (benefit)
$ 634 
$ 480 
Net realized gains (losses)
(507)
504 
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Net unrealized appreciation on investments
 
 
Income tax expense (benefit)
17 
Net realized gains (losses)
$ (24)
$ 105 
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions
Total
Common Shares
Common Shares in Treasury
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Net unrealized appreciation on investments
Cumulative Translation Adjustment
Accumulated Defined Benefit Plans Adjustment [Member]
Balance – beginning of year at Dec. 31, 2011
 
$ 10,095 
$ (327)
$ 5,326 
$ 7,327 
 
$ 1,715 
$ 258 
$ (62)
Net shares redeemed under employee share-based compensation plans
 
 
 
(93)
 
 
 
 
 
Exercise of stock options
 
 
 
(7)
 
 
 
 
 
Dividends declared on Common Shares – par value reduction
 
(504)
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(7)
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
175 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
135 
 
 
 
 
 
Tax benefit on share-based compensation expense
 
 
 
18 
 
 
 
 
 
Net income
2,706 
 
 
 
2,706 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(200)
200 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(200)
 
 
 
 
Change in year, net of income tax benefit (expense) of $(167), $408, and $(198)
 
 
 
 
 
 
918 
 
 
Change in year, net of income tax benefit (expense) of $(12), $63, and $(35)
 
 
 
 
 
 
 
81 
 
Change in year, net of income tax benefit of $4, nil, and $12
 
 
 
 
 
 
 
 
(23)
Balance - end of year at Dec. 31, 2012
27,531 
9,591 
(159)
5,179 
10,033 
2,887 
2,633 
339 
(85)
Net shares redeemed under employee share-based compensation plans
 
 
 
(126)
 
 
 
 
 
Exercise of stock options
 
 
 
(42)
 
 
 
 
 
Dividends declared on Common Shares – par value reduction
 
(692)
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(290)
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
194 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
191 
 
 
 
 
 
Tax benefit on share-based compensation expense
 
 
 
36 
 
 
 
 
 
Net income
3,758 
 
 
 
3,758 
 
 
 
 
Change in year, before reclassification from AOCI, net of income tax benefit (expense) of $(176) and $391
 
 
 
 
 
 
(1,371)
 
 
Amounts reclassified from AOCI, net of income tax benefit of $9 and $17
 
 
 
 
 
 
(88)
 
 
Change in year, net of income tax benefit (expense) of $(167), $408, and $(198)
 
 
 
 
 
 
(1,459)
 
 
Change in year, net of income tax benefit (expense) of $(12), $63, and $(35)
 
 
 
 
 
 
 
(276)
 
Change in year, net of income tax benefit of $4, nil, and $12
 
 
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2013
28,825 
8,899 
(255)
5,238 
13,791 
1,152 
1,174 
63 
(85)
Net shares redeemed under employee share-based compensation plans
 
 
 
(167)
 
 
 
 
 
Exercise of stock options
 
 
 
(58)
 
 
 
 
 
Dividends declared on Common Shares – par value reduction
 
(844)
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(1,449)
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
256 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
185 
 
 
 
 
 
Tax benefit on share-based compensation expense
 
 
 
28 
 
 
 
 
 
Net income
2,853 
 
 
 
2,853 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(81)
81 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(81)
 
 
 
 
Change in year, before reclassification from AOCI, net of income tax benefit (expense) of $(176) and $391
 
 
 
 
 
 
644 
 
 
Amounts reclassified from AOCI, net of income tax benefit of $9 and $17
 
 
 
 
 
 
33 
 
 
Change in year, net of income tax benefit (expense) of $(167), $408, and $(198)
 
 
 
 
 
 
677 
 
 
Change in year, net of income tax benefit (expense) of $(12), $63, and $(35)
 
 
 
 
 
 
 
(644)
 
Change in year, net of income tax benefit of $4, nil, and $12
 
 
 
 
 
 
 
 
Balance - end of year at Dec. 31, 2014
$ 29,587 
$ 8,055 
$ (1,448)
$ 5,145 
$ 16,644 
$ 1,191 
$ 1,851 
$ (581)
$ (79)
Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Net unrealized appreciation on investments, Change in year, income tax (expense) benefit
$ (167)
$ 408 
$ (198)
Cumulative translation adjustment, Change in year, income tax(expense) benefit
(12)
63 
(35)
Pension liability adjustment, Change in year, income tax (expense) benefit
12 
Net unrealized appreciation on investments
 
 
 
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax
33 
(88)
 
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Net unrealized appreciation on investments
 
 
 
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax
(176)
391 
   
Reclassification from Accumulated Other Comprehensive Income, Current Period, Tax
$ 9 
$ 17 
 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities
 
 
 
Net income
$ 2,853 
$ 3,758 
$ 2,706 
Adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Net realized (gains) losses
507 
(504)
(78)
Amortization of premiums/discounts on fixed maturities
188 
268 
220 
Deferred income taxes
145 
240 
(7)
Unpaid losses and loss expenses
317 
(365)
203 
Unearned premiums
441 
402 
522 
Future policy benefits
236 
191 
158 
Insurance and reinsurance balances payable
376 
176 
(151)
Accounts payable, accrued expenses, and other liabilities
13 
37 
(42)
Income taxes payable
103 
(45)
(167)
Insurance and reinsurance balances receivable
(469)
(624)
335 
Reinsurance recoverable on losses and loss expenses
119 
787 
372 
Reinsurance recoverable on policy benefits
23 
52 
Deferred policy acquisition costs
(397)
(503)
(340)
Prepaid reinsurance premiums
(89)
(31)
(123)
Other
149 
212 
335 
Net cash flows from operating activities
4,496 
4,022 
3,995 
Cash flows from investing activities
 
 
 
Purchases of fixed maturities available for sale
(15,553)
(21,340)
(23,572)
Purchases of to be announced mortgage-backed securities
 
(58)
(389)
Purchases of fixed maturities held to maturity
(267)
(447)
(388)
Purchases of equity securities
(251)
(264)
(135)
Sales of fixed maturities available for sale
7,482 
10,355 
14,321 
Sales of to be announced mortgage-backed securities
 
58 
448 
Sales of equity securities
670 
142 
119 
Maturities and redemptions of fixed maturities available for sale
6,413 
6,941 
5,523 
Maturities and redemptions of fixed maturities held to maturity
875 
1,488 
1,451 
Net change in short-term investments
(603)
524 
117 
Net derivative instruments settlements
(230)
(471)
(281)
Acquisition of subsidiaries (net of cash acquired of $20, $38, and $8)
(766)
(977)
(98)
Other
(274)
(393)
(555)
Net cash flows used for investing activities
(2,504)
(4,442)
(3,439)
Cash flows from financing activities
 
 
 
Dividends paid on Common Shares
(862)
(517)
(815)
Common Shares repurchased
(1,429)
(287)
(11)
Proceeds from issuance of long-term debt
699 
947 
 
Proceeds from issuance of short-term debt
1,978 
2,572 
2,933 
Repayment of short-term debt
(1,977)
(2,572)
(2,783)
Repayments of Long-term Debt
(501)
 
 
Proceeds from share-based compensation plans, including windfall tax benefits
127 
135 
126 
Other
188 
113 
 
Net cash flows (used for) from financing activities
(1,777)
391 
(550)
Effect of foreign currency rate changes on cash and cash equivalents
(139)
(7)
(5)
Net increase (decrease) in cash
76 
(36)
Cash – beginning of year
579 1 2 3
615 1 4
614 4
Cash – end of year
655 2 5
579 1 2 3
615 1 4
Supplemental cash flow information
 
 
 
Taxes paid
349 
218 
438 
Interest paid
$ 264 
$ 253 
$ 240 
Consolidated Statements Of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Cash Flows [Abstract]
 
 
 
Acquisition of subsidiaries, cash acquired
$ 20 
$ 38 
$ 8 
Summary of significant accounting policies
Summary of significant accounting policies
Summary of significant accounting policies

a) Basis of presentation
ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited, through its subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through five business segments: Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 15 for additional information.

The accompanying consolidated financial statements, which include the accounts of ACE Limited and its subsidiaries (collectively, ACE, we, us, or our), have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions, including internal reinsurance transactions, have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Amounts included in the consolidated financial statements reflect our best estimates and assumptions; actual amounts could differ materially from these estimates. ACE's principal estimates include:
unpaid loss and loss expense reserves, including long-tail asbestos and environmental (A&E) reserves;
future policy benefits reserves;
the valuation of value of business acquired (VOBA) and amortization of deferred policy acquisition costs and VOBA;
reinsurance recoverable, including a provision for uncollectible reinsurance;
the assessment of risk transfer for certain structured insurance and reinsurance contracts;
the valuation of the investment portfolio and assessment of OTTI;
the valuation of deferred tax assets;
the valuation of derivative instruments related to guaranteed living benefits (GLB); and
the valuation of goodwill.

b) Premiums
Premiums are generally recorded as written upon inception of the policy. For multi-year policies for which premiums written are payable in annual installments, only the current annual premium is included as written at policy inception due to the ability of the insured/reinsured to commute or cancel coverage within the policy term. The remaining annual premiums are recorded as written at each successive anniversary date within the multi-year term.

For property and casualty (P&C) insurance and reinsurance products, premiums written are primarily earned on a pro-rata basis over the policy terms to which they relate. Unearned premiums represent the portion of premiums written applicable to the unexpired portion of the policies in force. For retrospectively-rated policies, written premiums are adjusted to reflect expected ultimate premiums consistent with changes to incurred losses, or other measures of exposure as stated in the policy, and earned over the policy coverage period. For retrospectively-rated multi-year policies, premiums recognized in the current period are computed, using a with-and-without method, as the difference between the ceding enterprise's total contract costs before and after the experience under the contract at the reporting date. Accordingly, for retrospectively-rated multi-year policies, additional premiums are generally written and earned when losses are incurred.

Mandatory reinstatement premiums assessed on reinsurance policies are earned in the period of the loss event that gave rise to the reinstatement premiums.  All remaining unearned premiums are recognized over the remaining coverage period. 

Premiums from long-duration contracts such as certain traditional term life, whole life, endowment, and long-duration personal accident and health (A&H) policies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with income to result in the recognition of profit over the life of the contracts.

Retroactive loss portfolio transfer (LPT) contracts in which the insured loss events occurred prior to contract inception are evaluated to determine whether they meet criteria for reinsurance accounting. If reinsurance accounting is appropriate, written premiums are fully earned and corresponding losses and loss expenses recognized at contract inception. These contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting criteria for reinsurance accounting are recorded using the deposit method as described below in Note 1 k).

Reinsurance premiums assumed are based on information provided by ceding companies supplemented by our own estimates of premium when we have not received ceding company reports. Estimates are reviewed and adjustments are recorded in the period in which they are determined. Premiums are earned over the coverage terms of the related reinsurance contracts and range from one to three years.

c) Deferred policy acquisition costs and value of business acquired
Policy acquisition costs consist of commissions (direct and ceded), premium taxes, and certain underwriting costs related directly to the successful acquisition of new or renewal insurance contracts. A VOBA intangible asset is established upon the acquisition of blocks of long-duration contracts in a business combination and represents the present value of estimated net cash flows for the contracts in force at the acquisition date. Acquisition costs and VOBA, collectively policy acquisition costs, are deferred and amortized. Amortization is recorded in Policy acquisition costs in the consolidated statements of operations. Policy acquisition costs on P&C contracts are generally amortized ratably over the period in which premiums are earned. Policy acquisition costs on traditional long-duration contracts are amortized over the estimated life of the contracts, generally in proportion to premium revenue recognized based upon the same assumptions used in estimating the liability for future policy benefits. For non-traditional long-duration contracts, we amortize policy acquisition costs over the expected life of the contracts in proportion to expected gross profits.  The effect of changes in estimates of expected gross profits is reflected in the period the estimates are revised. Policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. Unrecoverable policy acquisition costs are expensed in the period identified.

Advertising costs are expensed as incurred except for direct-response campaigns that qualify for cost deferral, principally related to long-duration A&H business produced by the Insurance – Overseas General segment, which are deferred and recognized as a component of policy acquisition costs. For individual direct-response marketing campaigns that we can demonstrate have specifically resulted in incremental sales to customers and such sales have probable future economic benefits, incremental costs directly related to the marketing campaigns are capitalized as deferred policy acquisition costs. Deferred policy acquisition costs, including deferred marketing costs, are reviewed regularly for recoverability from future income, including investment income, and amortized in proportion to premium revenue recognized, primarily over a ten-year period, the expected economic future benefit period based upon the same assumptions used in estimating the liability for future policy benefits. The expected future benefit period is evaluated periodically based on historical results and adjusted prospectively. The amount of deferred marketing costs reported in Deferred policy acquisition costs in the consolidated balance sheets was $288 million and $307 million at December 31, 2014 and 2013, respectively. Amortization expense for deferred marketing costs was $99 million, $128 million, and $119 million for the years ended December 31, 2014, 2013, and 2012, respectively.

d) Reinsurance
ACE assumes and cedes reinsurance with other insurance companies to provide greater diversification of business and minimize the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve ACE of its primary obligation to policyholders.

For both ceded and assumed reinsurance, risk transfer requirements must be met in order to account for a contract as reinsurance, principally resulting in the recognition of cash flows under the contract as premiums and losses. To meet risk transfer requirements, a reinsurance contract must include insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. To assess risk transfer for certain contracts, ACE generally develops expected discounted cash flow analyses at contract inception. Deposit accounting is used for contracts that do not meet risk transfer requirements. Deposit accounting requires that consideration received or paid be recorded in the balance sheet as opposed to recording premiums written or losses incurred in the statement of operations. Non-refundable fees on deposit contracts are earned based on the terms of the contract described below in Note 1 k).

Reinsurance recoverable includes balances due from reinsurance companies for paid and unpaid losses and loss expenses and policy benefits that will be recovered from reinsurers, based on contracts in force. The method for determining the reinsurance recoverable on unpaid losses and loss expenses incurred but not reported (IBNR) involves actuarial estimates consistent with those used to establish the associated liability for unpaid losses and loss expenses as well as a determination of ACE's ability to cede unpaid losses and loss expenses under the terms of the reinsurance agreement.

Reinsurance recoverable is presented net of a provision for uncollectible reinsurance determined based upon a review of the financial condition of reinsurers and other factors. The provision for uncollectible reinsurance is based on an estimate of the reinsurance recoverable balance that will ultimately be unrecoverable due to reinsurer insolvency, a contractual dispute, or any other reason. The valuation of this provision includes several judgments including certain aspects of the allocation of reinsurance recoverable on IBNR claims by reinsurer and a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to determine the portion of a reinsurer's balance deemed uncollectible. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in an ACE-only beneficiary trust, letters of credit, and liabilities held with the same legal entity for which ACE believes there is a contractual right of offset. The determination of the default factor is principally based on the financial strength rating of the reinsurer. Default factors require considerable judgment and are determined using the current financial strength rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. The more significant considerations include, but are not necessarily limited to, the following:
For reinsurers that maintain a financial strength rating from a major rating agency, and for which recoverable balances are considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), the financial rating is based on a published source and the default factor is based on published default statistics of a major rating agency applicable to the reinsurer's particular rating class. When a recoverable is expected to be paid in a brief period of time by a highly rated reinsurer, such as certain property catastrophe claims, a default factor may not be applied;
For balances recoverable from reinsurers that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, or peer company, we determine a rating equivalent based on an analysis of the reinsurer that considers an assessment of the creditworthiness of the particular entity, industry benchmarks, or other factors as considered appropriate. We then apply the applicable default factor for that rating class. For balances recoverable from unrated reinsurers for which the ceded reserve is below a certain threshold, we generally apply a default factor of 34 percent, consistent with published statistics of a major rating agency;
For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, we establish a default factor and resulting provision for uncollectible reinsurance based on reinsurer-specific facts and circumstances. Upon initial notification of an insolvency, we generally recognize an expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for uncollectible reinsurance. When regulatory action is taken on a reinsurer, we generally recognize a default factor by estimating an expected recovery on all balances outstanding, net of collateral. When sufficient credible information becomes available, we adjust the provision for uncollectible reinsurance by establishing a default factor pursuant to information received; and
For other recoverables, management determines the provision for uncollectible reinsurance based on the specific facts and circumstances.

The methods used to determine the reinsurance recoverable balance and related provision for uncollectible reinsurance are regularly reviewed and updated, and any resulting adjustments are reflected in earnings in the period identified.

Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired coverage terms of the reinsurance contracts in force.

The value of reinsurance business assumed of $26 million and $27 million at December 31, 2014 and 2013, respectively, included in Other assets in the accompanying consolidated balance sheets, represents the excess of estimated ultimate value of the liabilities assumed under retroactive reinsurance contracts over consideration received. The value of reinsurance business assumed is amortized and recorded to losses and loss expenses based on the payment pattern of the losses assumed and ranges between 9 and 40 years. The unamortized value is reviewed regularly to determine if it is recoverable based upon the terms of the contract, estimated losses and loss expenses, and anticipated investment income. Unrecoverable amounts are expensed in the period identified.

e) Investments
Fixed maturities are classified as either available for sale or held to maturity. The available for sale portfolio is reported at fair value. The held to maturity portfolio includes securities for which we have the ability and intent to hold to maturity or redemption and is reported at amortized cost. Equity securities are classified as available for sale and are recorded at fair value. Short-term investments comprise securities due to mature within one year of the date of purchase and are recorded at fair value which typically approximates cost. Short-term investments include certain cash and cash equivalents, which are part of investment portfolios under the management of external investment managers.

Other investments principally comprise life insurance policies, policy loans, trading securities, other direct equity investments, investment funds, and limited partnerships.
Life insurance policies are carried at policy cash surrender value.
Policy loans are carried at outstanding balance.
Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in Net income.
Other investments over which ACE can exercise significant influence are accounted for using the equity method.
All other investments over which ACE cannot exercise significant influence are carried at fair value with changes in fair value recognized through OCI. For these investments, investment income and realized gains are recognized as related distributions are received.
Partially-owned investment companies comprise entities in which we hold an ownership interest in excess of three percent. These investments as well as ACE's investments in investment funds where our ownership interest is in excess of three percent are accounted for under the equity method because ACE exerts significant influence. These investments apply investment company accounting to determine operating results, and ACE retains the investment company accounting in applying the equity method. This means that investment income, realized gains or losses, and unrealized gains or losses are included in the portion of equity earnings reflected in Other (income) expense.

Investments in partially-owned insurance companies primarily represent direct investments in which ACE has significant influence and, as such, meet the requirements for equity accounting. We report our share of the net income or loss of the partially-owned insurance companies in Other (income) expense.

Realized gains or losses on sales of investments are determined on a first-in, first-out basis. Unrealized appreciation (depreciation) on investments is included as a separate component of AOCI in Shareholders' equity. We regularly review our investments for OTTI. Refer to Note 3 for additional information.

With respect to securities where the decline in value is determined to be temporary and the security's value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are the result of changing or unforeseen facts and circumstances (i.e., arising from a large insured loss such as a catastrophe), deterioration of the creditworthiness of the issuer or its industry, or changes in regulatory requirements. We believe that subsequent decisions to sell such securities are consistent with the classification of the majority of the portfolio as available for sale.

We use derivative instruments including futures, options, swaps, and foreign currency forward contracts for the purpose of managing certain investment portfolio risks and exposures. Refer to Note 10 for additional information. Derivatives are reported at fair value and are recorded in the accompanying consolidated balance sheets in either Accounts payable, accrued expenses, and other liabilities or Other assets with changes in fair value included in Net realized gains (losses) in the consolidated statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in the investment portfolio.

Net investment income includes interest and dividend income and amortization of fixed maturity market premiums and discounts and is net of investment management and custody fees. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized prospectively. Prepayment fees or call premiums that are only payable when a security is called prior to its maturity are earned when received and reflected in Net investment income. 

ACE participates in a securities lending program operated by a third-party banking institution whereby certain assets are loaned to qualified borrowers and from which we earn an incremental return. Borrowers provide collateral, in the form of either cash or approved securities, of 102 percent of the fair value of the loaned securities.  Each security loan is deemed to be an overnight transaction.  Cash collateral is invested in a collateral pool which is managed by the banking institution.  The collateral pool is subject to written investment guidelines with key objectives which include the safeguard of principal and adequate liquidity to meet anticipated redemptions. The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair value of the loaned securities changes. The collateral is held by the third-party banking institution, and the collateral can only be accessed in the event that the institution borrowing the securities is in default under the lending agreement. As a result of these restrictions, we consider our securities lending activities to be non-cash investing and financing activities. An indemnification agreement with the lending agent protects us in the event a borrower becomes insolvent or fails to return any of the securities on loan. The fair value of the securities on loan is included in fixed maturities and equity securities. The securities lending collateral is reported as a separate line in total assets with a related liability reflecting our obligation to return the collateral plus interest.

Similar to securities lending arrangements, securities sold under repurchase agreements, whereby ACE sells securities and repurchases them at a future date for a predetermined price, are accounted for as collateralized investments and borrowings and are recorded at the contractual repurchase amounts plus accrued interest. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The fair value of the underlying securities is included in fixed maturities and equity securities. In contrast to securities lending programs, the use of cash received is not restricted. We report the obligation to return the cash as Short-term debt in the consolidated balance sheets.

Refer to Note 4 for a discussion on the determination of fair value for ACE's various investment securities.

f) Cash
Cash includes cash on hand and deposits with an original maturity of three months or less at time of purchase. Cash held by external money managers is included in Short-term investments.

We have agreements with a third-party bank provider which implemented two international multi-currency notional cash pooling programs. In each program, participating ACE entities establish deposit accounts in different currencies with the bank provider and each day the credit or debit balances in every account are notionally translated into a single currency (U.S. dollars) and then notionally pooled. The bank extends overdraft credit to any participating ACE entity as needed, provided that the overall notionally-pooled balance of all accounts in each pool at the end of each day is at least zero. Actual cash balances are not physically converted and are not commingled between legal entities. Any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $300 million in the aggregate). Our syndicated letter of credit facility allows for same day drawings to fund a net pool overdraft should participating ACE entities overdraw contributed funds from the pool.

g) Goodwill and other intangible assets
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. Goodwill is assigned at acquisition to the applicable reporting unit of the acquired entities giving rise to the goodwill. Goodwill impairment tests are performed annually or more frequently if circumstances indicate a possible impairment.  For goodwill impairment testing, we use a qualitative assessment to determine whether it is more likely than not (i.e., more than a 50 percent probability) that the fair value of a reporting unit is greater than its carrying amount. If our assessment indicates less than a 50 percent probability that fair value exceeds carrying value, we quantitatively estimate a reporting unit's fair value. Goodwill recorded in connection with investments in partially-owned insurance companies is recorded in Investments in partially-owned insurance companies and is also measured for impairment annually.

During the third quarter of 2014, we changed our annual goodwill impairment testing date from December 31 to September 30 of each year. We believe this change is preferable as it more closely aligns the goodwill impairment testing date with the timing of our strategic business planning process. This change does not result in any delay, acceleration or avoidance of impairment. Based on our impairment testing for 2014, we determined no impairment was required and none of our reporting units were at risk for impairment.

Indefinite lived intangible assets are not subject to amortization. Finite lived intangible assets are amortized over their useful lives, generally ranging from 1 to 20 years. The amortization of finite lived intangible assets is reported in Other (income) expense in the consolidated statements of operations. Intangible assets are regularly reviewed for indicators of impairment. Impairment is recognized if the carrying amount is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value.

h) Unpaid losses and loss expenses
A liability is established for the estimated unpaid losses and loss expenses under the terms of, and with respect to, ACE's policies and agreements. Similar to premiums that are recognized as revenues over the coverage period of the policy, a liability for unpaid losses and loss expenses is recognized as expense when insured events occur over the coverage period of the policy. This liability includes a provision for both reported claims (case reserves) and incurred but not reported claims (IBNR reserves). IBNR reserve estimates are generally calculated by first projecting the ultimate cost of all losses that have occurred (expected losses), and then subtracting paid losses, case reserves, and loss expenses. The methods of determining such estimates and establishing the resulting liability are reviewed regularly and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses materially greater or less than recorded amounts.

Except for net loss and loss expense reserves of $49 million net of discount, held at December 31, 2014, representing certain structured settlements for which the timing and amount of future claim payments are reliably determinable and $62 million, net of discount, of certain reserves for unsettled claims that are discounted in statutory filings, ACE does not discount its P&C loss reserves. This compares with reserves of $54 million for certain structured settlements and $52 million of certain reserves for unsettled claims at December 31, 2013. Structured settlements represent contracts purchased from life insurance companies primarily to settle workers' compensation claims, where payments to the claimant by the life insurance company are expected to be made in the form of an annuity. ACE retains the liability to the claimant in the event that the life insurance company fails to pay. At December 31, 2014, the gross liability due to claimants was $606 million, net of discount, and reinsurance recoverables due from the life insurance companies was $557 million, net of discount. For structured settlement contracts where payments are guaranteed regardless of claimant life expectancy, the amounts recoverable from the life insurance companies at December 31, 2014 are included in Other assets in the consolidated balance sheets, as they do not meet the requirements for reinsurance accounting.

Included in unpaid losses and loss expenses are liabilities for asbestos and environmental (A&E) claims and expenses. These unpaid losses and loss expenses are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to changes in the legal environment including specific settlements that may be used as precedents to settle future claims. However, ACE does not anticipate future changes in laws and regulations in setting its A&E reserve levels.

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premiums from previous accident years.

For purposes of analysis and disclosure, management views prior period development to be changes in the nominal value of loss estimates from period to period, net of premium and profit commission adjustments on loss sensitive contracts. Prior period development generally excludes changes in loss estimates that do not arise from the emergence of claims, such as those related to uncollectible reinsurance, interest, unallocated loss adjustment expenses, or foreign currency. Accordingly, specific items excluded from prior period development include the following: gains/losses related to foreign currency remeasurement; losses recognized from the early termination or commutation of reinsurance agreements that principally relate to the time value of money; changes in the value of reinsurance business assumed reflected in losses incurred but principally related to the time value of money; and losses that arise from changes in estimates of earned premiums from prior accident years. Except for foreign currency remeasurement, which is included in Net realized gains (losses), these items are included in current year losses.

i) Future policy benefits
The valuation of long-duration contract reserves requires management to make estimates and assumptions regarding expenses, mortality, persistency, and investment yields. Estimates are primarily based on historical experience and information provided by ceding companies and include a margin for adverse deviation. Interest rates used in calculating reserves range from less than 1.0 percent to 6.5 percent at both December 31, 2014 and 2013. Actual results could differ materially from these estimates. Management monitors actual experience and where circumstances warrant, will revise assumptions and the related reserve estimates. Revisions are recorded in the period they are determined.

Certain of our long-duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets are classified as trading securities and reported in Other investments and the offsetting liabilities are reported in Future policy benefits in the consolidated balance sheets. Changes in the fair value of separate account assets that do not qualify for separate account reporting under GAAP are reported in Other income (expense) and the offsetting movements in the liabilities are included in Policy benefits in the consolidated statements of operations.

j) Assumed reinsurance programs involving minimum benefit guarantees under variable annuity contracts
ACE reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States and Japan. We generally receive a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of either the underlying accumulated account values or the underlying accumulated guaranteed values. Depending on an annuitant's age, the accumulation phase can last many years. To limit our exposure under these programs, all reinsurance treaties include annual or aggregate claim limits and many include an aggregate deductible.

The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDB), principally cover shortfalls between accumulated account value at the time of an annuitant's death and either i) an annuitant's total deposits; ii) an annuitant's total deposits plus a minimum annual return; or iii) the highest accumulated account value attained at any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Liabilities for GMDBs are based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the present value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected premiums during the contract period.  

Under reinsurance programs covering GLBs, we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GMAB risk is triggered if, at contract maturity, the contract holder's account value is less than a guaranteed minimum value. Our GLB reinsurance product meets the definition of a derivative for accounting purposes and is carried at fair value with changes in fair value recognized in income. Refer to Notes 5 c) and 10 a) for additional information.

k) Deposit assets and liabilities
Deposit assets arise from ceded reinsurance contracts purchased that do not transfer significant underwriting or timing risk. Deposit liabilities include reinsurance deposit liabilities and contract holder deposit funds. The reinsurance deposit liabilities arise from contracts sold for which there is not a significant transfer of risk. Contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract, and certain of these contracts are sold with a guaranteed rate of return. Under deposit accounting, consideration received or paid is recorded as a deposit asset or liability in the balance sheet as opposed to recording premiums and losses in the statement of operations.

Interest income on deposit assets, representing the consideration received or to be received in excess of cash payments related to the deposit contract, is earned based on an effective yield calculation. The calculation of the effective yield is based on the amount and timing of actual cash flows at the balance sheet date and the estimated amount and timing of future cash flows. The effective yield is recalculated periodically to reflect revised estimates of cash flows. When a change in the actual or estimated cash flows occurs, the resulting change to the carrying amount of the deposit asset is reported as income or expense. Deposit assets of $89 million and $100 million at December 31, 2014 and 2013, respectively, are reflected in Other assets in the consolidated balance sheets and the accretion of deposit assets related to interest pursuant to the effective yield calculation is reflected in Net investment income in the consolidated statements of operations.

Deposit liabilities include reinsurance deposit liabilities of $120 million and $131 million and contract holder deposit funds of $908 million and $699 million at December 31, 2014 and 2013, respectively. Deposit liabilities are reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets. At contract inception, the deposit liability equals net cash received. An accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the contract term. The deposit accretion rate is the rate of return required to fund expected future payment obligations. We periodically reassess the estimated ultimate liability and related expected rate of return. Changes to the deposit liability are generally reflected through Interest expense to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.

The liability for contract holder deposit funds equals accumulated policy account values, which consist of the deposit payments plus credited interest less withdrawals and amounts assessed through the end of the period.

l) Foreign currency remeasurement and translation
The functional currency for each of our foreign operations is generally the currency of the local operating environment. Transactions in currencies other than a foreign operation's functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in Net realized gains (losses) in the consolidated statements of operations. Functional currency assets and liabilities are translated into the reporting currency, U.S. dollars, using period end exchange rates and the related translation adjustments are recorded as a separate component of AOCI. Functional statement of operations amounts expressed in functional currencies are translated using average exchange rates.

m) Administrative expenses
Administrative expenses generally include all operating costs other than policy acquisition costs. The Insurance – North American P&C segment manages and uses an in-house third-party claims administrator, ESIS Inc. (ESIS).  ESIS performs claims management and risk control services for domestic and international organizations that self-insure P&C exposures as well as internal P&C exposures.  The net operating results of ESIS are included within Administrative expenses in the consolidated statements of operations and were $27 million, $25 million, and $23 million for the years ended December 31, 2014, 2013, and 2012, respectively.

n) Income taxes
Income taxes have been recorded related to those operations subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of our assets and liabilities. Refer to Note 8 for additional information. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. The valuation allowance assessment considers tax planning strategies, where applicable.

We recognize uncertain tax positions deemed more likely than not of being sustained upon examination.  Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

o) Earnings per share
Basic earnings per share is calculated using the weighted-average shares outstanding including participating securities with non-forfeitable rights to dividends such as unvested restricted stock. All potentially dilutive securities including stock options are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the weighted-average shares outstanding is increased to include all potentially dilutive securities. Basic and diluted earnings per share are calculated by dividing Net income by the applicable weighted-average number of shares outstanding during the year.

p) Cash flow information
Premiums received and losses paid associated with the GLB reinsurance products, which as discussed previously meet the definition of a derivative instrument for accounting purposes, are included within Cash flows from operating activities.  Cash flows, such as settlements and collateral requirements, associated with GLB and all other derivative instruments are included on a net basis within Cash flows from investing activities. Purchases, sales, and maturities of short-term investments are recorded on a net basis within Cash flows from investing activities.

q) Derivatives
ACE recognizes all derivatives at fair value in the consolidated balance sheets and participates in derivative instruments in two principal ways:

(i) To sell protection to customers as an insurance or reinsurance contract that meets the definition of a derivative for accounting purposes. For 2014 and 2013, the reinsurance of GLBs was our primary product falling into this category; and
(ii) To mitigate financial risks, principally arising from investment holdings, products sold, or assets and liabilities held in foreign currencies. For these instruments, changes in assets or liabilities measured at fair value are recorded as realized gains or losses in the consolidated statement of operations.

We did not designate any derivatives as accounting hedges during 2014, 2013, or 2012.

r) Share-based compensation
ACE measures and records compensation cost for all share-based payment awards at grant-date fair value. Compensation costs are recognized for share-based payment awards with only service conditions that have graded vesting schedules 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. Refer to Note 12 for additional information.
Acquisitions
Acquisitions
Acquisitions

Large Corporate Account P&C Insurance Business of Itaú Seguros, S.A. (Itaú Seguros)
On October 31, 2014, we expanded our presence in Brazil with the acquisition of the large corporate account property and casualty (P&C) insurance business of Itaú Seguros, Brazil's leading carrier for that business, for approximately $610 million in cash, subject to a working capital adjustment under the purchase agreement expected to be finalized in March 2015. This acquisition generated $449 million of goodwill, attributable to expected growth and profitability, none of which is currently deductible for income tax purposes. Goodwill may become deductible for income tax purposes under Brazilian tax law if this acquired entity is merged with certain ACE legal entities. Other intangible assets of $60 million were also generated based on ACE’s preliminary purchase price allocation. The other intangible assets primarily relate to renewal rights.

The Siam Commercial Samaggi Insurance PCL (Samaggi)
We and our local partner acquired 60.86 percent of Samaggi, a general insurance company in Thailand, from Siam Commercial Bank on April 28, 2014, and subsequently acquired an additional 32.17 percent ownership, through a mandatory tender offer, which expired on June 17, 2014. The purchase price for 93.03 percent of the company was $176 million in cash. This acquisition expands our presence in Thailand and Southeast Asia.

The acquisition generated $46 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $80 million based on ACE’s preliminary purchase price allocation.  The other intangible assets primarily relate to a bancassurance agreement.

Prior year acquisitions

ABA Seguros
On May 2, 2013, we acquired ABA Seguros, a property and casualty insurer in Mexico that provides automobile, homeowners, and small business coverages, for approximately $690 million in cash.

The acquisition generated $285 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $140 million based on ACE’s purchase price allocation. The other intangible assets primarily relate to distribution channels.

Fianzas Monterrey
On April 1, 2013, we acquired Fianzas Monterrey, a leading surety lines company in Mexico offering administrative performance bonds primarily to clients in the construction and industrial sectors, for approximately $293 million in cash. This acquisition expands our global franchise in the surety business and enhances our existing commercial lines and personal accident insurance business in Mexico.

The acquisition generated $137 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $73 million, based on ACE's purchase price allocation. The other intangible assets primarily relate to customer lists.

PT Asuransi Jaya Proteksi
We acquired 80 percent of PT Asuransi Jaya Proteksi (JaPro) on September 18, 2012 and our local partner acquired the remaining 20 percent on January 3, 2013. JaPro is one of Indonesia's leading general insurers offering personal lines and commercial coverages. This acquisition diversifies our existing business in Indonesia. The total purchase price for 100 percent of the company was approximately $107 million in cash.

Goodwill and other intangible assets arising from the acquisitions described above are included in our Insurance – Overseas General segment. The consolidated financial statements include results of acquired businesses from the acquisition dates.

To be acquired after 2014
On December 18, 2014, we announced that we have signed a definitive agreement to acquire the Fireman's Fund high net worth personal lines insurance business in the U.S. from Allianz for approximately $365 million. The acquisition is expected to expand ACE’s position as one of the largest high net worth personal lines insurers in the U.S. The transaction, which is subject to customary closing conditions, including insurance regulatory approval, is expected to be completed in the second quarter of 2015.
Investments
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

Fair value measurements
Fair value measurements
Fair value measurements
a) Fair value hierarchy
Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability (an exit price) in an orderly transaction between market participants and establishes a three-level valuation hierarchy based on the reliability of the inputs. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.
 
The three levels of the hierarchy are as follows:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;