ACE LTD, 10-Q filed on 7/30/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Jul. 16, 2014
Entity Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q2 
 
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
 
335,698,995 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Investments [Abstract]
 
 
Fixed maturities available for sale, at fair value (amortized cost - $49,719 and $48,406) (includes hybrid financial instruments of $305 and $302)
$ 51,601 
$ 49,254 
Fixed maturities held to maturity, at amortized cost (fair value – $6,015 and $6,263)
5,774 
6,098 
Equity securities, at fair value (cost – $874 and $841)
907 
837 
Short-term investments, at fair value and amortized cost
2,108 
1,763 
Other investments (cost – $2,876 and $2,671)
3,230 
2,976 
Total investments
63,620 
60,928 
Cash
594 1 2
579 1 3
Securities lending collateral
1,440 
1,632 
Accrued investment income
556 
556 
Insurance and reinsurance balances receivable
5,316 
5,026 
Reinsurance recoverable on losses and loss expenses
10,768 
11,227 
Reinsurance recoverable on policy benefits
234 
218 
Deferred policy acquisition costs
2,562 
2,313 
Value of business acquired
514 
536 
Goodwill and other intangible assets
5,522 
5,404 
Prepaid reinsurance premiums
1,867 
1,675 
Deferred tax assets
234 
616 
Investments in partially-owned insurance companies
470 
470 
Other assets
3,750 
3,330 
Total assets
97,447 
94,510 
Liabilities
 
 
Unpaid losses and loss expenses
37,177 
37,443 
Unearned premiums
8,296 
7,539 
Future policy benefits
4,778 
4,615 
Insurance and reinsurance balances payable
3,794 
3,628 
Securities lending payable
1,441 
1,633 
Accounts payable, accrued expenses, and other liabilities
5,419 
4,810 
Short-term debt
1,851 
1,901 
Long-term debt
4,057 
3,807 
Trust preferred securities
309 
309 
Total liabilities
67,122 
65,685 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Common Shares (CHF 26.01 and CHF 27.04 par value; 342,832,412 shares issued; 336,225,589 and 339,793,935 shares outstanding)
8,501 
8,899 
Common Shares in treasury (6,606,823 and 3,038,477 shares)
(630)
(255)
Additional paid-in capital
5,055 
5,238 
Retained earnings
15,304 
13,791 
Accumulated other comprehensive income (AOCI)
2,095 
1,152 
Total shareholders’ equity
30,325 
28,825 
Total liabilities and shareholders’ equity
$ 97,447 
$ 94,510 
Consolidated Balance Sheets (Parenthetical)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2014
USD ($)
Jun. 30, 2014
CHF
Dec. 31, 2013
USD ($)
Dec. 31, 2013
CHF
Statement of Financial Position [Abstract]
 
 
 
 
Fixed maturities available for sale, at amortized cost
$ 49,719 
 
$ 48,406 
 
Fixed maturities available for sale, hybrid financial instruments
305 
 
302 
 
Fixed maturities held to maturity, at amortized cost
6,015 
 
6,263 
 
Equity securities, at cost
874 
 
841 
 
Other investments, cost
$ 2,876 
 
$ 2,671 
 
Common Shares, par value
 
 26.01 
 
 27.04 
Common Shares, shares issued
342,832,412 
342,832,412 
342,832,412 
342,832,412 
Common Shares, shares outstanding
336,225,589 
336,225,589 
339,793,935 
339,793,935 
Common Shares in treasury, shares
6,606,823 
6,606,823 
3,038,477 
3,038,477 
Consolidated Statements Of Operations and Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Revenues
 
 
 
 
Net premiums written
$ 4,559 
$ 4,391 
$ 8,744 
$ 8,189 
Increase in unearned premiums
(227)
(324)
(442)
(549)
Net premiums earned
4,332 
4,067 
8,302 
7,640 
Net investment income
556 
534 
1,109 
1,065 
Net realized gains (losses):
 
 
 
 
Other-than-temporary impairment (OTTI) losses gross
(13)
(7)
(25)
(10)
Portion of OTTI losses recognized in other comprehensive income (OCI)
Net OTTI losses recognized in income
(12)
(7)
(23)
(10)
Net realized gains (losses) excluding OTTI losses
(61)
111 
(154)
320 
Total net realized gains (losses)
(73)
104 
(177)
310 
Total revenues
4,815 
4,705 
9,234 
9,015 
Expenses
 
 
 
 
Losses and loss expenses
2,388 
2,250 
4,549 
4,176 
Policy benefits
144 
110 
258 
241 
Policy acquisition costs
758 
665 
1,486 
1,279 
Administrative expenses
566 
564 
1,101 
1,078 
Interest expense
72 
73 
143 
133 
Other (income) expense
(25)
37 
(42)
27 
Total expenses
3,903 
3,699 
7,495 
6,934 
Income before income tax
912 
1,006 
1,739 
2,081 
Income tax expense (includes $5, $7, $2, and $12 of reclassified unrealized gains)
133 
115 
226 
237 
Net income
779 
891 
1,513 
1,844 
Other comprehensive income (loss)
 
 
 
 
Unrealized appreciation (depreciation)
589 
(1,470)
1,108 
(1,586)
Reclassification adjustment for net realized gains included in net income
(21)
(38)
(27)
(73)
Unrealized appreciation (Depreciation) after reclassification adjustment
568 
(1,508)
1,081 
(1,659)
Change in:
 
 
 
 
Cumulative translation adjustment
153 
(175)
120 
(386)
Pension liability
(5)
(3)
(13)
19 
Other comprehensive income (loss), before income tax
716 
(1,686)
1,188 
(2,026)
Income tax (expense) benefit related to OCI items
(147)
296 
(245)
399 
Other comprehensive income (loss)
569 
(1,390)
943 
(1,627)
Comprehensive income (loss)
1,348 
(499)
2,456 
217 
Earnings per share
 
 
 
 
Basic earnings per share
$ 2.30 
$ 2.61 
$ 4.47 
$ 5.41 
Diluted earnings per share
$ 2.28 
$ 2.59 
$ 4.43 
$ 5.36 
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Accumulated Net Unrealized Investment Gain (Loss) [Member]
 
 
 
 
Net realized gains (losses):
 
 
 
 
Total net realized gains (losses)
21 
38 
27 
73 
Expenses
 
 
 
 
Income tax expense (includes $5, $7, $2, and $12 of reclassified unrealized gains)
$ 5 
$ 7 
$ 2 
$ 12 
Consolidated Statements Of Operations and Comprehensive Income Consolidated Statements of Operations and Comprehensive Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Net realized gains (losses)
$ (73)
$ 104 
$ (177)
$ 310 
Income tax expense (benefit)
133 
115 
226 
237 
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Accumulated Net Unrealized Investment Gain (Loss) [Member]
 
 
 
 
Net realized gains (losses)
21 
38 
27 
73 
Income tax expense (benefit)
$ 5 
$ 7 
$ 2 
$ 12 
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions
Total
Common Stock [Member]
Treasury Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Net Unrealized Investment Gain (Loss) [Member]
Accumulated Translation Adjustment [Member]
Accumulated Defined Benefit Plans Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Balance - beginning of period at Dec. 31, 2012
 
$ 9,591 
$ (159)
$ 5,179 
$ 10,033 
$ 2,633 
$ 339 
$ (85)
 
Dividends declared on Common Shares – par value reduction
 
(342)
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(212)
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
152 
(128)
 
 
 
 
 
Exercise of stock options
 
 
 
(28)
 
 
 
 
 
Share-based compensation expense and other
 
 
 
105 
 
 
 
 
 
Funding of dividends declared to Retained earnings
 
 
 
 
 
 
 
 
Net income
1,844 
 
 
 
1,844 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
 
 
 
 
Change in period, before reclassification from AOCI, net of income tax (expense) benefit of $(210) and $332
 
 
 
 
 
(1,254)
 
 
 
Amounts reclassified from AOCI, net of income tax benefit of $2 and $12
 
 
 
 
 
(61)
 
 
 
Change in period, net of income tax (expense) benefit of $(208) and $344
 
 
 
 
 
(1,315)
 
 
 
Change in period, net of income tax (expense) benefit of $(42) and $62
 
 
 
 
 
 
(324)
 
 
Change in period, net of income tax (expense) benefit of $5 and $(7)
 
 
 
 
 
 
 
12 
 
Balance - end of period at Jun. 30, 2013
27,295 
9,249 
(219)
5,128 
11,877 
1,318 
15 
(73)
1,260 
Balance - beginning of period at Dec. 31, 2013
28,825 
8,899 
(255)
5,238 
13,791 
1,174 
63 
(85)
 
Dividends declared on Common Shares – par value reduction
 
(398)
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(569)
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
194 
(169)
 
 
 
 
 
Exercise of stock options
 
 
 
(33)
 
 
 
 
 
Share-based compensation expense and other
 
 
 
100 
 
 
 
 
 
Funding of dividends declared to Retained earnings
 
 
 
(81)
 
 
 
 
 
Net income
1,513 
 
 
 
1,513 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
 
81 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(81)
 
 
 
 
Change in period, before reclassification from AOCI, net of income tax (expense) benefit of $(210) and $332
 
 
 
 
 
898 
 
 
 
Amounts reclassified from AOCI, net of income tax benefit of $2 and $12
 
 
 
 
 
(25)
 
 
 
Change in period, net of income tax (expense) benefit of $(208) and $344
 
 
 
 
 
873 
 
 
 
Change in period, net of income tax (expense) benefit of $(42) and $62
 
 
 
 
 
 
78 
 
 
Change in period, net of income tax (expense) benefit of $5 and $(7)
 
 
 
 
 
 
 
(8)
 
Balance - end of period at Jun. 30, 2014
$ 30,325 
$ 8,501 
$ (630)
$ 5,055 
$ 15,304 
$ 2,047 
$ 141 
$ (93)
$ 2,095 
Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Net unrealized appreciation on investments, Change in period, income tax (expense) benefit
$ (208)
$ 344 
Cumulative translation adjustment, Change in period, income tax(expense) benefit
(42)
62 
Pension liability adjustment, Change in period, income tax (expense) benefit
(7)
Accumulated Net Unrealized Investment Gain (Loss) [Member]
 
 
Unrealized appreciation on investments, Change in period before reclassification to AOCI, income tax (expense) benefit
25 
61 
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Accumulated Net Unrealized Investment Gain (Loss) [Member]
 
 
Unrealized appreciation on investments, Change in period before reclassification to AOCI, income tax (expense) benefit
12 
Income tax expense from reclassification of unrealized gains
$ (210)
$ 332 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities
 
 
Net income
$ 1,513 
$ 1,844 
Adjustments to reconcile net income to net cash flows from operating activities
 
 
Net realized (gains) losses
177 
(310)
Amortization of premiums/discounts on fixed maturities
115 
134 
Deferred income taxes
117 
98 
Unpaid losses and loss expenses
(493)
(304)
Unearned premiums
594 
693 
Future policy benefits
139 
117 
Insurance and reinsurance balances payable
142 
182 
Accounts payable, accrued expenses, and other liabilities
37 
230 
Income taxes payable
(56)
20 
Insurance and reinsurance balances receivable
(244)
(611)
Reinsurance recoverable on losses and loss expenses
546 
538 
Reinsurance recoverable on policy benefits
(14)
Deferred policy acquisition costs
(228)
(268)
Prepaid reinsurance premiums
(171)
(179)
Other
(78)
(378)
Net cash flows from operating activities
2,096 
1,808 
Cash flows from investing activities
 
 
Purchases of fixed maturities available for sale
(7,960)
(10,778)
Purchases of to be announced mortgage-backed securities
(26)
Purchases of fixed maturities held to maturity
(129)
(299)
Purchases of equity securities
(64)
(194)
Sales of fixed maturities available for sale
3,842 
5,370 
Sales of to be announced mortgage-backed securities
26 
Sales of equity securities
45 
62 
Maturities and redemptions of fixed maturities available for sale
3,163 
4,112 
Maturities and redemptions of fixed maturities held to maturity
414 
908 
Net change in short-term investments
(295)
(137)
Net derivative instruments settlements
(185)
(317)
Acquisition of subsidiaries (net of cash acquired of $4 and $38)
(172)
(977)
Other
(118)
(126)
Net cash flows used for investing activities
(1,459)
(2,376)
Cash flows from financing activities
 
 
Dividends paid on Common Shares
(428)
(169)
Common Shares repurchased
(557)
(212)
Proceeds from issuance of long-term debt
699 
947 
Proceeds from issuance of short-term debt
977 
1,570 
Repayment of long-term debt
(500)
Repayment of short-term debt
(977)
(1,570)
Proceeds from share-based compensation plans, including windfall tax benefits
75 
62 
Other
86 
30 
Net cash flows (used for) from financing activities
(625)
658 
Effect of foreign currency rate changes on cash and cash equivalents
(26)
Net increase in cash
15 
64 
Cash – beginning of period
579 1 2
615 3
Cash – end of period
594 2 4
679 3
Supplemental cash flow information
 
 
Taxes paid
148 
88 
Interest paid
$ 134 
$ 117 
Consolidated Statements of Cash Flows (Parentheticals) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Consolidated Statements of Cash Flows (Parentheticals) [Abstract]
 
 
Cash Acquired from Acquisition
$ 4 
$ 38 
General
General
General

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 10 for additional information.

The interim unaudited 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 have been eliminated.

The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2013 Form 10-K.
Acquisitions
Acquisitions
Acquisitions

Large Corporate P&C Insurance Business of Itaú Seguros, S.A. (Itaú Seguros)
On July 4, 2014, we announced that we reached a definitive agreement to acquire the large corporate property and casualty (P&C) insurance business of Itaú Seguros, Brazil's leading carrier for that business, for approximately $685 million, at current exchange rates. This transaction, which is subject to regulatory approval and other customary closing conditions, is expected to be completed in the first quarter of 2015.
  
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. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – Overseas General segment.

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. Amortization of other intangible assets is included in Other (income) expense in the consolidated statements of operations. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – Overseas General segment.

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 greatly expanded our global franchise in the surety business and enhanced 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. Amortization of other intangible assets is included in Other (income) expense in the consolidated statements of operations. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – Overseas General segment.
Investments
Investments
Investments

a) Fixed maturities
 
June 30, 2014
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

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

 
$
80

 
$
(17
)
 
$
2,869

 
$

Foreign
15,084

 
563

 
(38
)
 
15,609

 
(1
)
Corporate securities
17,085

 
981

 
(36
)
 
18,030

 
(3
)
Mortgage-backed securities
11,185

 
308

 
(75
)
 
11,418

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

 
131

 
(15
)
 
3,675

 

 
$
49,719

 
$
2,063

 
$
(181
)
 
$
51,601

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

 
$
18

 
$
(2
)
 
$
795

 
$

Foreign
809

 
44

 

 
853

 

Corporate securities
1,828

 
101

 

 
1,929

 

Mortgage-backed securities
1,187

 
54

 

 
1,241

 

States, municipalities, and political subdivisions
1,171

 
31

 
(5
)
 
1,197

 

 
$
5,774

 
$
248

 
$
(7
)
 
$
6,015

 
$


December 31, 2013
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

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

 
$
62

 
$
(59
)
 
$
2,949

 
$

Foreign
14,336

 
377

 
(122
)
 
14,591

 

Corporate securities
16,825

 
777

 
(132
)
 
17,470

 
(6
)
Mortgage-backed securities
10,937

 
184

 
(227
)
 
10,894

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

 
65

 
(77
)
 
3,350

 

 
$
48,406

 
$
1,465

 
$
(617
)
 
$
49,254

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

 
$
16

 
$
(4
)
 
$
832

 
$

Foreign
864

 
33

 

 
897

 

Corporate securities
1,922

 
83

 

 
2,005

 

Mortgage-backed securities
1,341

 
39

 
(1
)
 
1,379

 

States, municipalities, and political subdivisions
1,151

 
16

 
(17
)
 
1,150

 

 
$
6,098

 
$
187

 
$
(22
)
 
$
6,263

 
$


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

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

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

 
 
 
December 31

 
 
 
2014

 
 
 
2013

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

 
Fair Value

 
Amortized Cost

 
Fair Value

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

 
$
2,537

 
$
2,387

 
$
2,411

Due after 1 year through 5 years
15,095

 
15,692

 
14,139

 
14,602

Due after 5 years through 10 years
15,917

 
16,575

 
16,200

 
16,535

Due after 10 years
5,009

 
5,379

 
4,743

 
4,812

 
38,534

 
40,183

 
37,469

 
38,360

Mortgage-backed securities
11,185

 
11,418

 
10,937

 
10,894

 
$
49,719

 
$
51,601

 
$
48,406

 
$
49,254

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
483

 
$
489

 
$
401

 
$
405

Due after 1 year through 5 years
2,590

 
2,693

 
2,284

 
2,363

Due after 5 years through 10 years
1,157

 
1,206

 
1,686

 
1,723

Due after 10 years
357

 
386

 
386

 
393

 
4,587

 
4,774

 
4,757

 
4,884

Mortgage-backed securities
1,187

 
1,241

 
1,341

 
1,379

 
$
5,774

 
$
6,015

 
$
6,098

 
$
6,263



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

b) Equity securities
 
June 30


December 31

(in millions of U.S. dollars)
2014


2013

Cost
$
874

 
$
841

Gross unrealized appreciation
77

 
63

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

 
$
837



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

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

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

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

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

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

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

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

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

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

 
2013

 
2014

 
2013

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

 

 
2

 

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

 
64

 
90

 
126

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

 
31

 
31

 
67

Equity securities:
 
 
 
 
 
 
 
OTTI on equity securities
(1
)
 

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

 
8

 
4

 
10

Gross realized losses excluding OTTI

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

 
7

 
(4
)
 
6

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

Investment and embedded derivative instruments
(15
)
 
40

 
(40
)
 
58

Fair value adjustments on insurance derivative
2

 
101

 
(46
)
 
429

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

 
(1
)
 
7

 
(1
)
Other
(1
)
 

 
(8
)
 

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

 
$
(177
)
 
$
310


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

 
2013

 
2014

 
2013

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

 
$
35

 
$
37

 
$
43

Additions where no OTTI was previously recorded
5

 
4

 
7

 
4

Additions where an OTTI was previously recorded
1

 
2

 
3

 
3

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

 
$
40

 
$
24

 
$
40



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

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

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

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

 
$

 
$
1,069

 
$
(19
)
 
$
1,069

 
$
(19
)
Foreign
1,274

 
(11
)
 
1,303

 
(27
)
 
2,577

 
(38
)
Corporate securities
1,118

 
(12
)
 
1,050

 
(24
)
 
2,168

 
(36
)
Mortgage-backed securities
486

 
(4
)
 
2,540

 
(71
)
 
3,026

 
(75
)
States, municipalities, and political subdivisions
366

 
(4
)
 
1,041

 
(16
)
 
1,407

 
(20
)
Total fixed maturities
3,244

 
(31
)
 
7,003

 
(157
)
 
10,247

 
(188
)
Equity securities
45

 
(2
)
 
462

 
(42
)
 
507

 
(44
)
Other investments
39

 
(1
)
 

 

 
39

 
(1
)
Total
$
3,328

 
$
(34
)
 
$
7,465

 
$
(199
)
 
$
10,793

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

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

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

 
$
(57
)
 
$
31

 
$
(6
)
 
$
1,825

 
$
(63
)
Foreign
4,621

 
(114
)
 
201

 
(8
)
 
4,822

 
(122
)
Corporate securities
3,836

 
(118
)
 
194

 
(14
)
 
4,030

 
(132
)
Mortgage-backed securities
5,248

 
(197
)
 
384

 
(31
)
 
5,632

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

 
(90
)
 
84

 
(4
)
 
2,248

 
(94
)
Total fixed maturities
17,663

 
(576
)
 
894

 
(63
)
 
18,557

 
(639
)
Equity securities
498

 
(67
)
 

 

 
498

 
(67
)
Other investments
67

 
(9
)
 

 

 
67

 
(9
)
Total
$
18,228

 
$
(652
)
 
$
894

 
$
(63
)
 
$
19,122

 
$
(715
)


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

 
December 31

(in millions of U.S. dollars)
2014

 
2013

Trust funds
$
10,554

 
$
11,315

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

 
1,970

Assets pledged under repurchase agreements
1,451

 
1,435

Deposits with U.S. regulatory authorities
1,336

 
1,334

Other pledged assets
459

 
391

 
$
15,769

 
$
16,445

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;
Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as
interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and
Level 3 – Inputs that are unobservable and reflect management’s judgments about assumptions that market participants
would use in pricing an asset or liability.

We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.

We use pricing services to obtain fair value measurements for the majority of our investment securities. Based on management’s understanding of the methodologies used, these pricing services only produce an estimate of fair value if there is observable market information that would allow them to make a fair value estimate. Based on our understanding of the market inputs used by the pricing services, all applicable investments have been valued in accordance with GAAP. We do not adjust prices obtained from pricing services. The following is a description of the valuation techniques and inputs used to determine fair values for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities
We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change, or some market inputs may not be relevant. Additionally, fixed maturities valuation is more subjective when markets are less liquid due to the lack of market based inputs (i.e., stale pricing), which may increase the potential that an investment's estimated fair value is not reflective of the price at which an actual transaction would occur. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. For a small number of fixed maturities, we obtain a quote from a broker (typically a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, we include these fair value estimates in Level 3. 

Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For equity securities in markets which are less active, fair values are based on market valuations and are classified within Level 2. Equity securities for which pricing is unobservable are classified within Level 3.

Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase that are traded in active markets, are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. Short-term investments for which pricing is unobservable are classified within Level 3.

Other investments
Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which NAV was used as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investments or will not have the contractual option to redeem the investments in the near term. The remainder of such investments is classified within Level 2. Certain of our long-duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Other investments also includes equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans, which are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.

Securities lending collateral
The underlying assets included in Securities lending collateral in the consolidated balance sheets are fixed maturities which are classified in the valuation hierarchy on the same basis as other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE’s obligation to return the collateral plus interest as it is reported at contract value and not fair value in the consolidated balance sheets.

Investment derivative instruments
Actively traded investment derivative instruments, including futures, options, and forward contracts are classified within Level 1 as fair values are based on quoted market prices. The fair value of cross-currency swaps are based on market valuations and are classified within Level 2. Investment derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Other derivative instruments
We maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for our guaranteed minimum death benefits (GMDB) and guaranteed living benefits (GLB) reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Other derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Separate account assets
Separate account assets represent segregated funds where investment risks are borne by the customers, except to the extent of certain guarantees made by ACE. Separate account assets comprise mutual funds classified in the valuation hierarchy on the same basis as other equity securities traded in active markets and are classified within Level 1. Separate account assets also include fixed maturities classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Excluded from the valuation hierarchy are the corresponding liabilities as they are reported at contract value and not fair value in the consolidated balance sheets. Separate account assets are recorded in Other assets in the consolidated balance sheets.

Guaranteed living benefits
The GLB arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. GLB’s are recorded in Accounts payable, accrued expenses, and other liabilities and Future policy benefits in the consolidated balance sheets. For GLB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality.

The most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty, but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease.

GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.

The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted, as appropriate, with industry estimates. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. During the three and six months ended June 30, 2014, no material changes were made to actuarial or behavioral assumptions. We made minor technical refinements to the model with a favorable (unfavorable) net income impact of approximately $1 million and $(2) million for the three and six months ended June 30, 2014, respectively. For detailed information on our lapse and annuitization rate assumptions, refer to Note 4 to the Consolidated Financial Statements of our 2013 Form 10-K.

We view the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3.
The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:
June 30, 2014
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,677

 
$
1,192

 
$

 
$
2,869

Foreign
216

 
15,381

 
12

 
15,609

Corporate securities

 
17,826

 
204

 
18,030

Mortgage-backed securities

 
11,411

 
7

 
11,418

States, municipalities, and political subdivisions

 
3,675

 

 
3,675

 
1,893

 
49,485

 
223

 
51,601

Equity securities
414

 
491

 
2

 
907

Short-term investments
1,069

 
1,039

 

 
2,108

Other investments
336

 
254

 
2,640

 
3,230

Securities lending collateral

 
1,440

 

 
1,440

Investment derivative instruments
9

 

 

 
9

Other derivative instruments
16

 
2

 

 
18

Separate account assets
1,349

 
88

 

 
1,437

Total assets measured at fair value
$
5,086

 
$
52,799

 
$
2,865

 
$
60,750

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
10

 
$

 
$

 
$
10

Other derivative instruments
15

 
2

 

 
17

GLB(1)

 

 
241

 
241

Total liabilities measured at fair value
$
25

 
$
2

 
$
241

 
$
268

(1) 
Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.
 
December 31, 2013
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,626

 
$
1,323

 
$

 
$
2,949

Foreign
223

 
14,324

 
44

 
14,591

Corporate securities

 
17,304

 
166

 
17,470

Mortgage-backed securities

 
10,886

 
8

 
10,894

States, municipalities, and political subdivisions

 
3,350

 

 
3,350

 
1,849

 
47,187

 
218

 
49,254

Equity securities
373

 
460

 
4

 
837

Short-term investments
953

 
803

 
7

 
1,763

Other investments
305

 
231

 
2,440

 
2,976

Securities lending collateral

 
1,632

 

 
1,632

Investment derivative instruments
19

 

 

 
19

Other derivative instruments

 
6

 

 
6

Separate account assets
1,145

 
81

 

 
1,226

Total assets measured at fair value
$
4,644

 
$
50,400

 
$
2,669

 
$
57,713

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
6

 
$

 
$

 
$
6

Other derivative instruments
60

 
2

 

 
62

GLB(1)

 

 
193

 
193

Total liabilities measured at fair value
$
66

 
$
2

 
$
193

 
$
261

(1) 
Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

The following table presents transfers of financial instruments between Level 1 and Level 2:
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30
 
 
June 30
 
(in millions of U.S. dollars)
2014

 
2013

 
2014

 
2013

Transfers from Level 1 to Level 2
$

 
$
6

 
$

 
$
19

Transfers from Level 2 to Level 1

 

 

 



Fair value of alternative investments
Included in Other investments in the fair value hierarchy at June 30, 2014 and December 31, 2013 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At June 30, 2014 and December 31, 2013, there were no probable or pending sales related to any of the investments measured at fair value using NAV. 

The following table presents, by investment category, the expected liquidation period, fair value, and maximum future funding commitments of alternative investments:
 
 
 
 
 
June 30

 
 
 
December 31

 
Expected
Liquidation
Period of Underlying Assets
 
 
 
2014

 
 
 
2013

(in millions of U.S. dollars)
Fair
Value

 
Maximum
Future Funding
Commitments

 
Fair
Value

 
Maximum
Future Funding
Commitments

Financial
5 to 9 Years
 
$
274

 
$
119

 
$
256

 
$
129

Real estate
3 to 9 Years
 
322

 
63

 
322

 
92

Distressed
6 to 9 Years
 
265

 
145

 
180

 
230

Mezzanine
6 to 9 Years
 
303

 
222

 
276

 
252

Traditional
3 to 8 Years
 
923

 
448

 
813

 
456

Vintage
1 to 3 Years
 
11

 

 
13

 

Investment funds
Not Applicable
 
385

 

 
428

 

 
 
 
$
2,483

 
$
997

 
$
2,288

 
$
1,159



Included in all categories in the above table except for Investment funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Further, for all categories except for Investment funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Investment Category
 
Consists of investments in private equity funds:
Financial
 
targeting financial services companies such as financial institutions and insurance services worldwide
Real estate
 
targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market
Distressed
 
targeting distressed debt/credit and equity opportunities in the U.S
Mezzanine
 
targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide
Traditional
 
employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.
Vintage
 
made before 2002 and where the funds’ commitment periods had already expired

Investment funds
ACE’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If ACE wishes to redeem an investment fund investment, it must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE’s investment within several months of the notification. Notice periods for redemption of the investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.

Level 3 financial instruments
The fair values of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) consist of various inputs and assumptions that management makes when determining fair value. Management analyzes changes in fair value measurements classified within Level 3 by comparing pricing and returns of our investments to benchmarks, including month-over-month movements, investment credit spreads, interest rate movements, and credit quality of securities.

The following table presents the significant unobservable inputs used in the Level 3 liability valuations. Excluded from the table below are inputs used to determine the fair value of Level 3 assets which are based on single broker quotes or net asset value and contain no quantitative unobservable inputs developed by management. 
(in millions of U.S. dollars, except for percentages)
Fair Value
 
Valuation
Technique
 
Significant
Unobservable Inputs
 
Ranges
June 30, 2014

 
December 31, 2013

 
 
 
GLB(1)
$
241

 
$
193