ACE LTD (Form: 10-Q, Received: 08/07/2009 14:23:18)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to


Commission File No. 1-11778		I.R.S. Employer Identification No. 98-0091805

ACE LIMITED

(Incorporated in Switzerland)

Bärengasse 32

CH-8001 Zurich, Switzerland

(Address of principal executive offices, Zip Code)

Telephone +41 (0)43 456 76 00

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x			Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company	)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

The number of registrant’s Common Shares (CHF 32.51 par value) outstanding as of August 5, 2009, was 336,160,598.

ACE LIMITED

INDEX TO FORM 10-Q


			Page No.
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets (Unaudited) June 30, 2009, and December 31, 2008		3

	Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2009 and 2008		4

	Consolidated Statements of Shareholders’ Equity (Unaudited) Six Months Ended June 30, 2009 and 2008		5

	Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2009 and 2008		7

	Notes to the Interim Consolidated Financial Statements (Unaudited)
	Note 1.	General	8
	Note 2.	Significant accounting policies	8
	Note 3.	Investments	12
	Note 4.	Assumed reinsurance programs involving minimum benefit guarantees under annuity contracts	21
	Note 5.	Debt	23
	Note 6.	Commitments, contingencies, and guarantees	24
	Note 7.	Shareholders’ equity	33
	Note 8.	Share-based compensation	33
	Note 9.	Fair value measurements	34
	Note 10.	Segment information	42
	Note 11.	Earnings per share	47
	Note 12.	Information provided in connection with outstanding debt of subsidiaries	48

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		54

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		100

Item 4.	Controls and Procedures		103

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings		104

Item 1A.	Risk Factors		104

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		105

Item 4.	Submission of Matters to a Vote of Security Holders		105

Item 6.	Exhibits		106

ACE LIMITED

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30 2009			December 31 2008
	(in millions of U.S. dollars, except share and per share data)
Assets
Investments
Fixed maturities available for sale, at fair value (amortized cost – $36,810 and $33,109) (includes hybrid financial instruments of $309 and $239)	$	35,697		$	31,155
Fixed maturities held to maturity, at amortized cost (fair value – $3,535 and $2,865)		3,517			2,860
Equity securities, at fair value (cost - $546 and $1,132)		423			988
Short-term investments, at fair value and amortized cost		2,081			3,350
Other investments (cost - $1,320 and $1,368)		1,363			1,362

Total investments		43,081			39,715
Cash		654			867
Securities lending collateral		1,370			1,230
Accrued investment income		478			443
Insurance and reinsurance balances receivable		4,016			3,453
Reinsurance recoverable on losses and loss expenses		13,430			13,917
Reinsurance recoverable on policy benefits		348			259
Deferred policy acquisition costs		1,376			1,214
Value of business acquired		793			823
Prepaid reinsurance premiums		1,911			1,539
Goodwill and other intangible assets		3,756			3,747
Deferred tax assets		1,579			1,835
Investments in partially-owned insurance companies (cost - $373 and $737)		462			832
Other assets		2,401			2,183

Total assets	$	75,655		$	72,057

Liabilities
Unpaid losses and loss expenses	$	37,268		$	37,176
Unearned premiums		6,725			5,950
Future policy benefits		2,984			2,904
Insurance and reinsurance balances payable		3,075			2,841
Deposit liabilities		314			345
Securities lending payable		1,427			1,296
Payable for securities purchased		1,082			740
Accounts payable, accrued expenses, and other liabilities		2,257			2,635
Income taxes payable		115			138
Short-term debt		216			471
Long-term debt		3,322			2,806
Trust preferred securities		309			309

Total liabilities		59,094			57,611

Commitments and contingencies
Shareholders’ equity
Common Shares (CHF 32.51 and CHF 33.14 par value, 337,565,874 and 335,413,501 shares issued, 336,097,451 and 333,645,471 shares outstanding)		10,704			10,827
Common Shares in treasury (1,468,423 and 1,768,030 shares)		(2	)		(3	)
Additional paid-in capital		5,453			5,464
Retained earnings		1,397			74
Deferred compensation obligation		3			3
Accumulated other comprehensive income (loss)		(991	)		(1,916	)
Common Shares issued to employee trust		(3	)		(3	)

Total shareholders’ equity		16,561			14,446

Total liabilities and shareholders’ equity	$	75,655		$	72,057

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the three and six months ended June 30, 2009 and 2008

(Unaudited)


	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
	(in millions of U.S. dollars, except per share data)
Revenues
Gross premiums written	$	5,117		$	5,293		$	9,652		$	9,702
Reinsurance premiums ceded		(1,702	)		(1,695	)		(2,813	)		(2,950	)

Net premiums written		3,415			3,598			6,839			6,752
Change in unearned premiums		(149	)		(170	)		(379	)		(384	)

Net premiums earned		3,266			3,428			6,460			6,368
Net investment income		506			532			1,008			1,021
Net realized gains (losses):
Other-than-temporary impairment (OTTI) losses gross		(305	)		(210	)		(497	)		(399	)
Portion of OTTI losses recognized in other comprehensive income		191			—			191			—

Net OTTI losses recognized in income		(114	)		(210	)		(306	)		(399	)
Net realized gains (losses) excluding OTTI losses		(111	)		84			(40	)		(80	)

Total net realized gains (losses)		(225	)		(126	)		(346	)		(479	)

Total revenues		3,547			3,834			7,122			6,910

Expenses
Losses and loss expenses		1,821			1,895			3,637			3,474
Policy benefits		78			89			177			152
Policy acquisition costs		523			569			1,004			1,037
Administrative expenses		454			461			874			836
Interest expense		56			62			109			108
Other (income) expense		(21	)		(125	)		(7	)		(110	)

Total expenses		2,911			2,951			5,794			5,497

Income before income tax		636			883			1,328			1,413
Income tax expense		101			137			226			290

Net income	$	535		$	746		$	1,102		$	1,123

Other comprehensive income (loss)
Unrealized appreciation (depreciation)	$	972		$	(731	)	$	526		$	(1,228	)
Reclassification adjustment for net realized (gains) losses included in net income		157			169			336			342

		1,129			(562	)		862			(886	)
Change in:
Cumulative translation adjustments		325			6			267			33
Pension liability		(10	)		1			(14	)		1

Other comprehensive income (loss), before income tax		1,444			(555	)		1,115			(852	)
Income tax (expense) benefit related to other comprehensive income items		(289	)		27			(190	)		35

Other comprehensive income (loss)		1,155			(528	)		925			(817	)

Comprehensive income	$	1,690		$	218		$	2,027		$	306

Basic earnings per share	$	1.58		$	2.20		$	3.28		$	3.31

Diluted earnings per share	$	1.58		$	2.18		$	3.27		$	3.29

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six months ended June 30, 2009 and 2008

(Unaudited)


	Six Months Ended June 30
	2009			2008
	(in millions of U.S. dollars)
Preferred Shares
Balance – beginning of period	$	—		$	2
Preferred Shares redeemed		—			(2	)

Balance – end of period		—			—

Common Shares
Balance – beginning of period		10,827			14
Net shares issued under employee share-based compensation plans		68			—
Exercise of stock options		1			—
Dividends declared on Common Shares-par value reduction		(192	)		—
Common Shares stock dividend		—			10,920

Balance – end of period		10,704			10,934

Common Shares in treasury
Balance – beginning of period		(3	)		—
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans		1			—

Balance – end of period		(2	)		—

Additional paid-in capital
Balance – beginning of period		5,464			6,812
Net shares redeemed under employee share-based compensation plans		(72	)		(13	)
Exercise of stock options		2			80
Share-based compensation expense		59			66
Preferred Shares redeemed		—			(573	)
Common Shares stock dividend		—			(925	)

Balance – end of period		5,453			5,447

Retained earnings
Balance – beginning of period		74			9,080
Effect of partial adoption of FAS 157		—			(4	)
Effect of adoption of FAS 159		—			6

Balance – beginning of period, adjusted for effect of adoption of new accounting principles		74			9,082
Effect of adoption of FSP FAS 115-2 and FAS 124-2		221			—
Net income		1,102			1,123
Dividends declared on Common Shares		—			(186	)
Dividends declared on Preferred Shares		—			(24	)
Common Shares stock dividend		—			(9,995	)

Balance – end of period		1,397			—

Deferred compensation obligation
Balance – beginning and end of period	$	3		$	3

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)

For the six months ended June 30, 2009 and 2008

(Unaudited)


	Six Months Ended June 30
	2009			2008
	(in millions of U.S. dollars)
Accumulated other comprehensive (loss) income
Net unrealized appreciation (depreciation) on investments
Balance – beginning of period	$	(1,712	)	$	596
Effect of adoption of FAS 159		—			(6	)

Balance – beginning of period, adjusted for effect of adoption of new accounting principle		(1,712	)		590
Effect of adoption of FSP FAS 115-2 and FAS 124-2		(267	)		—
Change in period, net of income tax (expense) benefit of $(201) and $52		1,010			(834	)

Balance – end of period		(969	)		(244	)

Cumulative translation adjustment
Balance – beginning of period		(161	)		231
Change in period, net of income tax (expense) benefit of $(76) and $(17)		191			16

Balance – end of period		30			247

Pension liability adjustment
Balance – beginning of period		(43	)		(58	)
Change in period, net of income tax (expense) benefit of $5 and $nil		(9	)		1

Balance – end of period		(52	)		(57	)

Accumulated other comprehensive (loss) income		(991	)		(54	)

Common Shares issued to employee trust
Balance – beginning and end of period		(3	)		(3	)

Total shareholders’ equity	$	16,561		$	16,327

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2009 and 2008

(Unaudited)


	Six Months Ended June 30
	2009			2008
	(in millions of U.S. dollars)
Cash flows from operating activities
Net income	$	1,102		$	1,123
Adjustments to reconcile net income to net cash flows from operating activities
Net realized (gains) losses		346			479
Amortization of premiums/discounts on fixed maturities		14			5
Deferred income taxes		(68	)		12
Unpaid losses and loss expenses		(135	)		(6	)
Unearned premiums		772			671
Future policy benefits		97			52
Insurance and reinsurance balances payable		238			55
Accounts payable, accrued expenses, and other liabilities		(360	)		74
Income taxes payable		17			(42	)
Insurance and reinsurance balances receivable		(484	)		(472	)
Reinsurance recoverable on losses and loss expenses		626			641
Reinsurance recoverable on policy benefits		(124	)		(24	)
Deferred policy acquisition costs		(195	)		(158	)
Prepaid reinsurance premiums		(361	)		(297	)
Other		(163	)		(31	)

Net cash flows from operating activities		1,322			2,082

Cash flows used for investing activities
Purchases of fixed maturities available for sale		(17,920	)		(10,050	)
Purchases of to be announced mortgage-backed securities		(5,264	)		(13,289	)
Purchases of fixed maturities held to maturity		(184	)		(216	)
Purchases of equity securities		(309	)		(588	)
Sales of fixed maturities available for sale		13,610			9,788
Sales of to be announced mortgage-backed securities		5,621			11,538
Sales of fixed maturities held to maturity		1			—
Sales of equity securities		1,074			724
Maturities and redemptions of fixed maturities available for sale		1,627			1,628
Maturities and redemptions of fixed maturities held to maturity		220			262
Net proceeds from (payments made on) the settlement of investment derivatives		5			(22	)
Acquisition of subsidiary (net of cash acquired of $19)		—			(2,557	)
Other		(96	)		(422	)

Net cash flows used for investing activities		(1,615	)		(3,204	)

Cash flows from financing activities
Dividends paid on Common Shares		(179	)		(178	)
Proceeds from exercise of options for Common Shares		3			80
Proceeds from Common Shares issued under ESPP		11			10
Dividends paid on Preferred Shares		—			(24	)
Net (repayment of) proceeds from short-term debt		(250	)		670
Net proceeds from issuance of long-term debt		500			1,195
Redemption of Preferred Shares		—			(575	)

Net cash from financing activities		85			1,178

Effect of foreign currency rate changes on cash and cash equivalents		(5	)		16

Net (decrease) increase in cash		(213	)		72
Cash – beginning of period		867			510

Cash – end of period	$	654		$	582

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

ACE Limited (ACE or the Company) is a holding company which, until July 18, 2008, was incorporated with limited liability under the Cayman Islands Companies Law. On March 19, 2008, the Company announced that its Board of Directors (the Board) approved a proposal to move the Company’s jurisdiction of incorporation from the Cayman Islands to Zurich, Switzerland (the Continuation). On July 10, 2008, and July 14, 2008, during ACE’s annual general meeting, the Company’s shareholders approved the Continuation and ACE became a Swiss company effective July 18, 2008.

The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 10.

On April 1, 2008, ACE acquired all outstanding shares of Combined Insurance Company of America (Combined Insurance) and certain of its subsidiaries from Aon Corporation for $2.56 billion. Combined Insurance is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products targeted to middle income consumers and small businesses in North America, Europe, Asia Pacific, and Latin America. ACE recorded the acquisition using the purchase method of accounting. Based on ACE’s final purchase price allocation, $882 million of goodwill and $43 million of other intangible assets were generated as a result of the acquisition. Goodwill was apportioned to the Life and Insurance – Overseas General segments in the amounts of $750 million and $132 million, respectively. The acquisition also generated $1 billion of value of business acquired (VOBA) which represented the fair value of the future profits of the in-force contracts. VOBA is amortized over a period of approximately 30 years.

The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, 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. Certain items in the prior period financial statements have been reclassified to conform to the current period presentation. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

2. Significant accounting policies

New accounting pronouncements

Adopted in the six months ended June 30, 2009

Business combinations

In December 2007, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 141 (Revised), Business Combinations (FAS 141R). FAS 141R establishes standards that provide a definition of the “acquirer” and broaden the application of the acquisition method. FAS 141R also establishes how an acquirer recognizes and measures the assets, liabilities, and any noncontrolling interest in the “acquiree”; recognizes and measures goodwill or a gain from a bargain purchase; and requires disclosures that enable users to evaluate the nature and financial effects of the business combination. FAS 141R shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FAS 141R may have a material impact on any future business combinations consummated by the Company, but did not have any effect on previously consummated business acquisitions.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In November 2008, the FASB issued Emerging Issues Task Force (EITF) No. 08-7 , Accounting for Defensive Intangible Assets (EITF 08-7). EITF 08-7 requires fair value be assigned to acquired defensive intangible assets in accordance with FAS No. 157, Fair Value Measurements (FAS 157), guidance. EITF 08-7 also requires a useful life be assigned to a defensive intangible asset based on the period over which the reporting entity expects a defensive intangible asset to contribute directly or indirectly to future cash flows. EITF 08-7 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of EITF 08-7 did not have a material impact on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 141R-1 , Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends provisions related to initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies acquired in business combinations under FAS 141R. FSP FAS 141R-1 requires acquired contingencies to be recognized at acquisition date fair value if fair value can be reasonably estimated during the allocation period. Otherwise, acquired contingencies would typically be accounted for in accordance with FAS No. 5, Accounting for Contingencies . FSP FAS 141R-1 is effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141R-1 may have a material impact on any future business combinations consummated by the Company, but did not have any effect on previously consummated business acquisitions.

Noncontrolling interests

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 (FAS 160). FAS 160 establishes accounting and reporting standards that require that ownership interests in subsidiaries held by parties other than the parent be presented in the consolidated statement of shareholders’ equity separately from the parent’s equity; the consolidated net income attributable to the parent and noncontrolling interest be presented on the face of the consolidated statements of operations; changes in a parent’s ownership interest while the parent retains controlling financial interest in its subsidiary be accounted for consistently; and sufficient disclosure that identifies and distinguishes between the interests of the parent and noncontrolling owners. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of FAS 160 did not have a material impact on the Company’s financial condition or results of operations.

Disclosures about derivative instruments and hedging activities

In March 2008, the FASB issued FAS No. 161, Disclosures About Derivative Instruments and Hedging Activities (FAS 161). FAS 161 establishes reporting standards that require enhanced disclosures about how and why derivative instruments are used, how derivative instruments are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and how derivative instruments affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. The Company adopted the provisions of FAS 161 effective January 1, 2009. Refer to Note 6.

Determination of the useful life of intangible assets

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors considered in developing assumptions used to determine the useful life of an intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (FAS 142). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141R and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied prospectively to intangible assets acquired after the effective date. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s financial condition or results of operations.

Financial guarantee insurance contracts

In May 2008, the FASB issued FAS No. 163, Accounting for Financial Guarantee Insurance Contracts – An interpretation of FASB Statement No. 60 (FAS 163). FAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how FAS No. 60, Accounting and Reporting by Insurance Enterprises , applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. FAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk management activities. FAS 163 requires that disclosures about the risk management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. ACE’s exposure to FAS 163 is principally through its investment in the common shares of Assured Guaranty Ltd (AGO). The adoption of FAS 163 did not have a material impact on the Company’s financial condition or results of operations.

Earnings per share

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 provides additional guidance in the calculation of earnings per share under FAS No. 128, Earnings Per Share , and requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s financial condition or results of operations.

Equity method accounting

In November 2008, the FASB issued EITF No. 08-6, Equity Method Investment Accounting Considerations (EITF 08-6). EITF 08-6 provides guidance for equity method accounting for specific topics. EITF 08-6 requires an equity method investor account for share issuances, and resulting dilutive effect, by an investee as if the investor had sold a proportionate share of its investment with the resulting gain or loss recognized in earnings. EITF 08-6 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. In connection with the adoption of EITF 08-6, the Company recognized a $67 million pre-tax loss upon a June 2009 share issuance by AGO. Refer to Note 3 e).

Fair value measurements

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material impact on the Company’s financial condition or results of operations.

Fair value disclosures

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ( FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FAS No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Company’s financial condition or results of operations.

Other-than-temporary impairments

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 amends OTTI guidance in existing GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. FSP FAS 115-2 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 115-2 did not have a material impact on the Company’s financial condition or results of operations.

Subsequent events

In May 2009, the FASB issued FAS No. 165, Subsequent Events (FAS 165). FAS 165 sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company has performed an evaluation of subsequent events through August 7, 2009, which is the date that the financial statements were issued. The adoption of FAS 165 did not impact the Company’s financial condition or results of operations.

To be adopted after June 30, 2009

Accounting Standards Codification

In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (FAS 168, or the Codification). The Codification, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), EITF and related literature. The Codification eliminates the GAAP hierarchy contained in FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of the Codification to result in any change to its financial condition or results of operations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Consolidation of variable interest entities and accounting for transfers of financial assets

In June 2009, the FASB issued FAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (FAS 166) and FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). FAS 166 amends FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities , by removing the exemption from consolidation for Qualifying Special Purpose Entities. This Statement also limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. FAS 167 amends FASB Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. FAS 166 and FAS 167 are effective for interim and annual reporting periods beginning on January 1, 2010.

3. Investments

a) Transfers of securities

As part of the Company’s fixed income diversification strategy, ACE has decided to hold to maturity certain commercial mortgage-backed securities that have shorter term durations. Because the Company has the intent to hold these securities to maturity, a transfer of such securities with a fair value of $704 million was made during the three months ended June 30, 2009, from Fixed maturities available for sale to Fixed maturities held to maturity. The $4 million unrealized depreciation at the date of the transfer continues to be reported as a component of Accumulated other comprehensive income and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

b) Net realized gains (losses)

The Company adopted the provisions of FSP FAS 115-2 as of April 1, 2009. Under the provisions of FSP FAS 115-2, when an OTTI related to a fixed maturity security has occurred, ACE is required to record the OTTI in net income if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security. Further, in cases where the Company does not intend to sell the security and it is more likely than not that it 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 included in other comprehensive income. For fixed maturities held to maturity, OTTI recognized in other comprehensive income is accreted from accumulated other comprehensive income to the amortized cost of the fixed maturity prospectively over the remaining term of the securities. Prior to the adoption of FSP FAS 115-2, for fixed maturities, ACE was required to record OTTI in net income unless the Company had the intent and ability to hold the impaired security to recovery. FSP FAS 115-2 does not have any impact on the accounting for OTTI for any other type of investment.

The cumulative effect of the adoption of FSP FAS 115-2 resulted in a reduction to Accumulated other comprehensive income and an increase to Retained earnings of $267 million as of April 1, 2009. These adjustments reflect the net of tax amount ($349 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that have not suffered a credit loss, the Company does not intend to sell, and it is more likely than not that ACE will not be required to sell before the recovery of their amortized cost. Retained earnings and Deferred tax assets as of April 1, 2009, were also reduced by $46 million as a result of an increase in the Company’s valuation allowance against deferred tax assets, which is a

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

direct effect of the adoption of FSP FAS 115-2. Specifically, as a result of the reassessment of credit losses required by the adoption of FSP FAS 115-2, ACE determined that certain previously impaired fixed maturity securities had suffered credit losses in excess of previously estimated amounts, which may give rise to additional future capital losses for tax purposes. Given the amount of available capital gains against which such additional capital losses could be offset, the Company expects that a portion of capital loss carry forwards will expire unused. Accordingly, ACE determined that an additional valuation allowance was necessary given that it is more likely than not that a portion of deferred tax assets related to previously impaired fixed income securities would not be realized.

Each quarter, the Company reviews its securities in an unrealized loss position (impaired securities), including fixed maturity securities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.

For impaired fixed maturities, if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security, an OTTI is considered to have occurred. In cases where the Company does not intend to sell the security and it is more likely than not that it will not be required to sell the security, ACE evaluates the security to determine if a credit loss has occurred primarily based on a combination of qualitative and quantitative factors including a discounted cash flow model, where necessary. If a credit loss is indicated, an OTTI is considered to have occurred. Prior to the adoption of FSP FAS 115-2, when evaluating fixed maturities for OTTI, the Company principally considered its ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and the Company’s assessment (using available market information such as credit ratings) of the issuer’s ability to make future scheduled principal and interest payments on a timely basis. The factors that the Company now considers when determining if a credit loss exists related to a fixed maturity security are discussed in “Evaluation of potential credit losses related to fixed maturities” below.

The Company reviews all non fixed maturity investments for OTTI 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;

•

the Company’s ability and intent to hold the security to the expected recovery period; and

•

equity securities in an unrealized loss position for twelve consecutive months are generally impaired.

Evaluation of potential credit losses related to fixed maturities

ACE reviews each fixed maturity security in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, ACE considers 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 ACE determines 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. The specific methodologies and significant assumptions used by asset class are discussed below. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 less than $100 million of gross unrealized loss as of June 30, 2009. 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 credit worthiness 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 develops these estimates using information based on market observable data, issuer specific information, and credit ratings. ACE developed its default assumption by using 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. ACE believes that use of a default assumption in excess of the historical mean is conservative and reasonable in light of recent market conditions. Default assumptions by Moody’s rating category are as follows (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%-1.4	%	0.0%-0.3	%

Below Investment Grade:
Ba	4.8	%	1.1	%
B	12.8	%	3.4	%
Caa-C	51.6	%	13.1	%

Consistent with our approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using the 40 percent historical mean recovery rate. ACE believes that use of a recovery rate assumption lower than the historical mean is conservative and reasonable in light of recent market conditions.

Application of the methodology and assumptions described above resulted in a credit loss recognized in net income for corporate securities for the three months ended June 30, 2009, of approximately $34 million, substantially all of which relates to below investment grade securities.

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 (on foreclosed properties).

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, Sub-prime and Option ARM sector bonds, and

•

lower loss severity for older vintage securities versus more recent vintage securities, which reflects the recent decline in underwriting standards.

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 the Company does not expect to recover its amortized cost basis and recognizes an estimated credit loss in net income.

The significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for potential credit loss as of June 30, 2009, by sector and vintage are as follows:

Range of Significant Assumptions Used


Sector ⁽¹⁾	Vintage	Default Rate ⁽²⁾		Loss Severity Rate ⁽²⁾
Prime	2004 and prior	6-50	%	20-50	%
	2005	17-28	%	36-49	%
	2006	21-32	%	33-62	%
	2007	13-21	%	44-51	%

ALT-A	2004 and prior	6-29	%	43-48	%
	2005	4-46	%	51-59	%
	2006	7-53	%	58-64	%
	2007	57-59	%	63-65	%

Sub-prime ⁽³⁾	2004 and prior	58	%	64	%
	2005	70-74	%	71-73	%
	2006	81	%	80	%
	2007	82	%	77	%

Option ARM	2004 and prior	40	%	42	%
	2005	54-73	%	53-60	%
	2006	72-77	%	62-64	%
	2007	72-76	%	58-64	%

⁽¹⁾	Prime, ALT-A, and Sub-prime sector bonds are categorized based on credit worthiness of the borrower. Option ARM sector bonds are categorized based on the type of mortgage product, rather than credit worthiness of the borrower.

⁽²⁾	Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.

⁽³⁾	The sub-prime population of securities in the portfolio is nominal. Accordingly, the default rate and loss severity rates are banded more tightly than for other sectors where the population of securities is larger and more diverse.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Application of the methodology and assumptions described above resulted in a credit loss recognized in net income for mortgage-backed securities for the three months ended June 30, 2009, of approximately $26 million. Given the variation in ratings between major rating agencies for the securities for which a credit loss was recognized in net income, ACE does not believe it is useful to provide the credit loss split between investment grade and below investment grade.

The following table shows, for the periods indicated, the Net realized gains (losses) and the losses included in Net realized gains (losses) and Other comprehensive income as a result of conditions which caused the Company to conclude the decline in fair value of certain investments was “other-than-temporary”. The impairments recorded in net income related to fixed maturities for the six months ended June 30, 2009, were primarily due to intent to sell securities in an unrealized loss position and securities with below investment grade credit ratings. Impairments related to all other investments were primarily due to duration and severity of decline below cost.


	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
	(in millions of U.S. dollars)
Fixed maturities:
OTTI on fixed maturities, gross	$	(281	)	$	(171	)	$	(369	)	$	(299	)
OTTI on fixed maturities included in other comprehensive income (pre-tax)		191			—			191			—

OTTI on fixed maturities, net		(90	)		(171	)		(178	)		(299	)
Net realized gains (losses) excluding OTTI		19			(27	)		59			(4	)

Total fixed maturities		(71	)		(198	)		(119	)		(303	)


Equity securities:
OTTI on equity securities		(1	)		(39	)		(26	)		(75	)
Net realized gains (losses) excluding OTTI		(80	)		52			(155	)		34

Total equity securities		(81	)		13			(181	)		(41	)


OTTI on other investments		(23	)		—			(102	)		(25	)
Futures, option contracts, and swaps		(21	)		(16	)		34			(25	)
Fair value adjustments on insurance derivative		284			75			283			(130	)
S&P put options and futures		(181	)		(10	)		(156	)		12
Other derivative instruments		(39	)		(5	)		(66	)		13
Other		(93	)		15			(39	)		20

Net realized gains (losses)	$	(225	)	$	(126	)	$	(346	)	$	(479	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table provides, for the three months ended June 30, 2009, a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recorded in Other comprehensive income. All amounts in the following table relate to Fixed maturities available for sale.


	June 30, 2009
	(in millions of U.S. Dollars)
Balance of credit losses related to securities still held-beginning of period	$	130
Additions where no OTTI was previously recorded		54
Additions where an OTTI was previously recorded		6
Reductions reflecting amounts previously recorded in Other comprehensive income but subsequently reflected in net income		(2	)
Reductions reflecting increases in expected cash flows to be collected		—
Reductions for securities sold during the period		—

Balance of credit losses related to securities still held-end of period	$	188

c) Fixed maturities

The following tables present the fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities as well OTTI included in Accumulated other comprehensive income at June 30, 2009, and December 31, 2008.


	June 30, 2009
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Included in Accumulated Other Comprehensive Income
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	3,144	$	66	$	(23	)	$	3,187	$	—
Foreign		9,888		236		(379	)		9,745		(19	)
Corporate securities		12,045		238		(596	)		11,687		(40	)
Mortgage-backed securities		10,243		195		(851	)		9,587		(172	)
States, municipalities, and political subdivisions		1,490		33		(32	)		1,491		—

	$	36,810	$	768	$	(1,881	)	$	35,697	$	(231	)


Held to maturity
U.S. Treasury and agency	$	844	$	41	$	—		$	885	$	—
Foreign		33		1		—			34		—
Corporate securities		374		5		(10	)		369		—
Mortgage-backed securities		1,543		17		(47	)		1,513		—
States, municipalities, and political subdivisions		723		12		(1	)		734		—

	$	3,517	$	76	$	(58	)	$	3,535	$	—

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	December 31, 2008
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	1,991	$	133	$	(2	)	$	2,122
Foreign		8,625		278		(529	)		8,374
Corporate securities		10,093		89		(1,121	)		9,061
Mortgage-backed securities		10,958		221		(1,019	)		10,160
States, municipalities, and political subdivisions		1,442		38		(42	)		1,438

	$	33,109	$	759	$	(2,713	)	$	31,155


Held to maturity
U.S. Treasury and agency	$	862	$	61	$	—		$	923
Foreign		38		1		(1	)		38
Corporate securities		405		2		(15	)		392
Mortgage-backed securities		877		11		(62	)		826
States, municipalities, and political subdivisions		678		9		(1	)		686

	$	2,860	$	84	$	(79	)	$	2,865

Fixed maturities at June 30, 2009, and December 31, 2008, by contractual maturity, are shown below. 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.


	June 30 2009				December 31 2008
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions of U.S. dollars)
Available for sale; maturity period
Due in 1 year or less	$	1,209	$	1,207	$	1,047	$	1,047
Due after 1 year through 5 years		12,702		12,619		9,706		9,868
Due after 5 years through 10 years		9,057		9,116		6,867		7,330
Due after 10 years		3,142		3,625		3,375		3,906

		26,110		26,567		20,995		22,151
Mortgage-backed securities		9,587		10,243		10,160		10,958

	$	35,697	$	36,810	$	31,155	$	33,109


Held to maturity; maturity period
Due in 1 year or less	$	598	$	590	$	327	$	325
Due after 1 year through 5 years		1,210		1,175		1,401		1,364
Due after 5 years through 10 years		132		126		227		212
Due after 10 years		82		83		84		82

		2,022		1,974		2,039		1,983
Mortgage-backed securities		1,513		1,543		826		877

	$	3,535	$	3,517	$	2,865	$	2,860

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

d) Equity securities

The fair value, cost of, and gross unrealized appreciation (depreciation) on equity securities at June 30, 2009, and December 31, 2008, are as follows:


	June 30 2009			December 31 2008
	(in millions of U.S. dollars)
Equity securities – cost	$	546		$	1,132
Gross unrealized appreciation		14			74
Gross unrealized depreciation		(137	)		(218	)

Equity securities – fair value	$	423		$	988

e) Investment in AGO

AGO, a Bermuda-based holding company provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance, and mortgage markets. On July 1, 2009, AGO acquired Financial Security Assurance Holdings Ltd. from Dexia Holdings Inc., a subsidiary of Dexia S.A. The purchase price included approximately $546 million in cash and approximately 22.3 million AGO common shares, according to AGO’s public filings. AGO financed the cash portion of the purchase price partly through a June 2009 issuance of 38.5 million common shares before the exercise of any overallotment option (June 2009 issuance), according to AGO’s public filings. Prior to the June 2009 issuance, ACE included its investment in AGO in Investments in partially-owned insurance companies using the equity method of accounting. Effective with the June 2009 issuance, in accordance with the provisions of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB 18), ACE was deemed to no longer exert significant influence over AGO and accounts for the investment in AGO as an available-for-sale equity security in accordance with FAS 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115). FAS 115 requires that ACE carry the AGO investment at fair value with any unrealized gains and losses reflected in other comprehensive income. EITF 08-6 requires ACE to account for AGO’s June 2009 issuance, and resulting dilutive effect, as if the Company had sold a proportionate share of the investment. In accordance with EITF 08-6, the Company recognized a $67 million pre-tax loss in Net realized gains (losses) upon AGO’s June 2009 issuance. As of June 30, 2009, the fair value of the Company’s investment in AGO was $237 million and $131 million of unrealized loss on this investment is reflected in Other comprehensive income in accordance with FAS 115.

f) Gross unrealized loss

As of June 30, 2009, there were 6,410 fixed maturities out of a total of 17,397 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $29 million. There were 45 equity securities out of a total of 358 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $131 million on AGO. The tightening of credit spreads, mainly during the three months ended June 30, 2009, resulted in a reduction to net unrealized losses at June 30, 2009, though most of the fixed maturities in an unrealized loss position at that date were investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following tables summarize, for all securities in an unrealized loss position at June 30, 2009, and December 31, 2008 (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
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in millions of U.S. dollars)
June 30, 2009
U.S. Treasury and agency	$	1,646	$	(22.4	)	$	6	$	(0.4	)	$	1,652	$	(22.8	)
Foreign		3,229		(268.2	)		627		(111.2	)		3,856		(379.4	)
Corporate securities		4,153		(264.7	)		2,052		(341.3	)		6,205		(606.0	)
Mortgage-backed securities		2,484		(129.5	)		2,394		(768.5	)		4,878		(898.0	)
States, municipalities, and political subdivisions		500		(19.2	)		153		(13.6	)		653		(32.8	)


Total fixed maturities		12,012		(704.0	)		5,232		(1,235.0	)		17,244		(1,939.0	)
Equity securities		340		(136.8	)		—		(0.1	)		340		(136.9	)
Other investments		578		(115.4	)		37		(24.1	)		615		(139.5	)


Total	$	12,930	$	(956.2	)	$	5,269	$	(1,259.2	)	$	18,199	$	(2,215.4	)

Included in the “0 – 12 Months” and “Over 12 Months” aging categories at June 30, 2009, are fixed maturities held to maturity with combined fair values of $562 million and $561 million, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories are $17 million and $41 million, respectively. Fixed maturities in a gross unrealized loss position for over 12 months principally comprise non-credit losses on investment grade securities where management does not intend to sell and it is more likely than not that ACE will not be forced to sell the security before recovery. For mortgage-backed securities in a gross unrealized loss position for over 12 months, management also considered credit enhancement in concluding the securities were not other-than-temporarily impaired. Other investments in a gross unrealized loss position for over 12 months principally comprise investments in limited partnerships with diversified underlying portfolios where management anticipates recovery in the near-term and has the ability and intent to hold to recovery. Gross unrealized gains as of June 30, 2009, were $1.04 billion.


	0 – 12 Months					Over 12 Months					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in millions of U.S. dollars)
December 31, 2008
U.S. Treasury and agency	$	605	$	(2.5	)	$	—	$	—		$	605	$	(2.5	)
Foreign		2,488		(335.7	)		587		(194.4	)		3,075		(530.1	)

Corporate securities		5,815		(884.2	)		1,228		(251.3	)		7,043		(1,135.5	)
Mortgage-backed securities		4,242		(880.0	)		319		(200.1	)		4,561		(1,080.1	)
States, municipalities, and political subdivisions		331		(23.1	)		109		(20.5	)		440		(43.6	)


Total fixed maturities		13,481		(2,125.5	)		2,243		(666.3	)		15,724		(2,791.8	)
Equity securities		694		(217.7	)		13		(0.5	)		707		(218.2	)
Other investments		508		(175.9	)		58		(17.3	)		566		(193.2	)


Total	$	14,683	$	(2,519.1	)	$	2,314	$	(684.1	)	$	16,997	$	(3,203.2	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Included in the “0 – 12 Months” and “Over 12 Months” aging categories at December 31, 2008, are fixed maturities held to maturity with combined fair values of $729 million and $105 million, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories were $59 million and $20 million, respectively. Gross unrealized gains as of December 31, 2008 were $1.1 billion.

g) Restricted assets

The Company 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. The Company also utilizes trust funds in certain large 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. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. At June 30, 2009, restricted assets of $12 billion are included in fixed maturities and short-term investments, with the balance included in equity securities and cash. The components of the fair value of the restricted assets at June 30, 2009, and December 31, 2008, are as follows:


	June 30 2009		December 31 2008
	(in millions of U.S. dollars)
Deposits with U.S. regulatory authorities	$	1,219	$	1,165
Deposits with non-U.S. regulatory authorities		2,417		1,863
Other pledged assets		621		805
Trust funds		8,199		7,712

	$	12,456	$	11,545

4. Assumed reinsurance programs involving minimum benefit guarantees under annuity contracts

The presentation of income and expenses relating to guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance for the periods indicated, are as follows:


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
	(in millions of U.S. dollars)
GMDB
Net premiums earned	$	27	$	32	$	50	$	64
Policy benefits	$	21	$	18	$	65	$	47

GMIB
Net premiums earned	$	39	$	38	$	79	$	72
Policy benefits	$	6	$	9	$	8	$	15
Realized gains (losses)	$	284	$	75	$	283	$	(130	)

Gain (loss) recognized in income	$	317	$	104	$	354	$	(73	)

Effect of partial adoption of FAS 157	$	—	$	—	$	—	$	4
Net cash received (disbursed)	$	38	$	38	$	78	$	73
Net (increase) decrease in liability	$	279	$	66	$	276	$	(150	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

At June 30, 2009, reported liabilities for GMDB and GMIB reinsurance were $226 million and $634 million, respectively, compared with $248 million and $910 million, respectively, at December 31, 2008. The reported liability for GMIB reinsurance at June 30, 2009, and December 31, 2008, includes a fair value adjustment of $528 million and $811 million, respectively. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitant’s account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more timely information, such as market conditions and demographics of in-force annuities.

GMDB reinsurance

At June 30, 2009, and December 31, 2008, the Company’s net amount at risk from its GMDB reinsurance programs was $4.4 billion and $4.7 billion, respectively. For GMDB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:

•

policy account values and guaranteed values are fixed at the valuation date (June 30, 2009, and December 31, 2008, respectively);

•

there are no lapses or withdrawals;

•

mortality according to 100 percent of the Annuity 2000 mortality table; and

•

future claims are discounted in line with the discounting assumption used in the calculation of the SOP reserve averaging between three to four percent.

At June 30, 2009, if all of the Company’s cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable by the Company, taking into account all appropriate claims limits, would be approximately $1.3 billion. As a result of the annual claim limits on the GMDB reinsurance agreements, the claims payable are lower in this case than if all the policyholders were to die over time, all else equal.

GMIB reinsurance

At June 30, 2009, the Company’s net amount at risk from its GMIB reinsurance programs was $1.5 billion, compared with $2.1 billion at December 31, 2008. For GMIB, the net amount at risk is defined as the present value of future claim payments under the following assumptions:

•

policy account values and guaranteed values are fixed at the valuation date (June 30, 2009, and December 31, 2008, respectively);

•

there are no deaths, lapses, or withdrawals;

•

policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the Company’s reinsurance contracts;

•

for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the SOP reserve; and

•

future claims are discounted in line with the discounting assumption used in the calculation of the SOP reserve averaging between three to four percent.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 65.

5. Debt

The following table outlines the Company’s debt as of June 30, 2009, and December 31, 2008.


	June 30 2009		December 31 2008
	(in millions of U.S. dollars)
Short-term debt
ACE INA subordinated notes due 2009	$	200	$	205
ACE INA term loan due 2009		16		16
Reverse repurchase agreements		—		250

	$	216	$	471

Long-term debt
ACE European Holdings due 2010	$	165	$	149
ACE INA term loan due 2011		50		50
ACE INA term loan due 2013		450		450
ACE INA senior notes due 2014		499		499
ACE INA senior notes due 2015		446		446
ACE INA senior notes due 2017		500		500
ACE INA senior notes due 2018		300		300
ACE INA senior notes due 2019		500		—
ACE INA debentures due 2029		100		100
ACE INA senior notes due 2036		298		298
Other		14		14

	$	3,322	$	2,806

Trust Preferred Securities
ACE INA capital securities due 2030	$	309	$	309

a) Short-term debt

The Company has executed reverse repurchase agreements with certain counterparties under which the Company agreed to sell securities and repurchase them at a future date for a predetermined price. At June 30, 2009, all reverse repurchase agreements had been settled.

b) ACE INA notes

In June 2009, ACE INA issued $500 million of 5.9 percent senior notes due June 2019. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.40 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

6. Commitments, contingencies, and guarantees

a) Derivative instruments

Derivative instruments employed

The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities, discussed below, these are the most numerous and frequent derivative transactions.

ACE maintains positions in certain convertible bond investments that contain embedded derivatives. In addition, the Company purchases to be announced mortgage-backed securities (TBA) as part of its investing activities. These securities are included within the Company’s fixed maturities available for sale (FM AFS) portfolio.

Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of GMIBs 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 Company’s GMIB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GMIBs are classified as future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). The Company also maintains positions in certain exchange-traded equity futures contracts and options on equity market futures to limit equity and interest rate exposure in the GMDB and GMIB block of business.

In relation to certain long- and short-term debt issues, the Company has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.

The Company carries all derivative instruments at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are used as hedges for accounting purposes.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table outlines the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of the Company’s derivative instruments at June 30, 2009.


	June 30, 2009
	Consolidated Balance Sheet Location	Fair Value			Notional Value/ Payment Provision
	(in millions of U.S. dollars)
Investment and embedded derivative instruments
Foreign currency forward contracts	AP	$	(5	)	$	315
Futures contracts on money market instruments	AP		1			3,165
Futures contracts on notes and bonds	AP		9			610
Options on money market instruments	AP		—			120
Convertible bonds	FM AFS		309			580
TBAs	FM AFS		171			166

		$	485		$	4,956

Other derivative instruments
Futures contracts on equities	AP	$	13		$	648
Options on equity market futures	AP		144			800
Interest rate swaps	AP		(20	)		516
Credit default swaps	AP		25			315
Other	AP		9			78

		$	171		$	2,357


GMIB ⁽¹⁾	AP/FPB	$	(634	)	$	1,492

⁽¹⁾	Note that the payment provision related to GMIB is the net amount at risk. The concept of a notional value does not apply to the GMIB reinsurance contracts.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table outlines derivative instrument activity in the consolidated statement of operations for the three and six months ended June 30, 2009. All amounts are reflected in Net realized gains (losses) in the consolidated statement of operations.


	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009
	(in millions of U.S. dollars)
Investment and embedded derivative instruments
Foreign currency forward contracts	$	(35	)	$	(14	)
All other futures contracts and options		(18	)		(4	)
Convertible bonds		38			57
TBAs		(6	)		(5	)

	$	(21	)	$	34

GMIB and other derivative instruments
GMIB	$	284		$	283
Futures contracts on equities		(89	)		(102	)
Options on equity market futures		(92	)		(54	)
Interest rate swaps		10			(15	)
Credit default swaps		(49	)		(52	)
Other		—			1

	$	64		$	61

Credit risk-related contingent features

Certain of the Company’s derivative instruments contain provisions that impact the amount of collateral that ACE is required to post and that allow the contract counterparty to cancel the contract contingent on the Company’s, and in certain cases subsidiaries of the Company’s, senior debt ratings (Ratings). The aggregate fair value of derivative instruments in a liability position with credit risk-related contingent features at June 30, 2009, was $20 million. In connection with these contracts, ACE has posted collateral of $9 million at June 30, 2009. The amount of collateral that ACE is required to post under these contracts would increase should the Company’s Ratings deteriorate. At June 30, 2009, the maximum amount of collateral that the Company would be required to post in respect of these derivative instruments, based on the contractual Ratings-based scales, is $20 million. The contract counterparties would be able to cancel the contracts if ACE’s Ratings fall to BBB- as measured by Standard and Poor’s (S&P) or Baa3 as measured by Moody’s.

Derivative instrument objectives

(i) Foreign currency exposure management

The Company uses foreign currency forward contracts (forwards) to minimize the effect of fluctuating foreign currencies. The forwards purchased are not specifically identifiable against cash, any single security, or groups of securities denominated in those currencies and, therefore, do not qualify as hedges for financial reporting purposes. All realized and unrealized contract gains and losses are reflected in Net realized gains (losses) in the consolidated statements of operations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(ii) Duration management and market exposure

Futures

Exchange-traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts may be used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract.

Interest rate swaps

An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. The Company also employs interest rate swaps related to certain debt issues for the purpose of either fixing and/or reducing borrowing costs.

Credit default swaps

A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller either takes delivery of the assets for the principal amount or pays the protection buyer the difference between the fair value of assets and the principal amount. The Company buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.

Options

Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company’s synthetic strategy as described above. Another use for option contracts may be to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.

The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the credit worthiness of its counterparties. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company’s investment guidelines.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(iii) Convertible security investments

A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond’s maturity. The convertible option is an embedded derivative which is marked-to-market with changes in fair value recognized in Net realized gains (losses). The debt host instrument is classified in the investment portfolio as available for sale. The Company purchases convertible bonds for their total return and not specifically for the conversion feature.

(iv) To be announced mortgage-backed securities (TBA)

By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. The Company purchases TBAs both for their total return and for the flexibility they provide related to ACE’s mortgage-backed security strategy.

(v) GMIB

Under the GMIB program, as the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as net realized gains (losses). Fair value represents exit price and thus, includes a risk margin. The Company may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) and changes in policyholder behavior (i.e., increased annuitization or decreased lapse rates) although the Company expects the business to be profitable. The Company believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.

b) Other investments

The Company invests in limited partnerships with a carrying value of $778 million included in Other investments. In connection with these investments, the Company has commitments that may require funding of up to $728 million over the next several years.

c) Taxation

The Internal Revenue Service (IRS) completed its field examination of the Company’s federal tax returns for 2002, 2003, and 2004 during the third quarter of 2007, and has proposed several adjustments principally involving transfer pricing and other insurance-related tax deductions. The Company subsequently filed a written protest with the IRS and the case is currently being reviewed by the IRS Appeals Division. The Company expects the appeals process to be completed within the next 12 months. While it is reasonably possible that a significant change in the Company’s unrecognized tax benefits could occur in the next twelve months, given the uncertainty regarding the possible outcomes of the appeals process, a current estimate of the range of reasonably possible changes cannot be made. However, the Company believes that the outcome would not have a material impact on ACE’s consolidated financial condition. The IRS commenced its field examination for tax years 2005 through 2007 during the second quarter of 2008 with no adjustments proposed as of June 30, 2009. With few exceptions, the Company’s significant U.K. subsidiaries remain subject to examination for tax years 2006 and later.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

d) Letters of credit

In June 2009, the Company entered into a $500 million unsecured operational LOC facility expiring in June 2014. At June 30, 2009, this facility was unutilized. This facility requires that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant.

e) Legal proceedings

(i) Claims and other litigation

The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.

(ii) Business practices litigation

Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries were issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG) and the Pennsylvania Insurance Department. Such inquiries concerned underwriting practices and non-traditional or loss mitigation insurance products.

On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance. On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolved the issues raised by the Department and the OAG arising from their investigation of ACE’s underwriting practices and contingent commission payments. On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolved investigations of ACE’s underwriting practices and contingent commission payments.

In June 2008, in an action filed by the NYAG against another insurer, the New York Appellate Division, First Department, confirmed the legality of contingent commission agreements – one of the focal points of the NYAG’s investigation. “Contingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between parties, defendants[s] had no duty to disclose the existence of the contingent commission agreement.” New York v. Liberty Mut. Ins. Co ., 52 A.D. 3d 378, 379 (2008) (citing Hersch v. DeWitt Stern Group, Inc ., 43 A.D. 3d 644, 645 (2007).

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

ACE, ACE INA Holdings, Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.

In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that acted as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.

In 2006 and 2007, the Court dismissed plaintiffs’ first two attempts to properly plead a case without prejudice and permitted plaintiffs one final opportunity to re-plead. The amended complaint, filed on May 22, 2007, purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. On June 21, 2007, defendants moved to dismiss the amended complaint and moved to strike the new parties. The Court granted defendants’ motions and dismissed plaintiffs’ antitrust and RICO claims with prejudice on August 31, 2007, and September 28, 2007, respectively. The Court also declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. On October 10, 2007, plaintiffs filed a Notice of Appeal of the antitrust and RICO rulings to the United States Court of Appeals for the Third Circuit. The parties fully briefed the appeal and argued before the Third Circuit on April 21, 2009. The court took the case under advisement, but did not indicate when it would issue a decision.

There are a number of federal actions brought by policyholders based on allegations similar to the allegations in the consolidated federal actions that were filed in, or transferred to, the United States District Court for the District of New Jersey for coordination. All proceedings in these actions are currently stayed.

•

New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; D.N.J.), was originally filed in the Northern District of Georgia on April 4, 2006. ACE, ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Ins. Co. Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd’s of London Syndicate 2488 AGM, along with a number of other insurers and brokers, are named.

•

Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757; D.N.J.) was filed on February 13, 2007. ACE, ACE INA Holdings, Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, are named.

•

Henley Management Co., Inc. et al v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, are named.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

•

Lincoln Adventures LLC et al. v. Those Certain Underwriters at Lloyd’s, London Members of Syndicates 0033 et al. (Case No. 07-60991; D.N.J.) was originally filed in the Southern District of Florida on July 13, 2007. Supreme Auto Transport LLC et al. v. Certain Underwriters of Lloyd’s of London, et al. (Case No. 07-6703; D.N.J.) was originally filed in the Southern District of New York on July 25, 2007. Lloyd’s of London Syndicate 2488 AGM, along with a number of other Lloyd’s of London Syndicates and various brokers, are named in both actions. The allegations in these putative class-action lawsuits are similar to the allegations in the consolidated federal actions identified above, although these lawsuits focus on alleged conduct within the London insurance market.

•

Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535; D.N.J.) was originally filed in the Northern District of Georgia on October 12, 2007. ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, are named.

Three cases have been filed in state courts with allegations similar to those in the consolidated federal actions described above.

•

Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts), a class action in Massachusetts, was filed on January 13, 2005. Illinois Union Insurance Company is named. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court.

•

Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida), a Florida state action, was filed on June 22, 2005. ACE American Insurance Co. is named. The trial court originally stayed this case, but the Florida Court of Appeals later remanded and the trial court declined to grant another stay. The court has denied motions to dismiss, and ACE American Ins. Co. has filed an answer. Discovery is ongoing.

•

State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int’l Group, Inc. et al. (Case No. 07-633857; Court of Common Pleas in Cuyahoga County, Ohio) is an Ohio state action filed by the Ohio Attorney General on August 24, 2007. ACE INA Holdings, Inc., ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, are named. Defendants filed motions to dismiss in November 2007. On July 2, 2008, the court denied all of the defendants’ motions. Discovery is ongoing and trial is set for August 2010.

ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania and the Court appointed Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers Pension Trust as lead plaintiffs. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenues and earnings were inflated by these practices. Plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10(b)-5 promulgated thereunder, and Section 20(a) of the Securities Act (control person liability). In 2005, ACE and the individual defendants filed a motion to dismiss. The Court heard oral argument on November 10, 2008, but did not rule on the motion. On December 16, 2008, the parties entered into a Stipulation of Settlement in which the parties agreed – contingent upon Court approval – that ACE would pay the plaintiffs $1.95 million in exchange for a full release of all claims. On June 9, 2009 the Court approved the settlement and dismissed the multidistrict litigation (including the four underlying suits) with prejudice.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

ACE is named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh seeking to recover damages for Marsh and its subsidiary, Marsh, Inc., against officers and directors of Marsh, American International Group Inc. (AIG), former AIG chief executive officer Maurice R. Greenberg, and ACE. The suit alleges that the defendants breached their fiduciary duty to and thereby damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions, and that ACE knowingly participated in the alleged scheme.

ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, are named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. In Delaware, the shareholder plaintiffs filed an amended complaint (their third pleading effort), on April 14, 2008, which drops Evan Greenberg as a defendant (plaintiffs in the New York action subsequently dismissed Evan Greenberg as well). On June 13, 2008, ACE filed a motion to dismiss, and on April 20, 2009, the court heard oral argument on the motion. On June 17, 2009 the Court dismissed all claims against ACE with prejudice; final judgment in favor of ACE was entered on July 13, 2009. The New York derivative action is currently stayed.

In all of the lawsuits described above, plaintiffs seek compensatory and in some cases special damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and, accordingly, no liability for compensatory damages has been established in the consolidated financial statements.

ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.

(iii) Legislative activity

The State of New York, as part of the 2009-10 State budget, has adopted language that requires an insurer which (1) paid to the Workers’ Compensation Board various statutory assessments in an amount less than that insurer “collected” from insured employers in a given year and (2) “has identified and held any funds collected but not paid to the Workers’ Compensation Board , as measurable and available, as of January 1, 2009” to pay retroactive assessments to the Workers’ Compensation Board. The language, and impact, of this new law is at present uncertain because it uses terms and dates that are not readily identifiable with respect to insurers’ statutory financial statements and because the State has not promulgated implementing regulations or other explanatory materials. The Company’s understanding is that the law is intended to address certain inconsistencies in the New York State laws regulating the calculation of workers’ compensation assessments by insurance carriers and the remittance of those funds to the State. In July 2009, ACE received a subpoena from the NYAG requesting documents related to these issues. Although the Company can not at this time predict the interpretation that will be afforded the language, ACE is confident that it has complied with the law governing workers’ compensation surcharges and assessments. ACE has established a contingency based on the Company’s best estimate of the potential liability that could result from an adverse interpretation of the legislation or other events surrounding this topic, based on the facts and circumstances at this time. Such contingency will be increased or decreased as circumstances develop. The Company does not expect the legislation to have a material impact on its financial condition or results of operations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

7. Shareholders’ equity

In connection with the Continuation, the Company changed the currency in which the par value of Ordinary Shares is stated from U.S. dollars to Swiss francs and increased the par value of Ordinary Shares from $0.041666667 to CHF 33.74 (the New Par Value) through a conversion of all issued Ordinary Shares into “stock” and re-conversion of the stock into Ordinary Shares with a par value equal to the New Par Value (the Par Value Conversion). The Par Value Conversion was followed immediately by a stock dividend, to effectively return shareholders to the number of Ordinary Shares held before the Par Value Conversion. The stock dividend did not therefore have the affect of diluting earnings per share. Upon the effectiveness of the Continuation, the Company’s Ordinary Shares became Common Shares. All Common Shares are registered common shares under Swiss corporate law. Notwithstanding the change of the currency in which the par value of Common Shares is stated, the Company continues to use U.S. dollars as its reporting currency for preparing the consolidated financial statements. For purposes of the consolidated financial statements, the increase in par value was accomplished by a corresponding reduction first to retained earnings and second to additional paid-in capital to the extent that the increase in par value exhausted retained earnings at the date of the Continuation. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions), must be declared by ACE in Swiss francs though dividend payments are made by the Company in U.S. dollars. For the foreseeable future, the Company expects to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax. For the three months ended June 30, 2009 and 2008, dividends declared per Common Share amounted to CHF 0.33 ($0.31) and $0.29, respectively. Dividends declared for the six months ended June 30, 2009 and 2008 were CHF 0.63 ($0.57) and $0.56, respectively. The par value distribution in the six months ended June 30, 2009, is reflected as such through Common Shares in the consolidated statement of shareholders’ equity and had the effect of reducing the par value per Common Share to CHF 32.51.

Under Swiss corporate law, the Company may not generally issue Common Shares below their par value. In the event there is a need to raise common equity at a time when the trading price of the Company’s Common Shares is below par value, the Company will need to obtain shareholder approval to decrease the par value of the Common Shares.

In July 2008, prior to the Continuation, the Company issued and placed 2,000,000 Common Shares in treasury principally for issuance upon the exercise of employee stock options. At June 30, 2009, 1,468,423 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.

8. Share-based compensation

During 2004, the Company established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP). The Company’s 2004 LTIP provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair value of the Company’s Common Shares on the date of grant. Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. On February 26, 2009, the Company granted 2,320,620 stock options with a weighted-average grant date fair value of $12.94. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.

The Company’s 2004 LTIP also provides for grants of restricted stock and restricted stock units. The Company generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the day of grant. On February 26, 2009, the

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Company granted 2,437,525 restricted stock awards and 322,860 restricted stock units to officers of the Company and its subsidiaries with a grant date fair value of $38.51. Each restricted stock unit represents the Company’s obligation to deliver to the holder one Common Share upon vesting.

9. Fair value measurements

a) Fair value hierarchy

The Company partially adopted the provisions of FAS 157 on January 1, 2008, and the cumulative effect of adoption resulted in a reduction to retained earnings of $4 million related to an increase in risk margins included in the valuation of certain GMIB contracts. The Company fully adopted the provisions of FAS 157 effective January 1, 2009. FAS 157 defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following is a description of the valuation measurements used for the Company’s financial instruments carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities

Fixed maturities with active markets are classified within Level 1 as fair values are based on quoted market prices. For fixed maturities that trade in less active markets, including most corporate and municipal securities in ACE’s portfolio, fair values are based on the output of “pricing matrix models”, the significant inputs into which include, but are not limited to, yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. These fixed maturities are classified within Level 2. Fixed maturities for which pricing is unobservable are classified within Level 3.

Equity securities

Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2. As previously discussed, during the three months ended June 30, 2009, ACE’s investment in AGO was reclassified from Investments in partially-owned insurance companies to Equity securities. The fair value of the Company’s investment in AGO is based on a quoted market price and continues to be classified within Level 1.

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 approximating par value.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Securities lending collateral

The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as the Company’s other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to the Company’s obligation to return the collateral plus interest.

Other investments

Fair values for other investments, principally other direct equity investments, investment funds, and limited partnerships, are based on the net asset value or financial statements and are included within Level 3. Equity securities and fixed maturities held in rabbi trusts maintained by the Company for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as the Company’s other equity securities and fixed maturities.

Investments in partially-owned insurance companies

Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies used for equity accounting are classified within Level 3.

Investment derivative instruments

For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, the Company obtains quoted market prices to determine fair value. As such, these instruments are included within Level 1. Forward contracts that are not exchange-traded are priced using a pricing matrix model principally employing observable inputs and, as such, are classified within Level 2. The Company’s position in interest rate swaps is typically classified within Level 3.

Guaranteed minimum income benefits

The liability for GMIBs arises from the Company’s reinsurance programs covering living benefit guarantees whereby the Company assumes the risk of GMIBs associated with variable annuity contracts. For GMIB 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 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 timely information, such as market conditions and demographics of in-force annuities. Based on the quarterly reserve review, no changes were made to actuarial or behavioral assumptions during the three months ended June 30, 2009. The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is 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 being equal, as lapse rates increase, ultimate claim payments will decrease. The 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 Company views 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, GMIB reinsurance is classified within Level 3.

Short- and long-term debt and trust preferred securities

Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including the Company’s incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. As such, these instruments are classified within Level 2.

Other derivative instruments

The Company maintains 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 guaranteed minimum death benefits (GMDB) and GMIB reinsurance business. The Company’s position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the Company’s 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. The Company’s position in credit default swaps is typically included within Level 3.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following tables present, by valuation hierarchy, the financial instruments carried or disclosed at fair value, and measured on a recurring basis, as of June 30, 2009, and December 31, 2008.


	Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(in millions of U.S. dollars)
June 30, 2009
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,259	$	1,928	$	—	$	3,187
Foreign		424		9,283		38		9,745
Corporate securities		57		11,530		100		11,687
Mortgage-backed securities		12		9,533		42		9,587
States, municipalities, and political subdivisions		1		1,487		3		1,491

		1,753		33,761		183		35,697


Fixed maturities held to maturity
U.S. Treasury and agency		338		547		—		885
Foreign		—		34		—		34
Corporate securities		—		369		—		369
Mortgage-backed securities		—		1,462		51		1,513
States, municipalities, and political subdivisions		—		734		—		734

		338		3,146		51		3,535


Equity securities		410		5		8		423
Short-term investments		1,382		695		4		2,081
Other investments		30		249		1,084		1,363
Securities lending collateral		—		1,370		—		1,370
Investments in partially-owned insurance companies		—		—		462		462

Investment derivative instruments		5		—		—		5
Other derivative instruments		13		124		34		171

Total assets at fair value	$	3,931	$	39,350	$	1,826	$	45,107


Liabilities:
GMIB	$	—		—		634	$	634
Short-term debt		—		224		—		224
Long-term debt		—		3,422		—		3,422
Trust preferred securities		—		252		—		252

Total liabilities at fair value	$	—	$	3,898	$	634	$	4,532

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(in millions of U.S. dollars)
December 31, 2008
Assets:
Fixed maturities available for sale	$	872	$	30,009	$	274	$	31,155
Fixed maturities held to maturity		332		2,532		1		2,865
Equity securities		962		5		21		988
Short-term investments		2,668		682		—		3,350
Other investments		37		226		1,099		1,362
Other derivative instruments		—		280		87		367

Total assets at fair value	$	4,871	$	33,734	$	1,482	$	40,087


Liabilities:
Investment derivative instruments	$	3	$	—	$	—	$	3
GMIB		—		—		910		910

Total liabilities at fair value	$	3	$	—	$	910	$	913

Level 3 financial instruments

The following tables provide a reconciliation of the beginning and ending balances of financial instruments carried or disclosed at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2009 and 2008.


	Balance- Beginning of Period		Net Realized Gains/ Losses			Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income		Purchases, Sales, Issuances, and Settlements, Net			Transfers Into (Out of) Level 3			Balance- End of Period		Change in Net Unrealized Gains (Losses) Relating to Financial Instruments Still Held at June 30, 2009 included in Net Income
	(in millions of U.S. dollars)
Three Months Ended June 30, 2009
Assets:
Fixed maturities available for sale
Foreign	$	39	$	(1	)	$	2	$	7		$	(9	)	$	38	$	(1	)
Corporate securities		103		(1	)		8		(5	)		(5	)		100		(5	)
Mortgage-backed securities		85		—			13		(54	)		(2	)		42		(1	)
States, municipalities, and political subdivisions		3		—			—		—			—			3		—

		230		(2	)		23		(52	)		(16	)		183		(7	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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	Balance- Beginning of Period		Net Realized Gains/ Losses			Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income			Purchases, Sales, Issuances, and Settlements, Net			Transfers Into (Out of) Level 3			Balance- End of Period		Change in Net Unrealized Gains (Losses) Relating to Financial Instruments Still Held at June 30, 2009 included in Net Income
	(in millions of U.S. dollars)
Fixed maturities held to maturity
Mortgage-backed securities		—		—			—			51			—			51		—

		—		—			—			51			—			51		—

Equity securities		8		—			—			—			—			8		—
Short-term investments		1		—			—			3			—			4		—
Other investments		1,027		6			41			11			(1	)		1,084		6
Investments in partially-owned insurance companies		481		8			(20	)		(7	)		—			462		—
Other derivative instruments		83		(51	)		—			2			—			34		(51	)

Total assets at fair value	$	1,830	$	(39	)	$	44		$	8		$	(17	)	$	1,826	$	(52	)

Liabilities:
GMIB	$	913	$	(284	)	$	—		$	5		$	—		$	634	$	(284	)


	Balance- Beginning of Period			Net Realized Gains/ Losses			Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income			Purchases, Sales, Issuances, and Settlements, Net			Transfers Into (Out of) Level 3			Balance- End of Period		Change in Net Unrealized Gains (Losses) Relating to Financial Instruments Still Held at June 30, 2008 included in Net Income
	(in millions of U.S. dollars)
Three Months Ended June 30, 2008
Assets:
Fixed maturities available for sale	$	547		$	(10	)	$	(7	)	$	35		$	(99	)	$	466	$	(8	)
Fixed maturities held to maturity		—			—			—			—			2			2		—
Equity securities		13			—			—			(5	)		2			10		—
Other investments		1,012			2			(35	)		138			—			1,117		(25	)
Other derivative instruments		37			(4	)		—			(2	)		—			31		13

Total assets at fair value	$	1,609		$	(12	)	$	(42	)	$	166		$	(95	)	$	1,626	$	(20	)

Liabilities:
Investment derivative instruments	$	(5	)	$	—		$	—		$	5		$	—		$	—	$	—
GMIB		441			(75	)		—			9			—			375		(75	)

Total liabilities at fair value	$	436		$	(75	)	$	—		$	14		$	—		$	375	$	(75	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Balance- Beginning of Period		Net Realized Gains/ Losses			Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income			Purchases, Sales, Issuances, and Settlements, Net			Transfers Into (Out of) Level 3			Balance- End of Period		Change in Net Unrealized Gains (Losses) Relating to Financial Instruments Still Held at June 30, 2009 included in Net Income
	(in millions of U.S. dollars)

Six Months Ended June 30, 2009
Assets:
Fixed maturities available for sale
Foreign	$	45	$	(1	)	$	—		$	4		$	(10	)	$	38	$	(1	)
Corporate securities		117		—			5			(6	)		(16	)		100		(4	)
Mortgage-backed securities		109		(4	)		14			(60	)		(17	)		42		(5	)
States, municipalities, and political subdivisions		3		—			—			—			—			3		—

		274		(5	)		19			(62	)		(43	)		183		(10	)

Fixed maturities held to maturity
Mortgage-backed securities		—		—			—			51			—			51		—
States, municipalities, and political subdivisions		1		—			—			(1	)		—			—		—

		1		—			—			50			—			51		—

Equity securities		21		—			—			4			(17	)		8		—
Short-term investments		—		—			—			4			—			4		—
Other investments		1,099		(83	)		20			49			(1	)		1,084		(83	)
Investments in partially-owned insurance companies		435		8			(17	)		36			—			462		—
Other derivative instruments		87		(52	)		—			(1	)		—			34		(52	)

Total assets at fair value	$	1,917	$	(132	)	$	22		$	80		$	(61	)	$	1,826	$	(145	)

Liabilities:
GMIB	$	910	$	(283	)	$	—		$	7		$	—		$	634	$	(283	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Balance- Beginning of Period			Net Realized Gains/ Losses			Change in Net Unrealized Gains (Losses) Included in Other Comprehensive Income			Purchases, Sales, Issuances, and Settlements, Net			Transfers Into (Out of) Level 3			Balance- End of Period		Change in Net Unrealized Gains (Losses) Relating to Financial Instruments Still Held at June 30, 2008 included in Net Income
	(in millions of U.S. dollars)

Six Months Ended June 30, 2008
Assets:
Fixed maturities available for sale	$	601		$	(13	)	$	(41	)	$	28		$	(109	)	$	466	$	(13	)
Fixed maturities held to maturity		—			—			—			—			2			2		—
Equity securities		12			—			—			(3	)		1			10		—
Other investments		898			(25	)		(39	)		283			—			1,117		(52	)
Other derivative instruments		17			16			—			(2	)		—			31		32

Total assets at fair value	$	1,528		$	(22	)	$	(80	)	$	306		$	(106	)	$	1,626	$	(33	)


Liabilities:
Investment derivative instruments	$	(6	)	$	(5	)	$	—		$	11		$	—		$	—	$	(2	)
GMIB		225			130			—			20			—			375		130

Total liabilities at fair value	$	219		$	125		$	—		$	31		$	—		$	375	$	128

b) Fair value option

Effective January 1, 2008, the Company elected the fair value option provided by FAS 159, The Fair Value Option For Financial Assets and Liabilities, (FAS 159) for certain of its available for sale equity securities valued and carried at $161 million on the election date. The Company elected the fair value option for these particular equity securities to simplify the accounting and oversight of this portfolio given the portfolio management strategy employed by the external investment manager. The election resulted in an increase in retained earnings and a reduction to accumulated other comprehensive income of $6 million as of January 1, 2008. This adjustment reflects the net of tax unrealized gains ($9 million pre-tax) associated with this particular portfolio at January 1, 2008. Subsequent to this election, changes in fair value related to these equity securities were recognized in Net realized gains (losses). During the three months ended June 30, 2008, the Company sold the entire portfolio. Accordingly, the Company currently holds no assets for which the provisions of FAS 159 have been elected. For the three and six months ended June 30, 2008, the Company recognized net realized gains (losses) related to changes in fair value of these equity securities of $9 million and $(11) million, respectively, in the consolidated statements of operations. Throughout 2008 to the date of sale, all of these equity securities were classified within Level 1 in the fair value hierarchy.

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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

10. Segment information

The Company operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries. Additionally, Insurance – North American has internet distribution channels for some of its products.

The Insurance – North American segment comprises the P&C operation in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations. ACE USA provides a broad array of P&C, A&H, and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ESIS, ACE USA’s in-house third-party claims administrator, performs claims management and risk control services for organizations that self-insure P&C exposures. The operating results of ESIS are included in Insurance – North American’s administrative expenses. ACE Westchester specializes in the wholesale distribution of excess, surplus, and specialty P&C products. ACE Bermuda provides commercial insurance products on an excess basis to a global client base, covering risks that are generally low in frequency and high in severity. ACE Private Risk Services provides personal lines coverages (such as homeowners and automobile) for high net worth clients. The run-off operations include Brandywine Holdings Corporation, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.

The Insurance – Overseas General segment consists of ACE International (excluding its life insurance business), the wholesale insurance operations of ACE Global Markets, and the international A&H and life insurance business of Combined Insurance. ACE International, the ACE INA network of indigenous retail insurance operations, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets, the London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488, offers an extensive product range through its unique parallel distribution of products via ACE European Group Limited (AEGL) and Lloyd’s Syndicate 2488. ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488 which is managed by ACE Underwriting Agencies Limited. AEGL, the London-based, Financial Services Authority-U.K. regulated company, underwrites U.K. and Continental Europe insurance and reinsurance business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in Europe, Asia Pacific, and Latin America. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which comprises ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (directors & officers and errors & omissions), marine, energy, aviation, political risk, specialty personal lines, consumer lines, A&H (principally accident and supplemental health), and life insurance.

The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C companies. The Global Reinsurance segment includes ACE Global Markets’ reinsurance operations, as well as an underwriting presence at Lloyd’s Reinsurance Company (China) Limited, a Lloyd’s licensed reinsurance company based in Shanghai.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Life segment includes the operations of ACE Tempest Life Re (ACE Life Re), ACE Life, and the domestic A&H and life business of Combined Insurance. ACE Life Re provides reinsurance coverage to other life insurance companies as well as marketing traditional life reinsurance products and services for the individual life business. ACE Life provides traditional life insurance protection, investments, and savings products to individuals and groups in several countries including China (through a partially-owned company), Egypt, Indonesia, Taiwan, Thailand, the United Arab Emirates, and Vietnam. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in the U.S. and Canada.

Corporate and Other (Corporate) includes ACE Limited, ACE Group Management and Holdings Ltd., ACE INA Holdings, Inc., and intercompany eliminations. In addition, Corporate includes the Company’s proportionate share of AGO’s earnings reflected in Other (income) expense to the date that ACE was no longer deemed to exert significant influence over AGO in accordance with the provisions of APB 18. Included in Losses and loss expenses are losses incurred in connection with the commutation of ceded reinsurance contracts that resulted from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.

For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables summarize the operations by segment for the periods indicated.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Statement of Operations by Segment

For the Three Months Ended June 30, 2009

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Gross premiums written	$	2,664		$	1,710		$	359		$	384		$	—		$	5,117
Net premiums written		1,454			1,265			329			367			—			3,415
Net premiums earned		1,415			1,246			241			364			—			3,266
Losses and loss expenses		997			635			56			133			—			1,821
Policy benefits		—			1			—			77			—			78
Policy acquisition costs		129			293			46			55			—			523
Administrative expenses		147			190			14			64			39			454

Underwriting income (loss)		142			127			125			35			(39	)		390

Net investment income		275			114			73			43			1			506
Net realized gains (losses) including OTTI		(97	)		(87	)		(47	)		108			(102	)		(225	)
Interest expense		—			—			—			—			56			56
Other (income) expense		1			5			1			(1	)		(27	)		(21	)
Income tax expense (benefit)		76			29			13			14			(31	)		101

Net income (loss)	$	243		$	120		$	137		$	173		$	(138	)	$	535

Statement of Operations by Segment

For the Three Months Ended June 30, 2008

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life		Corporate and Other			ACE Consolidated
Gross premiums written	$	2,718		$	1,876		$	272		$	427	$	—		$	5,293
Net premiums written		1,511			1,443			270			374		—			3,598
Net premiums earned		1,365			1,439			257			367		—			3,428
Losses and loss expenses		962			715			108			110		—			1,895
Policy benefits		—			5			—			84		—			89
Policy acquisition costs		129			323			54			63		—			569
Administrative expenses		131			208			14			69		39			461

Underwriting income (loss)		143			188			81			41		(39	)		414

Net investment income		282			134			79			40		(3	)		532
Net realized gains (losses) including OTTI		(105	)		(58	)		(20	)		64		(7	)		(126	)
Interest expense		—			—			—			—		62			62
Other (income) expense		3			(17	)		1			4		(116	)		(125	)
Income tax expense (benefit)		106			38			11			12		(30	)		137

Net income	$	211		$	243		$	128		$	129	$	35		$	746

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Statement of Operations by Segment

For the Six Months Ended June 30, 2009

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life		Corporate and Other			ACE Consolidated
Gross premiums written	$	4,742		$	3,403		$	738		$	769	$	—		$	9,652
Net premiums written		2,846			2,592			688			713		—			6,839
Net premiums earned		2,852			2,430			479			699		—			6,460
Losses and loss expenses		2,001			1,248			143			245		—			3,637
Policy benefits		—			3			—			174		—			177
Policy acquisition costs		252			553			97			102		—			1,004
Administrative expenses		287			365			26			122		74			874

Underwriting income (loss)		312			261			213			56		(74	)		768

Net investment income		538			234			145			89		2			1,008
Net realized gains (losses) including OTTI		(217	)		(80	)		(36	)		117		(130	)		(346	)
Interest expense		—			—			—			—		109			109
Other (income) expense		5			9			1			1		(23	)		(7	)
Income tax expense (benefit)		172			75			29			20		(70	)		226

Net income (loss)	$	456		$	331		$	292		$	241	$	(218	)	$	1,102

Statement of Operations by Segment

For the Six Months Ended June 30, 2008

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Gross premiums written	$	4,899		$	3,654		$	617		$	532		$	—		$	9,702
Net premiums written		2,871			2,788			614			479			—			6,752
Net premiums earned		2,719			2,662			520			467			—			6,368
Losses and loss expenses		1,831			1,308			225			110			—			3,474
Policy benefits		—			5			—			147			—			152
Policy acquisition costs		290			568			108			71			—			1,037
Administrative expenses		266			381			29			82			78			836

Underwriting income (loss)		332			400			158			57			(78	)		869

Net investment income		551			251			152			55			12			1,021
Net realized gains (losses) including OTTI		(166	)		(141	)		(65	)		(122	)		15			(479	)
Interest expense		—			—			—			—			108			108
Other (income) expense		3			(20	)		1			4			(98	)		(110	)
Income tax expense (benefit)		229			85			15			10			(49	)		290

Net income (loss)	$	485		$	445		$	229		$	(24	)	$	(12	)	$	1,123

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Underwriting assets are reviewed in total by management for purposes of decision-making. The Company does not allocate assets to its segments.

The following tables summarize the net premiums earned for each segment by product offering for the periods indicated.


	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
	(in millions of U.S. dollars)
For the Three Months Ended June 30, 2009
Insurance – North American	$	448	$	902	$	65	$	1,415
Insurance – Overseas General		422		357		467		1,246
Global Reinsurance		128		113		—		241
Life		—		—		364		364

	$	998	$	1,372	$	896	$	3,266

For the Three Months Ended June 30, 2008
Insurance – North American	$	357	$	946	$	62	$	1,365
Insurance – Overseas General		470		403		566		1,439
Global Reinsurance		132		125		—		257
Life		—		—		367		367

	$	959	$	1,474	$	995	$	3,428

For the Six Months Ended June 30, 2009
Insurance – North American	$	865	$	1,862	$	125	$	2,852
Insurance – Overseas General		842		672		916		2,430
Global Reinsurance		274		205		—		479
Life		—		—		699		699

	$	1,981	$	2,739	$	1,740	$	6,460

For the Six Months Ended June 30, 2008
Insurance – North American	$	663	$	1,934	$	122	$	2,719
Insurance – Overseas General		920		775		967		2,662
Global Reinsurance		257		263		—		520
Life		—		—		467		467

	$	1,840	$	2,972	$	1,556	$	6,368

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

11. Earnings per share

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated. The current and prior period calculations have been amended due to the impact of the adoption of FSP EITF 03-6-1. The previously reported amounts for basic earnings per share for the three and six months ended June 30, 2008, were $2.23 and $3.35, respectively. The previously reported amounts for diluted earnings per share for the three and six months ended June 30, 2008, were $2.20 and $3.31, respectively.


	Three Months Ended June 30					Six Months Ended June 30
	2009		2008			2009		2008
	(in millions of U.S. dollars, except share and per share data)
Numerator:
Net Income	$	535	$	746		$	1,102	$	1,123
Dividends on Preferred Shares		—		(13	)		—		(24	)

Net income available to holders of Common Shares	$	535	$	733		$	1,102	$	1,099


Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding		336,898,236		333,236,903			336,159,387		331,986,638
Denominator for diluted earnings per share:
Share-based compensation plans		610,060		2,243,842			342,529		2,172,679

Adjusted weighted average shares outstanding and assumed conversions		337,508,296		335,480,745			336,501,916		334,159,317

Basic earnings per share	$	1.58	$	2.20		$	3.28	$	3.31

Diluted earnings per share	$	1.58	$	2.18		$	3.27	$	3.29

Excluded from adjusted weighted average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective periods. For the three months ended June 30, 2009 and 2008, the potential anti-dilutive share conversions were 1,382,107 and 480,106, respectively. The potential anti-dilutive share conversions for the six months ended June 30, 2009 and 2008, were 1,596,259 and 415,418, respectively.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

12. Information provided in connection with outstanding debt of subsidiaries

The following tables present condensed consolidating financial information at June 30, 2009, and December 31, 2008, and for the three and six months ended June 30, 2009 and 2008, for ACE Limited (the Parent Guarantor) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.

Condensed Consolidating Balance Sheet at June 30, 2009

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Assets
Investments	$	60		$	22,440		$	20,581		$	—		$	43,081
Cash		(78	)		308			424			—			654
Insurance and reinsurance balances receivable		—			3,346			670			—			4,016
Reinsurance recoverable on losses and loss expenses		—			16,787			(3,357	)		—			13,430
Reinsurance recoverable on policy benefits		—			715			(367	)		—			348
Value of business acquired		—			793			—			—			793
Goodwill and other intangible assets		—			3,200			556			—			3,756
Investments in subsidiaries		15,949			—			—			(15,949	)		—
Due from (to) subsidiaries and affiliates, net		760			(385	)		385			(760	)		—
Other assets		14			7,715			1,848			—			9,577

Total assets	$	16,705		$	54,919		$	20,740		$	(16,709	)	$	75,655

Liabilities
Unpaid losses and loss expenses	$	—		$	29,356		$	7,912		$	—		$	37,268
Unearned premiums		—			5,444			1,281			—			6,725
Future policy benefits		—			2,354			630			—			2,984
Short-term debt		—			216			—			—			216
Long-term debt		—			3,322			—			—			3,322
Trust preferred securities		—			309			—			—			309
Other liabilities		144			6,741			1,385			—			8,270

Total liabilities		144			47,742			11,208			—			59,094

Total shareholders’ equity		16,561			7,177			9,532			(16,709	)		16,561

Total liabilities and shareholders’ equity	$	16,705		$	54,919		$	20,740		$	(16,709	)	$	75,655

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Condensed Consolidating Balance Sheet at December 31, 2008

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Assets
Investments	$	143		$	20,323		$	19,249		$	—		$	39,715
Cash		(52	)		442			477			—			867
Insurance and reinsurance balances receivable		—			2,944			509			—			3,453
Reinsurance recoverable on losses and loss expenses		—			16,880			(2,963	)		—			13,917
Reinsurance recoverable on policy benefits		—			625			(366	)		—			259
Value of business acquired		—			823			—			—			823
Goodwill and other intangible assets		—			3,199			548			—			3,747
Investments in subsidiaries		13,697			—			—			(13,697	)		—
Due from (to) subsidiaries and affiliates, net		784			(389	)		389			(784	)		—
Other assets		12			7,398			1,866			—			9,276

Total assets	$	14,584		$	52,245		$	19,709		$	(14,481	)	$	72,057

Liabilities
Unpaid losses and loss expenses	$	—		$	29,127		$	8,049		$	—		$	37,176
Unearned premiums		—			4,804			1,146			—			5,950
Future policy benefits		—			2,249			655			—			2,904
Short-term debt		—			471			—			—			471
Long-term debt		—			2,806			—			—			2,806
Trust preferred securities		—			309			—			—			309
Other liabilities		138			5,932			1,925			—			7,995

Total liabilities		138			45,698			11,775			—			57,611

Total shareholders’ equity		14,446			6,547			7,934			(14,481	)		14,446

Total liabilities and shareholders’ equity	$	14,584		$	52,245		$	19,709		$	(14,481	)	$	72,057

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2009

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Net premiums written	$	—		$	1,764		$	1,651		$	—		$	3,415
Net premiums earned		—			1,726			1,540			—			3,266
Net investment income		—			246			260			—			506
Equity in earnings of subsidiaries		587			—			—			(587	)		—
Net realized gains (losses) including OTTI		(50	)		(37	)		(138	)		—			(225	)
Losses and loss expenses		—			1,073			748			—			1,821
Policy benefits		—			20			58			—			78
Policy acquisition costs and administrative expenses		16			530			438			(7	)		977
Interest expense		(10	)		64			(8	)		10			56
Other (income) expense		—			(2	)		(19	)		—			(21	)
Income tax expense (benefit)		(4	)		70			35			—			101

Net income	$	535		$	180		$	410		$	(590	)	$	535

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2008

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Net premiums written	$	—		$	1,616		$	1,982		$	—		$	3,598
Net premiums earned		—			1,782			1,646			—			3,428
Net investment income		(2	)		287			247			—			532
Equity in earnings of subsidiaries		763			—			—			(763	)		—
Net realized gains (losses) including OTTI		(7	)		(96	)		(23	)		—			(126	)
Losses and loss expenses		—			1,062			833			—			1,895
Policy benefits		—			43			46			—			89
Policy acquisition costs and administrative expenses		24			519			491			(4	)		1,030
Interest expense		(14	)		67			(2	)		11			62
Other (income) expense		(2	)		(8	)		(115	)		—			(125	)
Income tax expense		—			115			22			—			137

Net income	$	746		$	175		$	595		$	(770	)	$	746

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2009

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated

Net premiums written	$	—		$	3,845		$	2,994		$	—		$	6,839
Net premiums earned		—			3,590			2,870			—			6,460
Net investment income		—			492			516			—			1,008
Equity in earnings of subsidiaries		1,156			—			—			(1,156	)		—
Net realized gains (losses) including OTTI		(53	)		(116	)		(177	)		—			(346	)
Losses and loss expenses		—			2,241			1,396			—			3,637
Policy benefits		—			42			135			—			177
Policy acquisition costs and administrative expenses		26			1,029			838			(15	)		1,878
Interest expense		(21	)		128			(17	)		19			109
Other (income) expense		—			5			(12	)		—			(7	)
Income tax expense (benefit)		(4	)		172			58			—			226

Net income	$	1,102		$	349		$	811		$	(1,160	)	$	1,102

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2008

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Net premiums written	$	—		$	3,559		$	3,193		$	—		$	6,752
Net premiums earned		—			3,491			2,877			—			6,368
Net investment income		(4	)		522			503			—			1,021
Equity in earnings of subsidiaries		1,138			—			—			(1,138	)		—
Net realized gains (losses) including OTTI		18			(190	)		(307	)		—			(479	)
Losses and loss expenses		—			2,078			1,396			—			3,474
Policy benefits		—			55			97			—			152
Policy acquisition costs and administrative expenses		50			1,045			786			(8	)		1,873
Interest expense		(18	)		112			1			13			108
Other (income) expense		(4	)		(14	)		(92	)		—			(110	)
Income tax expense		1			220			69			—			290

Net income	$	1,123		$	327		$	816		$	(1,143	)	$	1,123

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2009

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			ACE Limited Consolidated
Net cash flows from operating activities	$	68		$	730		$	524		$	1,322

Cash flows from (used for) investing activities
Purchases of fixed maturities available for sale		—			(10,445	)		(12,739	)		(23,184	)
Purchases of fixed maturities held to maturity		—			(184	)		—			(184	)
Purchases of equity securities		—			(180	)		(129	)		(309	)
Sales of fixed maturities available for sale		69			8,381			10,781			19,231
Sales of fixed maturities held to maturity		—			—			1			1
Sales of equity securities		—			495			579			1,074
Maturities and redemptions of fixed maturities available for sale		—			757			870			1,627
Maturities and redemptions of fixed maturities held to maturity		—			163			57			220
Net proceeds from the settlement of investment derivatives		—			—			5			5
Other		2			(94	)		(4	)		(96	)

Net cash flows from (used for) investing activities		71			(1,107	)		(579	)		(1,615	)


Cash flows (used for) from financing activities
Dividends paid on Common Shares		(179	)		—			—			(179	)
Proceeds from exercise of options for Common Shares		3			—			—			3
Proceeds from Common Shares issued under ESPP		11			—			—			11
Net proceeds from (repayment of) short-term debt		—			(250	)		—			(250	)
Net proceeds from (repayment of) long-term debt		—			500			—			500
Advances (to) from affiliates		—			1			(1	)		—

Net cash flows (used for) from financing activities		(165	)		251			(1	)		85

Effect of foreign currency rate changes on cash and cash equivalents		—			(8	)		3			(5	)

Net increase (decrease) in cash		(26	)		(134	)		(53	)		(213	)
Cash – beginning of period		(52	)		442			477			867

Cash – end of period	$	(78	)	$	308		$	424		$	654

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2008

(in millions of U.S. dollars)


	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			ACE Limited Consolidated
Net cash flows from (used for) operating activities	$	1,145		$	1,012		$	(75	)	$	2,082

Cash flows used for investing activities
Purchases of fixed maturities available for sale		—			(7,957	)		(15,382	)		(23,339	)
Purchases of fixed maturities held to maturity		—			(203	)		(13	)		(216	)
Purchases of equity securities		—			(251	)		(337	)		(588	)
Sales of fixed maturities available for sale		—			6,848			14,478			21,326
Sales of equity securities		—			439			285			724
Maturities and redemptions of fixed maturities available for sale		—			848			780			1,628
Maturities and redemptions of fixed maturities held to maturity		—			190			72			262
Net proceeds from (payments made on) the settlement of investment derivatives		11			—			(33	)		(22	)
Advances from (to) affiliates		(385	)		—			385			—
Acquisition of subsidiary (net of cash acquired of $19)		—			(2,557	)		—			(2,557	)
Other		(1	)		(152	)		(269	)		(422	)

Net cash flows used for investing activities		(375	)		(2,795	)		(34	)		(3,204	)

Cash flows (used for) from financing activities
Dividends paid on Common Shares		(178	)		—			—			(178	)
Dividends paid on Preferred Shares		(24	)		—			—			(24	)
Net proceeds from (repayment of) short-term debt		(51	)		—			721			670
Net proceeds from issuance of long-term debt		—			1,195			—			1,195
Redemption of Preferred Shares		(575	)		—			—			(575	)
Proceeds from exercise of options for Common Shares		80			—			—			80
Proceeds from Common Shares issued under ESPP		10			—			—			10
Advances from (to) affiliates		—			589			(589	)		—

Net cash flows (used for) from financing activities		(738	)		1,784			132			1,178

Effect of foreign currency rate changes on cash and cash equivalents		—			9			7			16

Net increase (decrease) in cash		32			10			30			72
Cash – beginning of period		—			310			200			510

Cash – end of period	$	32		$	320		$	230		$	582

⁽¹⁾	Includes all other subsidiaries of ACE Limited and intercompany eliminations.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and six months ended June 30, 2009. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K) and in our quarterly report on Form 10-Q for the quarter ended March 31, 2009. In addition, readers should review “Risk Factors” set forth in Item 1A. of Part I of our 2008 Form 10-K, as well as in Item 1A. of Part II of our quarterly report on Form 10-Q for the quarter ended March 31, 2009, and in Item 1A, of Part II of this report.

Other Information

We routinely post important information for investors on our website (www.acelimited.com) under the Investor Relations section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Relations portion of our website, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties, and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties, and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:

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developments in global financial markets, including changes in interest rates, stock markets, and other financial markets, increased government involvement or intervention in the financial services industry, the cost and availability of financing, and foreign currency exchange rate fluctuations, which could affect our statement of operations, investment portfolio, financial position, and financing plans;

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general economic and business conditions resulting from recent declines in the stock markets and tightening of credit and the depth and duration of the current recession;

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losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, or terrorism which could be affected by:

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the number of insureds and ceding companies affected;

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the amount and timing of losses actually incurred and reported by insureds;

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the impact of these losses on our reinsurers and the amount and timing of reinsurance recoverable actually received;

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the cost of building materials and labor to reconstruct properties following a catastrophic event; and

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complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits;

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infection rates and severity of pandemics and their effects on our business operations and claims activity;

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actions that rating agencies may take from time to time, such as financial strength or credit ratings downgrades or placing these ratings on credit watch negative or the equivalent;

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global political conditions, the occurrence of any terrorist attacks, including any nuclear, radiological, biological, or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;

•

the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality, or availability of reinsurance;

•

actual loss experience from insured or reinsured events and the timing of claim payments;

•

the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses and the timing of loss payments;

•

judicial decisions and rulings, new theories of liability, legal tactics, and settlement terms;

•

the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:

•

the capital markets,

•

the markets for directors and officers and errors and omissions insurance, and

•

claims and litigation arising out of such disclosures or practices by other companies;

•

uncertainties relating to governmental, legislative and regulatory policies, developments, actions, investigations and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;

•

the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies;

•

the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections and changes in market conditions that could render our business strategies ineffective or obsolete;

•

acquisitions made by us performing differently than expected, our failure to realize anticipated expense-related efficiencies or growth from acquisitions, or the impact of acquisitions on our pre-existing organization;

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risks associated with our re-domestication to Switzerland, including possible reduced flexibility with respect to certain aspects of capital management and the potential for additional regulatory burdens;

•

the potential impact from government-mandated insurance coverage for acts of terrorism;

•

the availability of borrowings and letters of credit under our credit facilities;

•

the adequacy of collateral supporting funded high deductible programs;

•

changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;

•

material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;

•

the effects of investigations into market practices in the property and casualty (P&C) industry;

•

changing rates of inflation and other economic conditions, for example, recession;

•

the amount of dividends received from subsidiaries;

•

loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;

•

the ability of our technology resources to perform as anticipated; and

•

management’s response to these factors and actual events (including, but not limited to, those described above).

The words “believe,” “anticipate,” “estimate,” “project,” “should,” “plan,” “expect,” “intend,” “hope,”, “feel”, “will likely result,” or “will continue,” and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

ACE Limited is the holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain significant operations in Bermuda. ACE Limited, which is now domiciled in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, the Company, we, us, or our) comprise a global insurance and reinsurance organization, with operating subsidiaries in more than 50 countries serving the needs of commercial and individual customers in more than 140 countries. We serve the P&C insurance needs of businesses of all sizes in a broad range of industries. We also provide specialized insurance products such as personal accident, supplemental health, and life insurance to individuals in select countries. Our reinsurance operations include both P&C and life companies. At June 30, 2009, ACE had total assets of $75.7 billion and shareholders’ equity of $16.6 billion.

Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.

Redomestication to Zurich, Switzerland

In July 2008, our shareholders approved proposals submitted by our Board of Directors to transfer our domicile from the Cayman Islands to Zurich, Switzerland, our new jurisdiction of incorporation (the Continuation). As a result of the Continuation, we are deregistered in the Cayman Islands and are now subject to Swiss law. In connection with the Continuation, we changed the currency in which the par value of our Ordinary Shares was stated from U.S. dollars to Swiss francs. Upon the effectiveness of the Continuation, our Ordinary Shares became Common Shares. All Common Shares are registered shares with a current par value of CHF 32.51 each.

Notwithstanding the change of the currency in which the par value of Common Shares is stated, we continue to use U.S. dollars as our reporting currency for preparing our Consolidated Financial Statements. For the foreseeable future, we expect to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which is not subject to Swiss withholding tax. Refer to “Liquidity and Capital Resources” below for more information, including changes to the process by which we make distributions in the form of par value reductions.

The Combined Insurance Acquisition

On April 1, 2008, ACE acquired all of the outstanding shares of Combined Insurance Company of America (Combined Insurance) and certain of its subsidiaries from Aon Corporation for $2.56 billion. Combined Insurance is an underwriter and distributor of specialty individual accident and supplemental health insurance products targeted to middle-income consumers and small businesses in North America, Europe, Asia Pacific, and Latin America. ACE recorded the Combined Insurance acquisition using the purchase method of accounting. Our consolidated operating results include the results of Combined Insurance from April 1, 2008.

Investment in Assured Guaranty Ltd.

On July 1, 2009, Assured Guaranty Ltd (AGO), a Bermuda-based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance, and mortgage markets, acquired Financial Security Assurance Holdings Ltd. from Dexia Holdings Inc., a subsidiary of Dexia S.A. According to AGO’s public filings, the purchase price included approximately $546 million in cash and approximately 22.3 million AGO common shares. Also, according to AGO’s public filings, AGO financed the cash portion of the purchase price partly through a June 2009 issuance of 38.5 million common shares before the exercise of any overallotment option (June 2009 issuance). Prior to the June 2009 issuance, ACE included its investment in AGO in Investments in partially-owned insurance companies using the equity method of accounting. Effective with the June 2009 issuance, in accordance with the provisions of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB 18), ACE was deemed to no longer exert significant influence over AGO and accounts for the investment in AGO as an available-for-sale equity security in accordance with FAS 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115). FAS 115 requires that ACE carry the AGO investment at fair value with any unrealized gains and losses reflected in other comprehensive income. EITF 08-6, Equity Method Investment Accounting Considerations requires ACE to account for AGO’s June 2009 issuance, and resulting dilutive effect, as if we had sold a proportionate share of the investment. In accordance with EITF 08-6, we recognized a $67 million pre-tax loss in Net realized gains (losses) upon AGO’s June 2009 issuance. As of June 30, 2009, the fair value of our investment in AGO was $237 million and $131 million of unrealized loss on this investment is reflected in other comprehensive income in accordance with FAS 115.

Market Conditions

Overall, pricing across our businesses improved modestly in the quarter ended June 30, 2009, compared with the first quarter of 2009, although premium growth was adversely impacted by a strong U.S. dollar as well as the recession and the general pricing environment. Consistent with the first quarter of 2009, we continued to experience more favorable pricing on reinsurance-related risks compared to insurance-related risks and also more favorable pricing on business sourced through the retail market compared with the wholesale market. Our reinsurance business continued to report growth in the second quarter of 2009, due to better rates, particularly on short-tail exposures, better terms on treaties, given our relative financial strength compared to competitors, and as a result of companies purchasing additional reinsurance for capital relief. With respect to our insurance business, the market continues to improve, although not in all classes. This is a general statement with many exceptions, but the overall trend that started several quarters ago slowly continues. Our renewal retentions declined due to our commitment to maintain underwriting discipline, and recession-related reductions in exposure – consumer, business, and employer-related products – impacting both P&C and A&H. In those areas of our business – generally casualty related – where more than price matters, we are experiencing relatively good growth, particularly in the U.S. Where purchasing decisions are simply based on price, our premium volume is flat or down.

Recession is impacting our revenue with the second quarter of 2009 reporting lower production than the first quarter. Client exposures are down as many buyers may have less ability to pay and are seeking more affordable alternatives such as higher deductibles and less limit. Some clients are willing to place their business with lower-rated, cheaper capacity in a quest to save premium dollars. Exposure reductions impact growth, which is especially evident in workers’ compensation, marine, general liability, environmental, and A&H. With respect to A&H, we are experiencing a slow-down in growth as consumers adjust to less available credit, overall decreased travel, and employers reducing employee benefits including accident insurance. Overall, our A&H business was impacted by both lower new business writings, as well as renewal persistency, which was down modestly. We believe that the impact of recession on our A&H business is transitory and over time as economic growth begins to resume, we expect our business to benefit.

Refer also to “Overview” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2008 Form 10-K.

Fair Value Measurements

We partially adopted the provisions of Financial Accounting Standard No. 157, Fair Value Measurements (FAS 157) on January 1, 2008. We fully adopted FAS 157 effective January 1, 2009. FAS 157 defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified.

The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect our judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

While the Company obtains values for the majority of the investment securities it holds from one or more pricing services, it is ultimately management’s responsibility to determine whether the values obtained and recorded in the financial statements are representative of fair value. We periodically update our understanding of the methodologies used by our pricing services in order to validate that the prices obtained from those services are consistent with FAS 157 valuation principles. Based on our understanding of the methodologies used by our pricing services, all applicable investments have been valued in accordance with FAS 157. We do not typically adjust prices obtained from pricing services.

At June 30, 2009, our Level 3 assets represented approximately four percent of our assets that are measured at fair value and two percent of our total assets. Our Level 3 liabilities represented approximately 14 percent of our liabilities that are measured at fair value and approximately one percent of our total liabilities at June 30, 2009. During the quarter ended June 30, 2009, we transferred $17 million out of our Level 3 total assets at fair value. The following is a description of the valuation measurements used for our financial instruments (Levels 1, 2, and 3) carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

•

Fixed maturities with active markets are classified within Level 1 as fair values are based on quoted market prices. For fixed maturities that trade in less active markets, including most corporate and municipal securities in ACE’s portfolio, fair values are based on the output of “pricing matrix models”, the significant inputs into which include, but are not limited to, yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. These fixed maturities are classified within Level 2. Our pricing methodologies incorporate back-testing of valuation techniques as a standard part of our process. Fixed maturities for which pricing is unobservable are classified within Level 3.

•

Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2. As previously discussed, during the quarter ended June 30, 2009, ACE’s investment in AGO was reclassified from Investments in partially-owned insurance companies to equity securities. The fair value of our investment in AGO is based on a quoted market price and continues to be classified within Level 1.

•

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 approximating par value.

•

The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as our other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to our obligation to return the collateral plus interest.

•

Fair values for other investments, principally other direct equity investments, investment funds, and limited partnerships, are based on the net asset value or financial statements and are included within Level 3. Equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as our other equity securities and fixed maturities.

•

Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies used for equity accounting are classified within Level 3.

•

For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, we obtain quoted market prices to determine fair value. As such, these instruments are included within Level 1. Forward contracts that are not exchange-traded are priced using a pricing matrix model principally employing observable inputs and, as such, are classified within Level 2. Our position in interest rate and swaps is typically classified within Level 3.

•

For guaranteed minimum income benefits (GMIB) reinsurance, we estimate fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of our 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 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 timely information, such as market conditions and demographics of in-force annuities. Based on the quarterly reserve review, no changes were made to actuarial or behavioral assumptions during the quarter ended June 30, 2009. The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is 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. The 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. We view our 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 our net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GMIB reinsurance is classified within Level 3. Refer to “Guaranteed minimum income benefits derivatives” below and “Quantitative and Qualitative Disclosures about Market Risk – Reinsurance of GMIB and GMDB guarantees” under Item 3.

•

Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflects ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. As such, these instruments are classified within Level 2.

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We maintain positions in other derivative instruments including exchange-traded futures contracts and option contracts designed to limit long-term exposure to a severe equity market decline or decrease in interest rates, which would cause an increase in expected claims and, therefore, reserves for guaranteed minimum death benefits (GMDB) and GMIB reinsurance business. The fair value of the majority of our 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.

Note 9 to our Consolidated Financial Statements presents a break-down of our financial instruments carried or disclosed at fair value by valuation hierarchy as well as a roll-forward of Level 3 financial instruments for the three and six months ended June 30, 2009 and 2008.

Guaranteed minimum income benefits derivatives

Under reinsurance programs covering living benefit guarantees, we assume the risk of GMIBs associated with variable annuity contracts. Our GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in net realized gains (losses) in the period of the change pursuant to Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). We believe that the most meaningful presentation of these derivatives is to reflect cash inflows or revenue as net premiums earned, and to record estimates of the average modeled value of future cash outflows as incurred losses. Accordingly, we recognize benefit reserves consistent with AICPA Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-duration Contracts and for Separate Accounts (SOP 03-1). Changes in this reserve are included in life underwriting income. The incremental difference between fair value and SOP 03-1 benefit reserves is reflected in accounts payable, accrued expenses, and other liabilities in the balance sheet and related changes in fair value are reflected in net realized gains (losses) in the consolidated statement of operations. We intend to hold these derivative contracts to maturity (i.e., the expiration of the underlying annuities through lapses, annuitization, or death). At maturity, the cumulative gains and losses will net to zero because, over time, the insurance liability will be increased or decreased to equal our obligation. For a sensitivity discussion of the effect of changes in interest rates, equity indices and other assumptions on the fair value of GMIBs, and the resulting impact on our net income, refer to Item 3. Refer to Note 2 j) to the Consolidated Financial Statements, under Item 8 of our 2008 Form 10-K, for further description of this product and related accounting treatment.

The fair value of GMIB reinsurance is estimated using an internal valuation model which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. 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 timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.

The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is 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. The 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.

Key factors affecting the lapse rate assumption include investment performance and policy duration. We generally assume that lapse rates increase with policy duration with a significant increase in rates after the end of the surrender charge period. As investment performance of underlying fund investments declines, and guarantees become more valuable, lapse rates are anticipated to decrease thereby increasing the expected value of claims on minimum guarantees and thus, benefit reserves and the incremental fair value liability.

Key factors affecting the GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period. As investment performance of underlying fund investments declines, the monthly income available to a policyholder who annuitizes their account value falls; this makes the GMIB more valuable. As the GMIB becomes more valuable, our modeling assumes that annuitization rates will increase, resulting in higher benefit reserves and fair value liability. The same is true in an environment where long-term interest rates are decreasing.

Based on our quarterly reserve review, no changes were made to actuarial or behavioral assumptions.

During the three and six months ended June 30, 2009, we recorded $284 million and $283 million of realized gains, respectively for GMIB reinsurance. This excludes realized losses of $181 million and $156 million, respectively on derivative instruments held to partially offset the risk in the variable annuity guarantee reinsurance portfolio. The realized gains for the three and six months ended June 30, 2009, of $284 million and $283 million, respectively were due to a rising equity market, increased interest rate levels, and decreased interest rate volatilities. These derivatives do not receive hedge accounting treatment. Refer to “Net Realized Gains (Losses)” for a breakdown of the realized gains on GMIB reinsurance and the realized losses on the derivatives for the quarters ended June 30, 2009 and 2008.

ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of variable annuity guarantees. Risk management begins with underwriting a prospective client and guarantee design, with particular focus on protecting ACE’s position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.

A second layer of risk management is the structure of the reinsurance contracts. All variable annuity guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The exact limits vary by contract but some examples of typical contract provisions include:

•

Annual claim limits, as a percentage of reinsured account or guaranteed value, for GMDBs and GMIBs; and

•

Annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs.

A third layer of risk management is the hedging strategy which is focused on mitigating long-term economic losses at a portfolio level. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value of $157 million and $280 million at June 30, 2009, and December 31, 2008, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.

We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. ACE Tempest Life Re did not quote on new or renewal variable annuity transactions in 2008 or the first half of 2009, and the aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.

Note that GMIB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The vast majority of policies we reinsure reach the end of their “waiting periods” in 2013 or later, as shown in the table below.


Year of first annuitization eligibility	Percent of living account values
2009 and prior	1	%
2010	<1	%
2011	<1	%
2012	7	%
2013	26	%
2014	20	%
2015	6	%
2016	6	%
2017	17	%
2018 and after	17	%

Total	100	%

The following table provides the historical cash flows under these policies for the periods indicated.


	Three Months Ended June 30					Six Months Ended June 30
	2009			2008		2009			2008
	(in millions of U.S. dollars)
Death Benefits (GMDB)
Premium	$	26		$	32	$	51		$	64
Less paid claims		43			9		88			16

Net	$	(17	)	$	23	$	(37	)	$	48


Living Benefits (Includes GMIB and GMAB)
Premium	$	39		$	37	$	79		$	70
Less paid claims		1			—		2			—

Net	$	38		$	37	$	77		$	70


Total VA Guaranteed Benefits
Premium	$	65		$	69	$	130		$	134
Less paid claims		44			9		90			16

Net	$	21		$	60	$	40		$	118

The amounts represent accrued past premium received and claims paid, split by benefit type.

Death Benefits (GMDB)

For premiums and claims from variable annuity contracts reinsuring GMDBs, using our current mortality assumptions we expect approximately $166 million of claims and $93 million of premium on death benefits over the next 12 months.

Living Benefits (Includes GMIB and GMAB)

Premiums and claims from variable annuity contracts reinsuring predominantly GMIBs and Guaranteed Minimum Accumulation Benefits (GMAB) are collectively known as Living Benefits. Substantially all of our living benefit reinsurance clients’ policyholders are currently ineligible to trigger a claim payment. The vast

majority of these policyholders begin to become eligible in 2013. Using our current assumptions, we expect approximately $3 million of claims and $150 million of premium on living benefits over the next 12 months.

Capital

As of June 30, 2009, the capital required to support the variable annuity guaranty business was approximately $440 million. All else being equal, any additional capital required as a result of a falling equity market would be approximately offset by the increase in the fair value of currently held hedge assets.

Collateral

In order for its U.S.-domiciled clients to obtain statutory reserve credit, ACE Tempest Life Re holds collateral on behalf of its clients in the form of qualified assets in trust or letters of credit, equal to their ceded statutory reserves. ACE Tempest Life Re maintains sufficient qualified assets to meet its funding requirements regardless of the level of the Standard and Poor’s (S&P) 500 index. The timing and amount of the calculation of the collateral varies by client according to the particulars of the reinsurance treaty and the statutory reserve guidelines of the client’s state of domicile.

Claim limits

Approximately 60 percent of the GMDB guaranteed value has an annual claim limit expressed as two percent of the total account value reinsured. The remainder of the GMDB guaranteed value is covered under treaties with limits calculated on other bases – either annual, aggregate, or at an individual policy level. The majority of this remainder has an annual limit calculated as a percentage of the total guaranteed value reinsured, with the percentage varying by contract from 0.22 percent to 1.8 percent.

Consolidated Operating Results – Three and Six Months Ended June 30, 2009 and 2008

Our consolidated operating results include the results of Combined Insurance from April 1, 2008.


	Three Months Ended June 30						Six Months Ended June 30						% change
	2009			2008			2009			2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Net premiums written	$	3,415		$	3,598		$	6,839		$	6,752		(5	)%	1	%
Net premiums earned		3,266			3,428			6,460			6,368		(5	)%	1	%
Net investment income		506			532			1,008			1,021		(5	)%	(1	)%
Net realized gains (losses)		(225	)		(126	)		(346	)		(479	)	79	%	(28	)%

Total revenues	$	3,547		$	3,834		$	7,122		$	6,910		(7	)%	3	%


Losses and loss expenses		1,821			1,895			3,637			3,474		(4	)%	5	%
Policy benefits		78			89			177			152		(12	)%	16	%
Policy acquisition costs		523			569			1,004			1,037		(8	)%	(3	)%
Administrative expenses		454			461			874			836		(2	)%	5	%
Interest expense		56			62			109			108		(10	)%	1	%
Other (income) expense		(21	)		(125	)		(7	)		(110	)	(83	)%	(94	)%

Total expenses	$	2,911		$	2,951		$	5,794		$	5,497		(1	)%	5	%


Income before income tax		636			883			1,328			1,413		(28	)%	(6	)%
Income tax expense		101			137			226			290		(26	)%	(22	)%

Net income	$	535		$	746		$	1,102		$	1,123		(28	)%	(2	)%

Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, decreased in the quarter ended June 30, 2009, compared with the prior year quarter. This decrease was primarily due to declines in production at our U.S.-based wholesale division and unfavorable foreign exchange impact in our international operations, partially offset by growth in our reinsurance business and increased assumed loss portfolio business. For the quarter ended June 30, 2009, the increase in assumed loss portfolio business added two percentage points to our net premiums earned. For the six months ended June 30, 2009, the first quarter 2009 declines were more than offset by the inclusion of Combined Insurance for the full period (the prior year period included the results of Combined Insurance from April 1, 2008) as well as the annual first quarter crop settlement and growth in assumed loss portfolio business. The inclusion of Combined Insurance added four percentage points to our net premiums written for the six months ended June 30, 2009, and the crop settlement added two percentage points. With respect to our crop insurance during the first quarter of each calendar year, our managing general agent (MGA) reports to us the final results from the previous crop year. Typically, this results in an adjustment to the previously estimated net premiums earned, losses and loss expenses, and profit share commission which impacts our policy acquisition costs.

The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30				% change
	2009		2008		2009		2008		Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Property and all other	$	998	$	959	$	1,981	$	1,840	4	%	8	%
Casualty		1,372		1,474		2,739		2,972	(7	)%	(8	)%

Subtotal	$	2,370	$	2,433	$	4,720	$	4,812	(3	)%	(2	)%
Personal accident (A&H)		766		875		1,486		1,336	(12	)%	11	%
Life		130		120		254		220	8	%	15	%

Net premiums earned	$	3,266	$	3,428	$	6,460	$	6,368	(5	)%	1	%


	Three Months Ended June 30				Six Months Ended June 30
	2009 % of total		2008 % of total		2009 % of total		2008 % of total
Property and all other	31	%	28	%	31	%	29	%
Casualty	42	%	43	%	42	%	46	%

Subtotal	73	%	71	%	73	%	75	%
Personal accident (A&H)	23	%	25	%	23	%	21	%
Life	4	%	4	%	4	%	4	%

Net premiums earned	100	%	100	%	100	%	100	%

Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure period expires. The decrease in net premiums earned for the quarter ended June 30, 2009, compared with the prior year quarter, was primarily related to unfavorable foreign exchange impact in our international retail operations, partially offset by an increase in assumed loss portfolio business. For the six months ended June 30, 2009, net premiums earned increased, compared with the prior year period, primarily due to the inclusion of Combined Insurance’s results for the full period, as well as the impact of the 2008 crop-year settlement and the growth in assumed loss portfolio business. Excluding Combined Insurance and the 2008 crop-year settlement, net premiums earned decreased six percentage points in the six months ended June 30, 2009.

Net investment income decreased in the three and six months ended June 30, 2009, compared with the prior year periods. Net investment income was adversely impacted because we increased cash and short-term investments relative to debt and equity securities during the fourth quarter of 2008 and first quarter of 2009 and due to unfavorable foreign exchange rate movements during the six months ended June 30, 2009. Refer to “Net Investment Income” and “Investments”.

In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.

The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, excluding Life, for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
Loss and loss expense ratio	58.2	%	58.5	%	58.9	%	57.1	%
Policy acquisition cost ratio	16.1	%	16.5	%	15.7	%	16.3	%
Administrative expense ratio	13.4	%	12.8	%	13.0	%	12.8	%

Combined ratio	87.7	%	87.8	%	87.6	%	86.2	%

The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, all excluding the impact of the 2008 and 2007 crop-year settlements for the periods indicated.


	Six Months Ended June 30
	2009		2008
Loss and loss expense ratio	58.4	%	58.8	%
Policy acquisition cost ratio	15.9	%	15.6	%
Administrative expense ratio	13.4	%	12.8	%

Combined ratio	87.7	%	87.2	%

The following table shows the impact of catastrophe losses, prior period development, and other significant events on our consolidated loss and loss expense ratio for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
Loss and loss expense ratio, as reported	58.2	%	58.5	%	58.9	%	57.1	%
Catastrophe losses	(1.0	)%	(1.9	)%	(1.2	)%	(1.5	)%
Prior period development excluding crop/hail results	5.4	%	3.4	%	3.8	%	3.1	%
Prior period development crop/hail related	—	%	—	%	0.1	%	1.7	%

Loss and loss expense ratio, adjusted	62.6	%	60.0	%	61.6	%	60.4	%

We recorded $31 million and $69 million in net catastrophe losses in the three and six months ended June 30, 2009, respectively, compared with $58 million and $89 million in the prior year periods, respectively. The catastrophe losses for the three and six months ended June 30, 2009, were primarily related to several weather-related events

across the southern and mid-western region of the United States and a European windstorm. For the three and six months ended June 30, 2008, our catastrophe losses were primarily related to floods in the U.S. 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 premium from previous accident years. We experienced $158 million and $226 million of net favorable prior period development in the three and six months ended June 30, 2009, respectively. This compares with net favorable prior period development of $104 million and $285 million in the three and six months ended June 30, 2008, respectively. The favorable prior period development was the net result of several underlying favorable and adverse movements. Refer to “Prior Period Development” for more information. The remaining increase in our loss and loss expense ratio, adjusted, for the quarter ended June 30, 2009, relates primarily to the increase in assumed loss portfolio business which added approximately 1.3 percentage points to our loss and loss expense ratio.

Our policy acquisition costs include commissions, premium taxes, underwriting, and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to the impact of the final settlement of 2008 crop-year results. Excluding this impact, the growth of our A&H business has increased our policy acquisition cost ratio. A&H business typically requires higher commission rates than traditional P&C business. Our administrative expenses declined in the quarter ended June 30, 2009, compared to the prior year quarter, primarily due to improvements in our international retail division. Our administrative expenses increased in the six months ended June 30, 2009, compared with the prior year period, primarily due to the inclusion of administrative expenses related to Combined Insurance for the full period.

Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective tax rate was 16 percent and 17 percent in the three and six months ended June 30, 2009, compared with 15 percent and 20 percent in the prior year periods. For the prior year quarter, our effective tax rate was adversely impacted by large realized losses on investments and derivatives and also due to a higher proportion of our income before income tax being generated in higher tax-paying jurisdictions.

Prior Period Development

The favorable prior period development of $158 million and $104 million during the quarters ended June 30, 2009 and 2008, respectively, was the net result of several underlying favorable and adverse movements. In the sections following the table below, significant prior period movements within each reporting segment by claim-tail attribute are discussed in more detail. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability, while short-tail lines include lines such as most property lines, energy, personal accident, aviation, and marine.

The following table summarizes prior period development, (favorable) and adverse, by segment and claim-tail attribute for the periods indicated.


Three months ended June 30:	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2009
Insurance – North American	$	(56	)	$	(18	)	$	(74	)	0.5	%
Insurance – Overseas General		(3	)		(23	)		(26	)	0.4	%
Global Reinsurance		(44	)		(14	)		(58	)	2.4	%
Life		—			—			—		0.2	%

Total	$	(103	)	$	(55	)	$	(158	)	0.7	%

2008
Insurance – North American	$	7		$	(30	)	$	(23	)	0.2	%
Insurance – Overseas General		(39	)		(15	)		(54	)	0.8	%
Global Reinsurance		(3	)		(24	)		(27	)	1.0	%

Total	$	(35	)	$	(69	)	$	(104	)	0.4	%

*	Calculated based on the segment beginning of period net unpaid loss and loss expense reserves.


Six months ended June 30:	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2009
Insurance – North American	$	(37	)	$	(47	)	$	(84	)	0.5	%
Insurance – Overseas General		(3	)		(47	)		(50	)	0.8	%
Global Reinsurance		(53	)		(39	)		(92	)	3.6	%
Life		—			1			1		0.3	%

Total	$	(93	)	$	(132	)	$	(225	)	0.9	%

2008
Insurance – North American	$	13		$	(159	)	$	(146	)	1.0	%
Insurance – Overseas General		(42	)		(56	)		(98	)	1.5	%
Global Reinsurance		(4	)		(37	)		(41	)	1.5	%

Total	$	(33	)	$	(252	)	$	(285	)	1.2	%

*	Calculated based on the segment beginning of period net unpaid loss and loss expense reserves.

Insurance – North American

Insurance – North American experienced net favorable prior period development of $74 million in the quarter ended June 30, 2009, compared with net favorable prior period development of $23 million in the prior year quarter. The net prior period development for the quarter ended June 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $56 million on long-tail business including:

•

Favorable development of $52 million in our national accounts loss sensitive accounts unit impacting the 2005-2007 accident years. This development represents the reduction in premium based loss reserves that resulted from a $96 million reduction in our estimate of retrospectively rated premiums for the 2004-2007 policy years due to a refinement in our estimation process. The change

in estimate of retrospectively rated premiums was triggered by a ground-up, policy level review conducted by ACE during the quarter ended June 30, 2009. The policy level review relies on more disaggregated policy data than our prior estimation process.

•

Adverse development of $12 million primarily in our national accounts workers’ compensation portfolios which is net of adverse development of $53 million affecting the 2005 and prior accident years and favorable development of $41 million affecting the 2008 accident year. The favorable development in the 2008 accident year is a function of our annual review of multi-claimant events, including industrial accidents. Consistent with prior years, we review these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses given that the majority of the business is excess of a high deductible or self-insured retention. Our assessment in the quarter ended June 30, 2009, of the 2008 events has led to a decrease in our estimate of the required provision for these claims. The adverse development in the 2005 and prior accident years was attributable to three primary causes. First, approximately half of the $53 million in adverse development was due to a change in our loss development factors. Annually, we review paid and incurred loss development factors by state to update our pricing model assumptions. The 2009 review completed in the quarter ended June 30, 2009, indicated an increase in our benchmark factors for our excess workers’ compensation exposures. Second, we completed a review of our accruals for unregistered audit premium in the quarter which indicated a $90 million understatement of accrued premiums for the 2004 and subsequent policy years. When these higher premiums were reflected in our reserve study, ultimate losses for the 2005 and prior accident years increased by $8 million. Third, higher than expected large loss development on a few large claim movements resulted in an increase in our estimates of ultimate losses of $12 million.

•

In addition to the national accounts development, there was favorable development of $8 million in our wholesale professional lines portfolios impacting the 2005 and prior accident years. Actual paid and incurred loss activity was lower than expected since the prior review for these accident years.

•

Net favorable development of $18 million on short-tail business including:

•

Favorable development of $15 million on property business comprised of the settlement of a claim for the 1997 accident year and, separately, favorable loss development and emergence on the 2008 accident year.

•

Favorable development of $7 million in our general aviation business affecting the 2005 and prior accident years, reflecting lower than expected actual loss development in general aviation liability since the last reserve analysis.

•

Adverse development of $6 million in inland marine driven by unexpected loss emergence across a number of accident years.

The net prior period development for the quarter ended June 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:

•

Net adverse development of $7 million on long-tail business including:

•

Adverse development of $15 million in our national accounts workers’ compensation portfolios comprised of two items of significance. First, favorable development of $47 million arising on accident year 2007, due to the absence of multi-claimant events such as industrial accidents. The majority of our exposure for these perils fall under our national accounts high deductible and excess product lines. We evaluate this exposure on an annual basis, after the accident year has closed, allowing for the late reporting or identification of significant losses and for an initial assessment of the accident year. Our review in 2008 of potential 2007 events, coupled with our initial assessment of the accident year led to a decrease in our estimate of the required provision for these claims. Second, adverse development of $62 million relating to 2003 and prior accident years. This development was the direct result of reported loss activity greater than expected in our prior review.

During 2008, a targeted open case reserve review was conducted by our claims staff. This review identified a relatively small number of large case reserve revisions primarily due to increased medical costs and lengthened life expectancies which contributed to our change in estimates.

•

Favorable development of $19 million in our national accounts commercial auto and general liability product lines impacting accident years 2003 and prior. The exposures affected were written on an excess basis. The combination of continued lower than expected reported incurred loss activity for the 2001-2003 accident years as well as increased weight on loss development reserving methods as these years mature has driven the majority of the improvement in projected ultimate losses.

•

Adverse development of $9 million on a run-off portfolio of assumed reinsurance impacting the 1998-2000 accident years. The change was largely attributable to bordereaux received during the quarter ended June 30, 2008, on a single cedant that was in liquidation.

•

Favorable development of $17 million on a run-off portfolio of fronted programs impacting the 2001 and prior accident years. During the quarter ended June 30, 2008, an account reconciliation was completed on the programs from the date of inception. It was determined that a combination of duplicate loss processing and unregistered reinsurance recoveries on paid losses led to an overstatement of the required reserves for this product line in prior quarters.

•

Adverse development of $29 million on a portfolio of primary casualty business written by our wholesale unit impacting the 2002-2004 accident years. This adverse activity was a function of higher than expected loss and allocated expenses on business that has a heavy concentration of exposure to commercial contractors. In the few quarters prior to the quarter ended June 30, 2008, both paid and incurred development patterns for the tail period beyond 60 months developed worse than industry benchmark factors which formed the basis for our projections in prior analyses.

•

Favorable development of $19 million on excess casualty and umbrella business in our wholesale unit primarily impacting accident years 2002-2004. This favorable activity was a function of a shift in weighting from expected loss based reserving methods to direct projections of ultimate losses as this long tailed exposure began to mature for these accident periods.

•

Adverse development of $10 million on a professional lines claim in accident year 2001 as a result of a review in the quarter ended June 30, 2008, that identified significant erosion below our attachment.

•

Net favorable development of $30 million on short-tail business including:

•

Favorable development of $11 million on crop/hail business relating to the recording of the April 2008 bordereau largely impacting the 2007 accident year.

•

Favorable settlements of $15 million on property claims mainly in accident years 2005-2007 as a result of favorable claims experience. A review of all open claims was performed during the quarter ended June 30, 2008, which concluded that actual experience to date had been more favorable than the assumptions used to establish the reserves for the open claims.

Insurance – Overseas General

Insurance – Overseas General experienced net favorable prior period development of $26 million in the quarter ended June 30, 2009, compared with net favorable prior period development of $54 million in the prior year quarter. The net prior period development for the quarter ended June 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $3 million on long-tail business based on reserve studies completed during the quarter ended June 30, 2009, none of which were significant.

•

Net favorable development of $23 million on short-tail business including:

•

Favorable development of $20 million in A&H lines following lower than expected loss development in most geographic areas. This development was spread across accident years 2003-2008 and mostly in the direct marketing book.

•

Favorable development of $9 million in the property and energy lines of business, predominantly from the European region. Specific case reserve reductions on previously reported claims and lower than anticipated development on other claims led to a release of prior year reserves, mainly in accident years 2006 and prior.

•

Adverse development of $5 million in the marine line. There were case specific increases in the quarter ended June 30, 2009, on several large claims that necessitated increases in accident years 2007 and 2008.

The net prior period development for the quarter ended June 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:

•

Net favorable development of $39 million on long-tail business including:

•

Favorable development of $38 million primarily in our primary and miscellaneous casualty books mainly in accident years 2005 and prior. Continued lower than expected reported incurred loss activity for these accident years has driven the majority of the improvement in projected ultimate losses.

•

Net favorable development of $15 million on short-tail business including:

•

Net favorable prior period development of $21 million comprised of $27 million favorable development on short-tail property, fire, tech, and marine lines primarily in accident years 2005-2007 in Europe, offset by $6 million adverse development on property claims mainly in years 2006 and 2007. This net favorable development was driven by lower frequency and severity of late reported claims than anticipated in the previous reserve review. The length of the payment and reporting patterns for the short-tail property, fire, and marine lines is such that a credible adjustment to the prior accident year can be made six months after the end of the prior year based on actual claim emergence.

•

Adverse prior period development of $17 million in aviation, primarily in accident years 2004-2007, impacting the products liability and airport liability portfolios. This adverse prior period development was largely driven by upwards revisions to case reserving assumptions on several claims following notifications received during the quarter ended June 30, 2008.

•

Favorable prior period development of $18 million in A&H, primarily in accident years 2005-2007, in Europe. This favorable prior period development was driven by better than expected loss experience relative to prior reserving assumptions. The favorable experience arose in direct marketing and group A&H businesses across several countries with no particular underlying trend identifiable.

•

Adverse prior period development of $6 million in marine, primarily following an adverse court ruling during the quarter ended June 30, 2008, on a claim arising on a policy written in 2001.

Global Reinsurance

Global Reinsurance experienced net favorable prior period development of $58 million in the quarter ended June 30, 2009, compared with $27 million of net favorable prior period development in the prior year quarter. The net prior period development for the quarter ended June 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $44 million on long-tail business including:

•

Favorable development of $24 million in the casualty and automobile lines of business principally in treaty years 2005 and prior and favorable development of $20 million in the D&O line of

business primarily in treaty years 2002-2005. These developments were the result of reserve studies on these lines of business completed during the quarter ended June 30, 2009. Following a comparison of our existing patterns with emerging loss experience, we subsequently adjusted our patterns to reflect more of our own data which resulted in the lengthening of patterns for certain D&O and casualty classes while we shortened the patterns for auto. Further, this increased reliance on our own experience was also reflected in a greater weighting towards experience-based methods. Since experience has tended to be relatively favorable compared with assumptions, the changes resulted in the favorable development referenced above.

•

Net favorable development of $14 million on short-tail business including:

•

Favorable development of $5 million as a result of a court ruling during the quarter ended June 30, 2009, for one large claim in treaty year 2005 primarily in the property line of business. The remaining favorable development of $9 million was across several lines and treaty years, as a result of a variety of causes.

The net prior period development for the quarter ended June 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:

•

Net favorable development of $3 million on long-tail business across many lines and years. The larger movements include:

•

Adverse development of $4 million for U.S. professional liability/D&O resulting from an increase in reserves due to sub-prime losses.

•

Favorable development of $4 million for workers’ compensation catastrophe business mainly in accident years 2003-2005. For workers’ compensation catastrophe business, a review of the remaining open claims was performed by the actuarial department in conjunction with the claims department. The conclusions of that review recommended the release of reserves.

•

Net favorable development of $24 million on short-tail business including:

•

Favorable prior period development of $12 million for trade credit business in accident years 2004 and prior. The release was the result of an exposure study that was concluded in second quarter of 2008 and continued favorable loss emergence.

•

Favorable prior period development of $4 million for property business in accident years 2003-2007. The reserve release reflects continued favorable development in the quarter ended June 30, 2008, on the underlying book of reserves and the short-tail nature of the line.

•

Net favorable development of $8 million, primarily driven by $3 million favorable development from aviation exposures across accident years 2004-2007. The release was driven by lower than expected frequency of claims relative to the reserving assumptions.

Life

Life incurred favorable net prior period development of less than $0.5 million in the quarter ended June 30, 2009, compared with no prior period development in the prior year quarter. The net prior period development for the quarter ended June 30, 2009, was all in the short-tail line of A&H primarily in the 2005 and 2007 accident years.

Segment Operating Results – Three and Six Months Ended June 30, 2009 and 2008

The discussions that follow include tables that show our segment operating results for the three and six months ended June 30, 2009 and 2008.

We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. As discussed previously, we completed the acquisition of all of the outstanding shares of Combined Insurance and certain of its subsidiaries on April 1, 2008. As such, our segment

operating results include the results of the acquired Combined Insurance business from April 1, 2008. Results from Combined Insurance’s North American operations are included in ACE’s Life segment as the products are similar to those in our existing life operations. The results from Combined Insurance’s international operations are included in ACE’s Insurance – Overseas General segment as the products have similar economic characteristics to the existing products in this segment and are distributed outside of the North American insurance markets. For more information on each of our segments refer to “Segment Information” in our 2008 Form 10-K.

Insurance – North American

The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes our retail division ACE USA (including ACE Canada), ACE Westchester which is our wholesale division in the U.S., ACE Bermuda, ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine Holdings).


	Three Months Ended June 30						Six Months Ended June 30						% change
	2009			2008			2009			2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)

Net premiums written	$	1,454		$	1,511		$	2,846		$	2,871		(4	)%	(1	)%
Net premiums earned		1,415			1,365			2,852			2,719		4	%	5	%
Losses and loss expenses		997			962			2,001			1,831		4	%	9	%
Policy acquisition costs		129			129			252			290		—	%	(13	)%
Administrative expenses		147			131			287			266		12	%	8	%

Underwriting income	$	142		$	143		$	312		$	332		(1	)%	(6	)%


Net investment income		275			282			538			551		(2	)%	(2	)%
Net realized gains (losses)		(97	)		(105	)		(217	)		(166	)	(8	)%	31	%
Other (income) expense		1			3			5			3		(67	)%	67	%
Income tax expense		76			106			172			229		(28	)%	(25	)%

Net income	$	243		$	211		$	456		$	485		15	%	(6	)%


Loss and loss expense ratio		70.5	%		70.5	%		70.2	%		67.3	%
Policy acquisition cost ratio		9.1	%		9.5	%		8.8	%		10.7	%
Administrative expense ratio		10.4	%		9.5	%		10.1	%		9.8	%

Combined ratio		90.0	%		89.5	%		89.1	%		87.8	%

Net premiums written for the Insurance – North American segment decreased in the three and six months ended June 30, 2009, compared with the prior year periods. Our wholesale and national accounts businesses continue to decline due to economic conditions resulting in insureds’ purchasing less coverage. Our retail operations have experienced growth in specialty casualty and professional lines, reflecting a favorable rate environment in these lines, as well as new product offerings and expanded opportunities to participate in desirable lower layers of certain casualty programs. For the quarter ended June 30, 2009, the decrease in net premiums written was primarily a result of production declines in our wholesale division, which experienced lower production in professional lines, casualty, property, and inland marine. Our retail division experienced stable net premiums written in the quarter ended June 30, 2009, reporting growth in specialty casualty and professional lines, as well as an increase in assumed loss portfolio business. These increases in our retail operations were partially offset by lower workers’ compensation business within national accounts, as well as, declines in the property divisions and unfavorable foreign exchange impact from our Canadian operations. For the six months ended June 30, 2009, the decrease was primarily due to the decline in wholesale professional lines, casualty, and property lines as well as

lower retail property production and unfavorable foreign exchange impact from our Canadian operations. In addition, the first quarter of 2008, included a one-time portfolio assumption of $76 million in net premiums written as part of our acquisition of our personal lines business. The declines in the first half of 2009, were partially offset by the annual first quarter crop settlement and growth in assumed loss portfolio business, as well as the second quarter 2009 increases in specialty casualty and professional lines. With respect to the annual first quarter crop settlement, during the first quarter of each calendar year, we receive the results from the previous crop year which typically results in adjustments to previously estimated premiums, losses and loss expenses, and profit share commission (which impacts policy acquisition costs). For the six months ended June 30, 2009, the 2008 crop-year settlement increased net premiums written by approximately five percentage points.

The following two tables provide a line of business breakdown of Insurance – North American’s net premiums earned for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30				% change
	2009		2008		2009		2008		Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)

Property and all other	$	448	$	357	$	865	$	663	25	%	30	%
Casualty		902		946		1,862		1,934	(5	)%	(4	)%
Personal accident (A&H)		65		62		125		122	5	%	2	%

Net premiums earned	$	1,415	$	1,365	$	2,852	$	2,719	4	%	5	%


	Three Months Ended June 30				Six Months Ended June 30
	2009 % of total		2008 % of total		2009 % of total		2008 % of total
Property and all other	32	%	26	%	30	%	24	%
Casualty	63	%	69	%	65	%	71	%
Personal accident (A&H)	5	%	5	%	5	%	5	%

Net premiums earned	100	%	100	%	100	%	100	%

Insurance – North American’s increase in net premiums earned for the quarter ended June 30, 2009, compared with the prior year quarter, was primarily due to earnings in our retail operations on assumed loss portfolio business, as well as, strong production in specialty casualty and professional lines. Additionally, the quarter ended June 30, 2008, was negatively impacted by premium adjustments reflecting better than expected loss experience for several loss sensitive programs. For the quarter ended June 30, 2009, our wholesale operation reported a decline in net premiums earned as a result of lower production in its casualty, professional, and property lines over the past few quarters. Lower retail national account and small workers’ compensation business, as well as, an unfavorable foreign exchange impact in our Canadian operation also partially offset growth in net premiums earned. The increase for the six months ended June 30, 2009, compared with the prior year period, primarily follows the trends in the second quarter of 2009, in addition to the 2008 crop-year settlement which added five percentage points to net premiums earned.

The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
Loss and loss expense ratio, as reported	70.5	%	70.5	%	70.2	%	67.3	%
Catastrophe losses	(1.4	)%	(1.6	)%	(0.8	)%	(1.3	)%
Prior period development excluding crop/hail results	5.2	%	1.7	%	2.7	%	1.5	%
Prior period development crop/hail related	—	%	—	%	0.2	%	3.9	%

Loss and loss expense ratio, adjusted	74.3	%	70.6	%	72.3	%	71.4	%

The following table shows our loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, all excluding the impact of the 2008 and 2007 crop-year settlement for the periods indicated.


	Six Months Ended June 30
	2009		2008

Loss and loss expense ratio	69.8	%	71.2	%
Policy acquisition cost ratio	8.9	%	9.0	%
Administrative expense ratio	10.6	%	9.8	%

Combined ratio	89.3	%	90.0	%

Insurance – North American’s net catastrophe losses were $20 million and $24 million in the three and six months ended June 30, 2009, compared with $22 million and $37 million in the prior year periods. The catastrophe losses for the three and six months ended June 30, 2009, were primarily related to several weather-related events across the southern and mid-western regions of the United States. Insurance – North American experienced net favorable prior period development of $74 million and $84 million in the three and six months ended June 30, 2009. This compares with net favorable prior period development of $23 million and $146 million in the prior year periods. Refer to “Prior Period Development” for more information. The increase in our loss and loss expense ratio, adjusted, for the quarter ended June 30, 2009, relates primarily to the increase in assumed loss portfolio business which added approximately two percentage points to Insurance – North American’s loss and loss expense ratio.

Insurance – North American’s policy acquisition cost ratio decreased in the quarter ended June 30, 2009, compared with the prior year quarter, primarily due to the impact of the assumed loss portfolio business which generates lower acquisition costs compared to other types of business. For the six months ended June 30, 2009, the decrease in the policy acquisition cost ratio, compared with the prior year period, was primarily due to the impact of the assumed loss portfolio business, as well as, the final settlement of 2008 crop year results. Insurance – North American’s administrative expense ratio increased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to higher administrative expenses in our retail division, partially offset by the favorable impact of the assumed loss portfolio business which generates lower administrative expenses relative to other types of business. For the six months ended June 30, 2009, the increase in administrative expenses was also partially offset by the favorable impact of the first quarter crop settlement which increased net premiums earned without generating additional administrative expenses. Excluding the favorable impact of the crop settlement and assumed loss portfolio transfers, the administrative expense ratio increased for the three and six months ended June 30, 2009, compared with the prior year periods. These increases primarily reflected an increase in spending to support new business growth and new product expansion in certain businesses, as well as, stable administrative expenses associated with mature businesses that are currently experiencing declining premiums due to market conditions.

Insurance – Overseas General

The Insurance – Overseas General segment consists of ACE International, which comprises our network of indigenous retail insurance operations; the wholesale insurance operations of ACE Global Markets, our London market underwriting unit including Lloyd’s Syndicate 2488; and the international A&H and life business of Combined Insurance. This segment has four regions of operations: ACE European Group, which is comprised of ACE Europe and ACE Global Markets branded business, ACE Asia Pacific, ACE Far East, and ACE Latin America. Combined Insurance distributes specialty individual accident and supplemental health insurance products targeted to middle income consumers in Europe, Asia Pacific, and Latin America. The following results include Combined Insurance from April 1, 2008.


	Three Months Ended June 30						Six Months Ended June 30						% change
	2009			2008			2009			2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)

Net premiums written	$	1,265		$	1,443		$	2,592		$	2,788		(12	)%	(7	)%
Net premiums earned		1,246			1,439			2,430			2,662		(13	)%	(9	)%
Losses and loss expenses		635			715			1,248			1,308		(11	)%	(5	)%
Policy benefits		1			5			3			5		(80	)%	(40	)%
Policy acquisition costs		293			323			553			568		(9	)%	(3	)%
Administrative expenses		190			208			365			381		(9	)%	(4	)%

Underwriting income	$	127		$	188		$	261		$	400		(32	)%	(35	)%


Net investment income		114			134			234			251		(15	)%	(7	)%
Net realized gains (losses)		(87	)		(58	)		(80	)		(141	)	50	%	(43	)%
Other (income) expense		5			(17	)		9			(20	)	(129	)%	(145	)%
Income tax expense		29			38			75			85		(24	)%	(12	)%

Net income	$	120		$	243		$	331		$	445		(51	)%	(26	)%


Loss and loss expense ratio		51.0	%		50.0	%		51.5	%		49.3	%
Policy acquisition cost ratio		23.6	%		22.4	%		22.8	%		21.3	%
Administrative expense ratio		15.2	%		14.5	%		15.0	%		14.3	%

Combined ratio		89.8	%		86.9	%		89.3	%		84.9	%

Insurance – Overseas General’s net premiums written decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to the continued strengthening of the U.S. dollar relative to major currencies. Refer to the table below for the impact of foreign exchange on net premiums written and earned. On a constant dollar basis, our international retail operations experienced P&C growth, mainly in professional lines and casualty, in Europe and Latin America and reported increased A&H business in Latin America and Asia Pacific. In addition to the unfavorable foreign exchange impact, our London market unit, reported lower constant dollar production within most product lines, with political risk and A&H showing modest growth.

The following two tables provide a line of business and regional breakdown of Insurance – Overseas General’s net premiums earned for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30				% change
	2009		2008		2009		2008		Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)

Line of Business
Property and all other	$	422	$	470	$	842	$	920	(10	)%	(8	)%
Casualty		357		403		672		775	(11	)%	(13	)%
Personal accident (A&H)		467		566		916		967	(17	)%	(5	)%

Net premiums earned	$	1,246	$	1,439	$	2,430	$	2,662	(13	)%	(9	)%


Region
Europe	$	564	$	677	$	1,095	$	1,190	(17	)%	(8	)%
Asia Pacific		187		216		363		394	(13	)%	(8	)%
Far East		105		105		219		205	—	%	7	%
Latin America		186		201		354		394	(7	)%	(10	)%

		1,042		1,199		2,031		2,183	(13	)%	(7	)%
ACE Global Markets		204		240		399		479	(15	)%	(17	)%

Net premiums earned	$	1,246	$	1,439	$	2,430	$	2,662	(13	)%	(9	)%


	Three Months Ended June 30				Six Months Ended June 30
	2009 % of total		2008 % of total		2009 % of total		2008 % of total

Line of Business
Property and all other	34	%	33	%	34	%	35	%
Casualty	29	%	28	%	28	%	29	%
Personal accident (A&H)	37	%	39	%	38	%	36	%

Net premiums earned	100	%	100	%	100	%	100	%


Region
Europe	45	%	47	%	45	%	45	%
Asia Pacific	15	%	15	%	15	%	14	%
Far East	8	%	7	%	9	%	8	%
Latin America	15	%	14	%	15	%	15	%

	83	%	83	%	84	%	82	%
ACE Global Markets	17	%	17	%	16	%	18	%

Net premiums earned	100	%	100	%	100	%	100	%

Insurance – Overseas General’s net premiums earned decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to an unfavorable foreign exchange impact. On a constant dollar basis, net premiums earned increased primarily due to growth in P&C production in our international retail operations.

Insurance – Overseas General conducts business internationally and in most major foreign currencies. The following table summarizes the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the period indicated.


	Three Months Ended June 30, 2009
Net premiums written:
Growth in original currency	1.3	%
Foreign exchange effect	(13.6	)%

Growth as reported in U.S. dollars	(12.3	)%

Net premiums earned:
Growth in original currency	0.7	%
Foreign exchange effect	(14.2	)%

Growth as reported in U.S. dollars	(13.5	)%

The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
Loss and loss expense ratio, as reported	51.0	%	50.0	%	51.5	%	49.3	%
Catastrophe losses	(0.8	)%	(1.8	)%	(1.0	)%	(1.5	)%
Prior period development	2.1	%	3.7	%	2.0	%	3.7	%

Loss and loss expense ratio, adjusted	52.3	%	52.0	%	52.5	%	51.5	%

Net catastrophe losses were $10 million and $25 million for the three and six months ended June 30, 2009, respectively. This compares with net catastrophe losses of $25 million and $40 million in the prior year periods. Insurance – Overseas General experienced net favorable prior period development of $26 million and $50 million in the three and six months ended June 30, 2009, respectively, compared with favorable prior period developments of $54 million and $98 million, respectively in the prior year periods. Refer to “Prior Period Development” for more information. Our loss and loss expense ratio will tend to decrease on a comparative basis as the proportion of A&H business to P&C business grows. A&H business typically generates a much lower loss and loss expense ratio (and a higher policy acquisition cost ratio) than traditional P&C business. After considering this impact, the adjusted loss ratio for the three and six months ended June 30, 2009, increased due to slightly higher A&H loss experience.

Insurance – Overseas General’s policy acquisition cost ratio increased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to higher commission rates on A&H business, which typically attracts higher commission rates than traditional P&C business. Additionally, for the six months ended June 30, 2009, A&H business, which generates higher acquisition costs than other business, represented a higher proportion of net premiums earned. Insurance – Overseas General’s administrative expense ratio increased in the three and six months ended June 30, 2009, primarily due to the decrease in net premiums earned.

Global Reinsurance

The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverages to a diverse array of primary P&C companies.


	Three Months Ended June 30						Six Months Ended June 30						% change
	2009			2008			2009			2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Net premiums written	$	329		$	270		$	688		$	614		22	%	12	%
Net premiums earned		241			257			479			520		(6	)%	(8	)%
Losses and loss expenses		56			108			143			225		(48	)%	(36	)%
Policy acquisition costs		46			54			97			108		(15	)%	(10	)%
Administrative expenses		14			14			26			29		—	%	(10	)%

Underwriting income	$	125		$	81		$	213		$	158		54	%	35	%


Net investment income		73			79			145			152		(8	)%	(5	)%
Net realized gains (losses)		(47	)		(20	)		(36	)		(65	)	135	%	(45	)%
Other (income) expense		1			1			1			1		—	%	—	%
Income tax expense		13			11			29			15		18	%	93	%

Net income	$	137		$	128		$	292		$	229		7	%	28	%


Loss and loss expense ratio		23.4	%		42.1	%		29.8	%		43.3	%
Policy acquisition cost ratio		19.0	%		21.0	%		20.2	%		20.8	%
Administrative expense ratio		5.8	%		5.5	%		5.5	%		5.6	%

Combined ratio		48.2	%		68.6	%		55.5	%		69.7	%

Global Reinsurance reported increased net premiums written in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to production growth in property lines across all its regions of operations.

The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30				% change
	2009		2008		2009		2008		Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Line of Business
Property and all other	$	61	$	64	$	137	$	122	(5	)%	12	%
Casualty		113		125		205		263	(10	)%	(22	)%
Property catastrophe		67		68		137		135	(1	)%	1	%

Net premiums earned	$	241	$	257	$	479	$	520	(6	)%	(8	)%


	Three Months Ended June 30				Six Months Ended June 30
	2009 % of total		2008 % of total		2009 % of total		2008 % of total
Line of Business
Property and all other	25	%	25	%	29	%	23	%
Casualty	47	%	49	%	43	%	51	%
Property catastrophe	28	%	26	%	28	%	26	%

Net premiums earned	100	%	100	%	100	%	100	%

Global Reinsurance’s net premiums earned decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to lower casualty reinsurance production than in prior periods as well as an unfavorable foreign exchange impact.

The following table shows the impact of catastrophe losses and prior period development on this segment’s loss and loss expense ratio for the periods indicated.


	Three Months Ended June 30				Six Months Ended June 30
	2009		2008		2009		2008
Loss and loss expense ratio, as reported	23.4	%	42.1	%	29.8	%	43.3	%
Catastrophe losses	(0.5	)%	(4.2	)%	(4.1	)%	(2.3	)%
Prior period development	24.0	%	10.3	%	19.2	%	7.9	%

Loss and loss expense ratio, adjusted	46.9	%	48.2	%	44.9	%	48.9	%

Global Reinsurance recorded net catastrophe losses of $1 million and $20 million in the three and six months ended June 30, 2009, respectively. This compares with net catastrophe losses of $11 million and $12 million in the three and six months ended June 30, 2008, respectively. Global Reinsurance experienced net favorable prior period development of $58 million and $92 million in the three and six months ended June 30, 2009, respectively. This compares to net favorable prior period development of $27 million and $41 million, respectively. Refer to “Prior Period Development” for more information. The remaining decrease in the loss and loss expense ratio was due to a change in business mix which resulted in a greater proportion of property and property catastrophe business, which typically incur lower loss ratios than casualty business.

Global Reinsurance’s policy acquisition cost ratio decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to non-renewal of high acquisition cost business and favorable commission adjustments which reduced acquisition costs booked. Administrative expenses were stable during the quarter ended June 30, 2009, as additional expense accruals recorded during the quarter were offset by lower staffing costs as a result of reduced headcount. The administrative expense ratio increased in the quarter ended June 30, 2009, primarily due to the decrease in net premiums earned. For the six months ended June 30, 2009, administrative expenses declined due to the reduced headcount.

Life

The Life segment includes the operations of ACE Tempest Life Re (ACE Life Re), ACE Life, and the North American A&H and life business of Combined Insurance. ACE Life Re comprises two operations. The first provides reinsurance to primary life insurers for variable annuity guarantees and the other is a traditional life reinsurance company. ACE Life Re is currently focused on expanding its traditional life reinsurance business and is not currently quoting on new opportunities in the variable annuity reinsurance marketplace. ACE Life develops direct insurance opportunities in emerging markets, including Egypt, Indonesia (commenced operations in April 2009), Taiwan, Thailand, Vietnam, and the United Arab Emirates, as well as in China through a partially-owned

company that is not consolidated into the results below. Combined Insurance distributes specialty individual accident and supplemental health insurance products that are targeted to middle income consumers in the U.S. and Canada. The following results include Combined Insurance, which contributed 70 percent of the current quarter’s net premiums earned. Combined Insurance was acquired on April 1, 2008, and consequently, did not contribute to our operating results in the first quarter of 2008. We assess the performance of our life business based on life underwriting income which includes net investment income.


	Three Months Ended June 30					Six Months Ended June 30					% change
	2009			2008		2009		2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Net premiums written	$	367		$	374	$	713	$	479		(2	)%	49	%
Net premiums earned		364			367		699		467		(1	)%	50	%
Loss and loss expenses		133			110		245		110		21	%	123	%
Policy benefits		77			84		174		147		(8	)%	18	%
Policy acquisition costs		55			63		102		71		(13	)%	44	%
Administrative expenses		64			69		122		82		(7	)%	49	%
Net investment income		43			40		89		55		8	%	62	%

Life underwriting income		78			81		145		112		(4	)%	29	%
Net realized gains (losses)		108			64		117		(122	)	NM		NM
Other (income) expense		(1	)		4		1		4		NM		(75	)%
Income tax expense		14			12		20		10		17	%	100	%

Net income (loss)	$	173		$	129	$	241	$	(24	)	34	%	NM

NM – not meaningful

The following table provides a line of business breakdown of life underwriting income for the periods indicated.


	Three Months Ended June 30						Six Months Ended June 30					% change
	2009			2008			2009		2008			Q2-09 vs. Q2-08		YTD-09 vs. YTD-08
	(in millions of U.S. dollars)
Life reinsurance	$	42		$	47		$	68	$	85		(11	)%	(20	)%
Life insurance		(1	)		(7	)		1		(14	)	(86	)%	NM
A&H		37			41			76		41		(10	)%	85	%

Life underwriting income	$	78		$	81		$	145	$	112		(4	)%	29	%

For the six months ended June 30, 2009, the increase in life underwriting income for Life insurance and A&H was primarily due to the inclusion of Combined Insurance business in life insurance and A&H for the full period (the prior year period included Combined Insurance from April 1, 2008). With respect to life insurance, ACE Life continues to incur start-up costs in several countries, although its underwriting losses are lower in 2009 relative to 2008.

Life reinsurance underwriting income decreased in the three and six months ended June 30, 2009, compared with the prior year periods, primarily due to additional GMDB claims paid and payable and an increase in insurance liabilities for expected future claim payments as a result of lower equity market levels. Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported GMIB reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. Net realized gains increased in the three and six months ended

June 30, 2009, compared with the prior year periods, principally due to a decline in the fair value of GMIB reinsurance liabilities related to an increase in long-term interest rates during 2009.

Other Income and Expense Items


	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
	(in millions of U.S. dollars)
Equity in net loss (income) of partially-owned insurance companies	$	(29	)	$	(130	)	$	(31	)	$	(114	)
Noncontrolling interest expense		1			1			2			4
Federal excise tax		3			6			6			7
Other		4			(2	)		16			(7	)

Other (income) expense	$	(21	)	$	(125	)	$	(7	)	$	(110	)

Other (income) expense primarily comprises our equity in net income of AGO prior to the June 2009 issuance and Huatai Insurance Company of China, Limited, which is included in equity in net income of partially-owned insurance companies. As discussed previously, prior to AGO’s June 2009 issuance, we included our investment in AGO in Investments in partially-owned insurance companies and reflected our portion of its net income (loss) under equity in net income of partially-owned insurance companies. Effective with the June 2009 issuance, we now account for the investment as an available-for-sale equity security. Refer to “Overview – Investment in Assured Guaranty Ltd.”

Other (income) expense also includes certain federal excise taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.

Net Investment Income


	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
	(in millions of U.S. dollars)
Fixed maturities	$	479		$	502		$	959		$	971
Short-term investments		10			30			23			57
Equity securities		13			29			29			49
Other		12			(3	)		29			(9	)

Gross investment income		514			558			1,040			1,068
Investment expenses		(8	)		(26	)		(32	)		(47	)

Net investment income	$	506		$	532		$	1,008		$	1,021

Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, changes in overall asset allocation, and the impact of foreign exchange. Net investment income decreased five percent and one percent in the three and six months ended June 30, 2009, compared with the prior year periods. The average market yield on fixed maturities was 5.6 percent at June 30, 2009 and 2008. This yield is the weighted average yield to maturity of our fixed income portfolio based on the market prices of our holdings as of those dates. This effectively equates to the new money rate if we were to continue investing our portfolio in a similar distribution. Our average yield on invested assets was 4.7 percent and 4.9 percent for the quarters ended June 30, 2009 and 2008, respectively, which represents our net investment income divided by average cost of fixed maturities and other investments, and average market value of equity securities. Net investment income was adversely impacted because we increased cash and short-

term investments relative to debt and equity securities during the fourth quarter of 2008 and first quarter of 2009 and due to unfavorable foreign exchange rate movements during the six months ended June 30, 2009.

During the quarter ended June 30, 2009, we deployed accumulated cash primarily into high-grade fixed-income securities. We also liquidated the majority of our publicly traded equity holdings and invested the proceeds in corporate bonds. While we cannot be certain, we believe this tactical shift should lead to an improvement in both book yield and investment income over time.

Net Realized and Unrealized Gains (Losses)

We take a long-term view with our investment strategy and our investment managers manage our investment portfolio to maximize total return within certain specific guidelines designed to minimize risk. The majority of our investment portfolio is available for sale and reported at fair value. Our held to maturity investment portfolio is reported at amortized cost. Refer to “Investments”, below, for information on fixed maturities we transferred from available for sale to held to maturity during the quarter ended June 30, 2009.

The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when we record an other-than-temporary impairment (OTTI) charge in net income (as discussed below). Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GMIB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.

We adopted the provisions of FSP FAS 115-2 and FAS 124-2 (FSP FAS 115-2) as of April 1, 2009. Under the provisions of FSP FAS 115-2, when an OTTI related to a fixed maturity security has occurred, we are required to record the OTTI in net income if we have the intent to sell the security or it is more likely than not that we will be required to sell the security. 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, we must evaluate the security to determine the portion of 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 included in other comprehensive income.

Prior to the adoption of FSP FAS 115-2,for fixed maturities, ACE was required to record OTTI in net income unless we had the intent and ability to hold the impaired security to the expected recovery period. FSP FAS 115-2 does not have any impact on the accounting for OTTI for any other type of investment.

The cumulative effect of the adoption resulted in a reduction to Accumulated other comprehensive income and an increase to Retained earnings of $267 million as of April 1, 2009. These adjustments reflect the net of tax amount ($349 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that have not suffered a credit loss, we do not intend to sell, and it is more likely than not that we will not be required to sell before the recovery of their amortized cost. Retained earnings and Deferred tax assets as of April 1, 2009, were also reduced by $46 million as a result of an increase in our valuation allowance against deferred tax assets, which is a direct effect of the adoption of FSP FAS 115-2. Specifically, as a result of the reassessment of credit losses required by the adoption of FSP FAS 115-2, we determined that certain previously impaired fixed maturity securities had suffered credit losses in excess of previously estimated amounts, which may give rise to additional future capital losses for tax purposes. Given the amount of available capital gains against which such additional capital losses could be offset, we expect that a portion of capital loss carry forwards will expire unused. Accordingly, we determined that an additional valuation allowance was necessary given that it is more likely than not that a portion of deferred tax assets related to previously impaired fixed income securities would not be realized.

Each quarter, we review our securities in an unrealized loss position (impaired securities), including fixed maturity securities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.

For impaired fixed maturities, if we have the intent to sell the security or it is more likely than not that we will be required to sell the security, an OTTI is considered to have occurred. 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, we evaluate the security to determine if a credit loss has occurred based on a combination of qualitative and quantitative factors including a discounted cash flow model, where necessary. If a credit loss is indicated, an OTTI is considered to have occurred. Prior to the adoption of FSP FAS 115-2 when evaluating fixed maturities for OTTI, we principally considered our ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and our assessment (using available market information such as credit ratings) of our ability to make future scheduled principal and interest payments on a timely basis. The factors that we now consider when determining if a credit loss exists related to a fixed maturity security are discussed in Note 3 b) to the Consolidated Financial Statements. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

We review all non-fixed maturity investments for OTTI 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;

•

our ability and intent to hold the security to the expected recovery period; and

•

equity securities in an unrealized loss position for twelve consecutive months are generally impaired.

The following tables present our pre-tax net realized and unrealized gains (losses) for the periods indicated.


	Three months ended June 30, 2009								Three months ended June 30, 2008
	Net Realized Gains (Losses)			Net Unrealized Gains (Losses)		Net Impact			Net Realized Gains (Losses)			Net Unrealized Gains (Losses)			Net Impact
	(in millions of U.S. dollars)
Fixed maturities	$	(71	)	$	1,348	$	1,277		$	(198	)	$	(469	)	$	(667	)
Equity securities		(81	)		49		(32	)		13			(75	)		(62	)
Other		(116	)		101		(15	)		15			(11	)		4

Subtotal		(268	)		1,498		1,230			(170	)		(555	)		(725	)

Derivatives:
Equity and fixed income derivatives		(21	)		—		(21	)		(16	)		—			(16	)
Fair value adjustment on insurance derivatives		284			—		284			75			—			75
S&P put option and futures		(181	)		—		(181	)		(10	)		—			(10	)
Fair value adjustment on other derivatives		(39	)		—		(39	)		(5	)		—			(5	)

Subtotal derivatives		43			—		43			44			—			44

Total gains (losses)	$	(225	)	$	1,498	$	1,273		$	(126	)	$	(555	)	$	(681	)


	Six Months Ended June 30, 2009								Six Months Ended June 30, 2008
	Net Realized Gains (Losses)			Net Unrealized Gains (Losses)		Net Impact			Net Realized Gains (Losses)			Net Unrealized Gains (Losses)			Net Impact
	(in millions of U.S. dollars)
Fixed maturities	$	(119	)	$	1,134	$	1,015		$	(303	)	$	(653	)	$	(956	)
Equity securities		(181	)		21		(160	)		(41	)		(231	)		(272	)
Other		(141	)		62		(79	)		(5	)		(16	)		(21	)

Subtotal		(441	)		1,217		776			(349	)		(900	)		(1,249	)

Derivatives:
Equity and fixed income derivatives		34			—		34			(25	)		—			(25	)
Fair value adjustment on insurance derivatives		283			—		283			(130	)		—			(130	)
S&P put option and futures		(156	)		—		(156	)		12			—			12
Fair value adjustment on other derivatives		(66	)		—		(66	)		13			—			13

Subtotal derivatives		95			—		95			(130	)		—			(130	)

Total gains (losses)	$	(346	)	$	1,217	$	871		$	(479	)	$	(900	)	$	(1,379	)

Our net realized losses in the three and six months ended June 30, 2009, included write-downs of $114 million and $306 million, respectively, as a result of conditions which caused us to conclude that the decline in fair value of certain securities was other-than-temporary. This compares with write-downs of $210 million and $399 million for the three and six months ended June 30, 2008, respectively.

The following table provides a breakdown of our net realized gains (losses) on fixed maturities for the period indicated. Other net realized gains (losses) includes gains and losses from security sales and non-credit related OTTI.


	Three Months Ended June 30, 2009
	Credit Impairment			Other Net Realized Gains (Losses)			Net Realized Gains (Losses)
	(in millions of U.S. dollars)
Investment grade corporate	$	—		$	(7	)	$	(7	)
High yield corporate		(34	)		(51	)		(85	)
Mortgage-backed securities/Asset-backed securities		(26	)		10			(16	)
Convertible bonds		—			37			37

Fixed maturities	$	(60	)	$	(11	)	$	(71	)

Our fixed income portfolio has approximately $30 million in exposure to CIT Group Inc. (CIT), a bank holding company engaged in providing commercial financing and leasing products. We do not expect potential losses from our exposure to CIT to have a material impact on our operating results or financial condition.

As of June 30, 2009, our investment portfolios held by U.S. legal entities included approximately $891 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on our view that we will hold our fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $312 million related to these fixed income investments. This strategy allows us to recognize the associated deferred tax asset related to these fixed income investments as we do not believe these losses will ever be realized. In addition, management decreased the valuation allowance by $12 million during the quarter ended June 30, 2009, as a result of improvement in the unrealized gains and losses in the overall U.S. portfolio.

We engage in a securities lending program, which involves lending investments to other institutions for short periods of time. ACE invests the collateral received in short-term funds of high credit quality with the objective of maintaining a stable principal balance. Certain investments in the money market mutual funds purchased with the securities lending collateral declined in value resulting in an unrealized loss of $57 million. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. We concluded that the decline in value was temporary.

Investments

Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with over one half invested in AAA securities), as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of options and swaps, was 3.8 years at June 30, 2009, and 3.6 years at December 31, 2008. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.5 billion at June 30, 2009. During the quarter ended June 30, 2009, we deployed accumulated cash primarily into high-grade fixed-income securities. We also liquidated the majority of our publicly traded equity holdings and invested the proceeds in corporate bonds. This allocation to corporate bonds is diversified and targeted to the upper-tier of the high-yield sector, with an average rating of BB+. While we cannot be certain, we believe this tactical shift should lead to an improvement in both book yield and investment income over time.

For the six months ended June 30, 2009, we experienced net unrealized gains of $1.2 billion, primarily due to tightening of credit spreads during the quarter ended June 30, 2009, though most of the fixed maturities in an unrealized loss position at that date were investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

As part of our fixed income diversification strategy, we have decided to hold to maturity certain commercial mortgage-backed securities that have shorter term durations. Because we have the intent to hold such securities to maturity, a transfer of such securities with a fair value of $704 million was made during the quarter ended June 30, 2009, from Fixed maturities available for sale to Fixed maturities held to maturity. The $4 million unrealized depreciation at the date of the transfer continues to be reported as a component of Accumulated other comprehensive income and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

Our Other investments principally comprise direct investments, investment funds, and limited partnerships. Our exposure to sub-prime asset backed securities was $55 million at June 30, 2009, which represented less than one percent of our investment portfolio. We do not expect any material investment loss from our exposure to sub-prime mortgages. Our investment portfolio is broadly diversified across geographies, sectors, and issuers. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio and we provide no credit default protection.

We have long-standing global credit limits for our entire portfolio across the organization. Exposures are aggregated, monitored, and actively managed by our Global Credit Committee, comprised of senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well established strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.

The following table shows the fair value and cost/amortized cost of our invested assets at June 30, 2009, and December 31, 2008.


	June 30, 2009				December 31, 2008
	Fair Value		Cost/ Amortized Cost		Fair Value		Cost/ Amortized Cost
	(in millions of U.S. dollars)
Fixed maturities available for sale	$	35,697	$	36,810	$	31,155	$	33,109
Fixed maturities held to maturity		3,535		3,517		2,865		2,860
Short-term investments		2,081		2,081		3,350		3,350

		41,313		42,408		37,370		39,319
Equity securities		423		546		988		1,132
Other investments		1,363		1,320		1,362		1,368

Total investments	$	43,099	$	44,274	$	39,720	$	41,819

The fair value of our total investments increased $3.4 billion during the six months ended June 30, 2009. The increase was primarily due to unrealized appreciation and the investing of operating cash flows.

The following tables show the market value of our fixed maturities and short-term investments at June 30, 2009, and December 31, 2008. The first table lists investments according to type and the second according to S&P credit rating.


	June 30, 2009				December 31, 2008
	Market Value		Percentage of Total		Market Value		Percentage of Total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Treasury	$	1,652	4	%	$	1,018	3	%
Agency		2,420	6	%		2,027	5	%
Corporate		11,522	28	%		8,744	23	%
Mortgage-backed securities		11,100	27	%		10,986	29	%
Asset-backed securities		534	1	%		709	2	%
Municipal		2,225	5	%		2,124	6	%
Non-U.S.		9,779	24	%		8,412	23	%
Short-term investments		2,081	5	%		3,350	9	%

Total	$	41,313	100	%	$	37,370	100	%


AAA	$	22,611	55	%	$	22,960	61	%
AA		3,870	9	%		3,374	9	%
A		6,328	15	%		5,497	15	%
BBB		4,383	11	%		3,388	9	%
BB		2,334	6	%		1,119	3	%
B		1,601	4	%		934	3	%
Other		186	—	%		98	—	%

Total	$	41,313	100	%	$	37,370	100	%

The table below summarizes our largest exposures to corporate bonds by market value and S&P credit rating as at June 30, 2009.


	June 30, 2009
	Market Value		Rating
	(in millions of U.S. dollars)
General Electric Co.	$	443	AA+
JP Morgan Chase & Co.		363	A+
Bank of America Corp.		348	A
Wells Fargo & Co.		309	AA-
AT&T Inc.		256	A
Citigroup Inc.		214	A
Verizon Communication Inc.		211	A
Goldman Sachs Group Inc.		199	A
Morgan Stanley		185	A
HSBC Holdings Plc		175	AA-
Comcast Corp		170	BBB+
ConocoPhillips		126	A
Lloyds TSB Group Plc		123	A
Telecom Italia SpA		119	BBB
Time Warner Cable Inc.		110	BBB
XTO Energy Inc.		106	BBB
Credit Suisse Group		97	A
Barclays PLC		97	A+
Deutsche Telekom AG		92	BBB+
American Express Co.		87	BBB+
Roche Holding AG		86	AA-
Dominion Resources Inc./VA		83	A-
American International Group		82	A-
Telefonica SA		78	A-
Banco Santander SA		77	AA

Total	$	4,236

Mortgage-backed and Asset-backed Securities

Additional details on the mortgage-backed and asset-backed components of our investment portfolio at June 30, 2009, are provided below:

Mortgage-backed and Asset-backed Securities

Market Value at June 30, 2009

(in millions of U.S. dollars)


	S&P Credit Rating
	AAA		AA		A		BBB		BB and below		Total
Mortgage-backed securities
Residential mortgage-backed (RMBS)
GNMA	$	544	$	—	$	—	$	—	$	—	$	544
FNMA		4,863		—		—		—		—		4,863
FHLMC		2,002		—		—		—		—		2,002

Total agency RMBS		7,409		—		—		—		—		7,409
Non-agency RMBS		1,066		82		98		65		230		1,541

Total RMBS		8,475		82		98		65		230		8,950
Commercial mortgage-backed		2,138		1		8		3		—		2,150

Total mortgage-backed securities	$	10,613	$	83	$	106	$	68	$	230	$	11,100


Asset-backed securities
Sub-prime	$	43	$	4	$	6	$	—	$	2	$	55
Credit cards		37		5		6		9		—		57
Autos		221		23		18		4		1		267
Other		150		1		2		2		—		155

Total asset-backed securities	$	451	$	33	$	32	$	15	$	3	$	534

Mortgage-backed and Asset-backed Securities

Amortized Cost at June 30, 2009

(in millions of U.S. dollars)


	S&P Credit Rating
	AAA		AA		A		BBB		BB and below		Total
Mortgage-backed securities
Residential mortgage-backed (RMBS)
GNMA	$	532	$	—	$	—	$	—	$	—	$	532
FNMA		4,744		—		—		—		—		4,744
FHLMC		1,939		—		—		—		—		1,939

Total agency RMBS		7,215		—		—		—		—		7,215
Non-agency RMBS		1,470		128		161		97		345		2,201

Total RMBS		8,685		128		161		97		345		9,416
Commercial mortgage-backed		2,357		1		9		3		—		2,370

Total mortgage-backed securities	$	11,042	$	129	$	170	$	100	$	345	$	11,786


Asset-backed securities
Sub-prime	$	78	$	6	$	14	$	1	$	6	$	105
Credit cards		37		4		6		10		—		57
Autos		217		23		20		4		3		267
Other		150		1		4		5		—		160

Total asset-backed securities	$	482	$	34	$	44	$	20	$	9	$	589

Restricted assets

We are required to maintain assets on deposit with various regulatory authorities to support our 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. We also utilize trust funds in certain large 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 LOCs and derivative transactions. At June 30, 2009, restricted assets of $12 billion are included in fixed maturities and short-term investments, with the balance being included in equity securities and cash. The components of the fair value of the restricted assets at June 30, 2009, and December 31, 2008, are as follows:


	June 30 2009		December 31 2008
	(in millions of U.S. dollars)
Deposits with U.S. regulatory authorities	$	1,219	$	1,165
Deposits with non-U.S. regulatory authorities		2,417		1,863
Other pledged assets		621		805
Trust funds		8,199		7,712

	$	12,456	$	11,545

Reinsurance Recoverable on Ceded Reinsurance

The composition of our reinsurance recoverable on losses and loss expenses at June 30, 2009, and December 31, 2008, is as follows:


	June 30 2009			December 31 2008
	(in millions of U.S. dollars)
Reinsurance recoverable on unpaid losses and loss expenses	$	13,009		$	13,386
Provision for uncollectible reinsurance on unpaid losses and loss expenses		(453	)		(451	)

Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance		12,556			12,935
Reinsurance recoverable on paid losses and loss expenses		997			1,122
Provision for uncollectible reinsurance on paid losses and loss expenses		(123	)		(140	)

Net reinsurance recoverable	$	13,430		$	13,917


Reinsurance recoverable on policy benefits	$	348		$	259

We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. Net reinsurance recoverable has declined $487 million from December 31, 2008, primarily related to payments on the 2008 crop-year and Brandywine due to the quarterly National Indemnity Company (NICO) payment. Reinsurance recoverable on policy benefits increased primarily due to a cession within Combined Insurance’s long-term care business.

Unpaid losses and loss expenses

As an insurance and reinsurance company, we are required, by applicable laws and regulations and GAAP, to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The

estimate of the liabilities includes provisions for claims that have been reported but unpaid at the balance sheet date (case reserves) and for future obligations from claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient). The reserves provide for liabilities that exist for the Company as of the balance sheet date. The loss reserve also includes an estimate of expenses associated with processing and settling these unpaid claims (loss expenses). At June 30, 2009, our gross unpaid loss and loss expense reserves were $37.3 billion and our net unpaid loss and loss expense reserves were $24.7 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money.


	Gross Losses			Reinsurance Recoverable			Net Losses
	(in millions of U.S. dollars)
Balance at December 31, 2008	$	37,176		$	12,935		$	24,241
Losses and loss expenses incurred		2,454			638			1,816
Losses and loss expenses paid		(2,504	)		(762	)		(1,742	)
Other (including foreign exchange revaluation)		(195	)		(57	)		(138	)

Balance at March 31, 2009	$	36,931		$	12,754		$	24,177
Losses and loss expenses incurred		2,633			812			1,821
Losses and loss expenses paid		(2,868	)		(1,154	)		(1,714	)
Other (including foreign exchange revaluation)		572			144			428

Balance at June 30, 2009	$	37,268		$	12,556		$	24,712

The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual.

The following table shows our total reserves segregated between case reserves (including loss expense reserves) and IBNR reserves at June 30, 2009, and December 31, 2008.


	June 30, 2009						December 31, 2008
	Gross		Ceded		Net		Gross		Ceded		Net
	(in millions of U.S. dollars)
Case reserves	$	16,999	$	6,527	$	10,472	$	16,583	$	6,539	$	10,044
IBNR reserves		20,269		6,029		14,240		20,593		6,396		14,197

Total	$	37,268	$	12,556	$	24,712	$	37,176	$	12,935	$	24,241

Asbestos and Environmental (A&E) and Other Run-off Liabilities

Due to timing constraints this section is presented on a one quarter lag basis.

Included in our liabilities for losses and loss expenses are amounts for A&E (A&E liabilities). The A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of our A&E liabilities is particularly sensitive to future changes in the legal, social, and economic environment. We have not assumed any such future changes in setting the value of our A&E reserves, which include provisions for both reported and IBNR claims.

Our exposure to A&E claims principally arises out of liabilities acquired when we purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to our acquisition of the P&C business of CIGNA, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the Restructuring) which included the division of Insurance Company of North America (INA) into

two separate corporations: (1) an active insurance company that retained the INA name and continued to write P&C business and (2) an inactive run-off company, now called Century Indemnity Company (Century). As a result of the division, predominantly all A&E and certain other liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century, and Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings. As part of the 1999 acquisition of the P&C business of CIGNA, we acquired Brandywine Holdings and its various subsidiaries. For more information refer to “Brandywine Run-Off Entities” below. Our A&E reserves are not discounted and do not reflect any anticipated future changes in the legal, social or economic environment, or any benefit from future legislative reforms.

The table below presents a roll forward of our consolidated A&E loss reserves (excludes Other run-off liabilities), allocated and unallocated loss expense reserves for A&E exposures, and the provision for uncollectible paid and unpaid reinsurance recoverables for the quarter ended March 31, 2009.


	Asbestos						Environmental						Total
	Gross			Net ⁽¹⁾			Gross			Net ⁽¹⁾			Gross			Net ⁽¹⁾
	(in millions of U.S. dollars)
Balance at December 31, 2008	$	2,629		$	1,365		$	310		$	297		$	2,939		$	1,662
Incurred activity		2			1			1			1			3			2
Payment activity		(155	)		(122	)		(27	)		(30	)		(182	)		(152	)
Foreign currency revaluation		(4	)		(1	)		—			—			(4	)		(1	)

Balance at March 31, 2009	$	2,472		$	1,243		$	284		$	268		$	2,756		$	1,511

⁽¹⁾	The net balances at December 31, 2008, were reduced by $21 million ($4 million Asbestos, and $17 million Environmental) to reflect final bad debt reserve adjustments.

The A&E net loss reserves including allocated and unallocated loss expense reserves and provision for uncollectible reinsurance at March 31, 2009, of $1.511 billion shown in the above table are comprised of $1.147 billion in reserves held by Brandywine run-off companies, $113 million of reserves held by Westchester Specialty, $138 million of reserves held by ACE Bermuda and $113 million of reserves held by Insurance – Overseas General. The net figures in the above table reflect third-party reinsurance other than reinsurance provided by NICO under three aggregate excess of loss contracts described below (collectively, the NICO contracts). We exclude the NICO contracts as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependant on the timing of the payment of the related claims. Our ability to make an estimate of this split is not practicable. We believe, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and non-A&E, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for the net A&E incurred losses and allocated loss expenses within the limits of coverage and above ACE’s retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participations by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.

Brandywine run-off - impact of NICO contracts on ACE’s run-off liabilities

As part of the acquisition of CIGNA’s P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and allocated loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO contract (the Brandywine NICO Agreement) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in the fourth quarter of 2002.

The following table presents a roll forward of net loss reserves, allocated and unallocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement. The table presents Brandywine incurred activity for the quarter ended March 31, 2009.


	Brandywine									NICO Coverage ⁽³⁾			Net of NICO Coverage
	A&E ⁽¹⁾			Other ⁽²⁾			Total			NICO Coverage ⁽³⁾			Net of NICO Coverage
	(in millions of U.S. dollars)
Balance at December 31, 2008	$	1,269		$	1,016		$	2,285		$	1,430		$	855
Incurred activity		3			6			9			—			9
Payment activity		(125	)		(32	)		(157	)		(143	)		(14	)

Balance at March 31, 2009	$	1,147		$	990		$	2,137		$	1,287		$	850

⁽¹⁾	The A&E balance was decreased by $21 million at December 31, 2008, to reflect final bad debt reserve adjustments.

⁽²⁾	Other consists primarily of workers’ compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business. The Other balance was increased by $4 million at December 31, 2008, to reflect final bad debt reserve adjustments.

⁽³⁾	The balance at December 31, 2008, has been increased by $13 million to reflect final activity on the fourth quarter 2008 NICO bordereau.

The incurred activity consisted primarily of unallocated loss adjustment expenses.

Reserve Reviews

During 2008, we conducted an internal, ground-up review of our consolidated A&E liabilities as of December 31, 2007. During the same period, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century. This external review was conducted in accordance with the Brandywine Restructuring Order, which requires that an independent actuarial review of Century’s reserves be completed every two years. Management takes full responsibility for the estimation of its A&E liabilities. As a result of our internal review, we increased our net loss reserves for the Brandywine operations, including A&E by $65 million (net of reinsurance provided by NICO), while the gross loss reserves increased by $143 million. The conclusions of the external review provided estimates of ultimate net Brandywine liabilities that were little changed from a comparable study in 2006. We also decreased our net loss reserves for Westchester Specialty’s A&E and other liabilities by $13 million (net of NICO), while the gross loss reserves decreased by $10 million.

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

As part of the acquisition of Westchester Specialty in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million (the 1998 NICO Agreement). NICO has also provided an 85 percent pro-rata share of $150 million of reinsurance protection on losses and allocated loss adjustment expenses incurred on or before December 31, 1992, in excess of a retention of $755 million (the 1992 NICO Agreement). At December 31, 2008, the remaining unused incurred limit under the 1998 NICO Agreement was $530 million, which is only available for losses and loss adjustment expenses. The 1992 NICO Agreement is exhausted on an incurred basis.

The following table presents a roll forward of net loss reserves, allocated and unallocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of 1996 and prior Westchester Specialty operations that are the subject business of the NICO covers. The table presents incurred activity for the quarter ended March 31, 2009.


	Westchester Specialty									NICO Coverage			Net of NICO Coverage
	A&E			Other			Total			NICO Coverage			Net of NICO Coverage
	(in millions of U.S. dollars)
Balance at December 31, 2008	$	122		$	125		$	247		$	216		$	31
Incurred activity		—			—			—			—			—
Payment activity		(9	)		(3	)		(12	)		(11	)		(1	)

Balance at March 31, 2009	$	113		$	122		$	235		$	205		$	30

Reserving considerations

For asbestos, we face claims relating to policies issued to manufacturers, distributors, installers, and other parties in the chain of commerce for asbestos and products containing asbestos. Claims can be filed by individual claimants or groups of claimants with the potential for hundreds of individual claimants at one time. Claimants will generally allege damages across an extended time period which may coincide with multiple policies for a single insured.

Environmental claims present exposure for remediation and defense costs associated with the contamination of property as a result of pollution. It is common, especially for larger defendants, to be named as a potentially responsible party at multiple sites.

Brandywine run-off entities

In addition to housing a significant portion of our A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. The following companies comprise ACE’s Brandywine operations: Century (a Pennsylvania insurer), Century Re (a Pennsylvania insurer), and Century International Reinsurance Company Ltd. (a Bermuda insurer (CIRC)). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.

The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of an aggregate excess of loss reinsurance agreement. INA Financial Corporation established and funded a dividend retention fund (the Dividend Retention Fund) consisting of $50 million plus investment earnings. Pursuant to an interpretation of the Brandywine restructuring order, the full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. Under the Restructuring Order, while any obligation to maintain the Dividend Retention Fund is in effect, to the extent dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million within five years. In the quarter ended March 31, 2009, and in the years ended December 31, 2008 and 2007, no such dividends were paid and, therefore, no replenishment of the Dividend Retention Fund occurred. The Dividend Retention Fund may not be terminated without prior written approval from the Pennsylvania Insurance Commissioner.

In addition, an ACE INA insurance subsidiary provided reinsurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement (the Aggregate Excess of Loss Agreement), triggered if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to the contribution of the balance, if any, of the Dividend Retention Fund.

Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at March 31, 2009, was $25 million and approximately $115 million in statutory-basis losses have been ceded to the Aggregate Excess of Loss Agreement on an inception-to-date basis. Century reports the amount ceded under the Aggregate Excess of Loss Agreement in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its liabilities, including certain asbestos related and environmental pollution liabilities. For GAAP reporting purposes, intercompany reinsurance recoverables related to the Aggregate Excess of Loss Agreement are eliminated upon consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement on a GAAP basis, we adjust the statutory cession to exclude the discount embedded in statutory loss reserves and adjust the statutory provision for uncollectible reinsurance to a GAAP basis amount. At March 31, 2009, approximately $411 million in GAAP basis losses were ceded under the Aggregate Excess of Loss Agreement, leaving a remaining limit of coverage under that agreement of approximately $389 million. At December 31, 2008, the remaining limit of coverage under the agreement was $393 million. While we believe ACE has no legal obligation to fund losses above the Aggregate Excess of Loss Agreement limit of coverage, ACE’s consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine companies remain consolidated subsidiaries of ACE.

Uncertainties relating to ACE’s ultimate Brandywine exposure

In addition to the Dividend Retention Fund and Aggregate Excess of Loss Agreement commitments described above, certain ACE entities are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. As of March 31, 2009, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $1.3 billion. At March 31, 2009, Century’s carried gross reserves (including reserves ceded by the active ACE companies to Century) were $2.9 billion. We believe the intercompany reinsurance recoverables, which relate to liabilities payable over many years (i.e., 25 years or more), are not impaired at this time. A substantial portion of the liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of March 31, 2009, approximately $1.3 billion of cover remains on a paid basis. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables. As of March 31, 2009, losses ceded by Century to the active ACE companies and other amounts owed to Century by the active ACE companies were approximately $466 million in the aggregate.

Catastrophe Management

We continue to closely monitor our catastrophe accumulation around the world. Our modeled annual aggregate 1 in 100 year return period U.S. hurricane probable maximum loss, net of reinsurance is approximately $1.2 billion; i.e., according to the model there is a one percent chance that ACE’s losses incurred in any year from U.S. hurricanes could be in excess of $1.2 billion (or seven percent of our total shareholders’ equity at June 30, 2009). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $142 billion. Our modeled single occurrence 1 in 100 return period California earthquake probable maximum loss, net of reinsurance is approximately $862 million; i.e., according to the model there is a one percent chance that ACE’s losses incurred in any single California earthquake event could be in excess of $862 million (or approximately five percent of our total shareholders’ equity at June 30, 2009). We estimate that at such hypothetical loss levels, the industry losses would be approximately $43 billion. ACE’s modeled losses reflect our in-force portfolio and reinsurance program as of April 1, 2009.

The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between ACE’s loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent ACE’s potential maximum exposures and it is highly likely that ACE’s actual incurred losses would vary materially from the modeled estimates.

Liquidity

Global market and economic conditions have been severely disrupted in recent quarters and these conditions may potentially affect (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties, and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources, the risks we assume under reinsurance programs covering variable annuity guarantees, and our investment performance. However, for the reasons discussed below, we believe that our present cash flows from operations, investing activities, and financing activities are sufficient to fund our current working capital and debt obligation needs. Refer to “Liquidity” in our 2008 Form 10-K.

We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios through 2009. Should the need arise, we generally have access to the capital markets and other available credit facilities. At June 30, 2009, our available credit lines totaled $2.5 billion and usage was $1.5 billion. This compares with total available credit lines of $1.9 billion at December 31, 2008. During the quarter ended June 30, 2009, we entered into a five-year, unsecured letter of credit facility, which permits the issuance of up to $500 million of letters of credit by ACE Limited. These letters of credit will be used for the general corporate purposes of ACE and our subsidiaries and may be issued to support the obligations of any wholly-owned subsidiary of ACE. This new credit facility supplements our existing letter of credit and revolving credit facilities. We believe that this increase to our total available credit capacity will facilitate collateral management through periods of financial market volatility and increased catastrophe severity that might occur in the near term. The covenants in the new credit facility are substantially similar to the covenants in other ACE group credit facilities. Refer to “Credit Facilities” below.

Our access to funds under existing credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Generally, our existing credit facilities have remaining terms of over three years. However, we may be required to replace credit sources in a difficult market should one of our existing credit providers experience financial difficulty. There has also been recent consolidation in the banking industry, which could lead to increased reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities .

The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed below. During the six months ended June 30, 2009, we were able to meet all of our obligations, including the payments of dividends declared on our Common Shares, with our net cash flows and dividends received.

We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. ACE Limited did not receive any dividends from ACE Bermuda or ACE Tempest Life Re during the six months ended June 30, 2009. During the six months ended June 30, 2008, ACE Bermuda declared and paid dividends of $280 million, and ACE Tempest Life Re declared and paid dividends of $915 million. A portion of the dividends received in the prior year period were used in connection with our April 1, 2008, acquisition of Combined Insurance. We expect that a majority of our cash inflows in 2009 will be from our Bermuda subsidiaries.

The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. The U.S. insurance subsidiaries of ACE INA (Cigna’s P&C business which we acquired in 1999) may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.

ACE Limited did not receive any dividends from ACE Global Markets or ACE INA during the six months ended June 30, 2009 and 2008. The debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.

Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the six months ended June 30, 2009 and 2008.

•

Our consolidated net cash flows from operating activities were $1.3 billion in the six months ended June 30, 2009, compared with $2.1 billion for the prior year period. These amounts reflect net income for each period, adjusted for non-cash items and changes in working capital. Net income was $1.1 billion in the six months ended June 30, 2009 and 2008. For the six months ended June 30, 2009, significant adjustments included net realized gains (losses) of $346 million, increases of unearned premiums and insurance/reinsurance balances payable of $1 billion, offset by increases in insurance/reinsurance balances receivable and prepaid reinsurance premiums of $845 million, as well as decreases of reinsurance recoverable on loss and loss expenses of $626 million. Reinsurance recoverable on losses and loss expenses were significantly impacted by the 2008 annual crop settlement during the first quarter of 2009. The six months ended June 30, 2009, included higher than typical net claim payments in connection with catastrophes and other individual large losses, and an increase in tax payments. In addition, during the quarter ended June 30, 2009, operating cash flows were adversely impacted by the return of approximately $160 million in collateral relating to the derivatives we use to hedge our variable annuity business. As the markets improved, the value of these hedges declined requiring us to return collateral we had received from counterparties.

•

Our consolidated net cash flows used for investing activities were $1.6 billion in the six months ended June 30, 2009, compared with $3.2 billion in the prior year period. Net investing activities for the six months ended June 30, 2009, were related primarily to net purchases of fixed maturities. For the six months ended June 30, 2008, net investing activities were related primarily to net purchases and maturities on the fixed maturities portfolio and the acquisition of Combined Insurance of $2.56 billion.

•

Our consolidated net cash flows from financing activities were $85 million in the six months ended June 30, 2009, compared with net cash flows from financing activities of $1.2 billion in the prior year period. Net cash flows from financing activities in the six months ended June 30, 2009, included net proceeds from the issuance, in June 2009, of $500 million in long-term debt, net repayment of reverse repurchase agreements of $250 million, and dividends paid on our Common Shares of $179 million. Net

cash flows from financing activities for the six months ended June 30, 2008, included net proceeds from the issuance of $1.9 billion in debt (net of repayment of debt), including $705 million in reverse repurchase agreements, partially offset by $777 million of net cash flows used for financing activities relating to the redemption of our Preferred Shares, and dividends paid on our Common and Preferred Shares.

Both internal and external forces influence our financial condition, results of operations, and cash flows. Claim settlements, premium levels, and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us, and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments, and the liquidity provided by our credit facilities, are adequate to meet expected cash requirements.

In addition to cash from operations, routine sales of investments, and financing arrangements, we have agreements with a bank provider which implemented two international multi-currency notional cash pooling programs to enhance cash management efficiency during periods of short-term timing mismatches between expected inflows and outflows of cash by currency. 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 co-mingled between legal entities. ACE entities may incur overdraft balances as a means to address short-term timing mismatches, and any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $150 million in the aggregate). Our revolving credit facility allows for same day drawings to fund a net pool overdraft should participating ACE entities withdraw contributed funds from the pool.

We also, from time to time, utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. Refer to “Capital Resources” below.

Capital Resources

Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at June 30, 2009, and December 31, 2008.


	June 30 2009			December 31 2008
	(in millions of U.S. dollars, except for percentages)
Short-term debt	$	216		$	471
Long-term debt		3,322			2,806

Total debt		3,538			3,277


Trust preferred securities		309			309

Total shareholders’ equity		16,561			14,446

Total capitalization	$	20,408		$	18,032


Ratio of debt to total capitalization		17.3	%		18.2	%
Ratio of debt plus trust preferred securities to total capitalization		18.9	%		19.9	%

We have executed reverse repurchase agreements with certain counterparties whereby we agreed to sell securities and repurchase them at a date in the future for a predetermined price. At December 31, 2008, short-term debt included $250 million of amounts owed to brokers under reverse repurchase agreements. At June 30, 2009, all amounts owed to brokers had been repaid.

In June 2009, our subsidiary ACE INA Holdings Inc., issued $500 million of 5.9 percent senior notes due June 2019. The notes are guaranteed by ACE Limited. The net proceeds from the issue of the senior notes were used to repay amounts owed to brokers under reverse repurchase agreements as noted above, and will also be used to refinance upcoming debt maturities and for general corporate purposes.

Total shareholders’ equity increased $2.1 billion in the six months ended June 30, 2009. The following table reports the significant movements in our shareholders’ equity for the six months ended June 30, 2009.


	June 30, 2009
	(in millions of U.S. dollars)
Total shareholders’ equity, December 31, 2008	$	14,446
Net income		1,102
Dividend declared on Common Shares		(192	)
Change in net unrealized appreciation (depreciation) on investments, net of tax		1,010
Cumulative translation, net of tax		191
Income tax valuation allowance on the adoption of FSP FAS 115-2 and FAS 124-2		(46	)
Other movements, net		50

Total shareholders’ equity, June 30, 2009	$	16,561

As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities, which includes Common Shares, up to $250 million. At June 30, 2009, this authorization had not been utilized. We generally maintain shelf registration capacity at all times in order to allow capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our currently effective unlimited shelf registration statement expires in December 2011.

On January 12, 2009, and April 13, 2009, we paid dividends of $0.27 and $0.26 per Common Share (CHF 0.30 in each case) to shareholders of record on December 17, 2008, and March 31, 2009, respectively, through a distribution from the par value of Common Shares (refer to “Effects of the Continuation on Dividends”). On August 10, 2009, we will pay a dividend of $0.31 per Common Share (CHF 0.33), to shareholders of record on July 28, 2009. We have paid dividends each quarter since we became a public company in 1993.

Effects of the Continuation on Dividends

For the foreseeable future, we expect to make distributions to shareholders as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital rather than through dividends. At the 2008 Annual General Meeting, the Company’s shareholders approved a par value reduction of CHF 0.90, payable in three installments between that meeting and the 2009 Annual General Meeting. Under the resolutions so approved, the U.S. dollar amount of each installment depended upon the currency exchange rate in effect at the time of its payment, which caused the U.S. dollar value of each installment to vary from the date of approval. At the 2009 Annual General Meeting, the Board proposed and shareholders approved the payment of a dividend by the Company in the form of a distribution to shareholders (the Dividend Approval) through a Swiss franc par value reduction pursuant to a formula that will have the effect of making the U.S. dollar value of distributions more consistent.

The Dividend Approval provides for an annual par value reduction of CHF 1.36 (the Base Annual Dividend), equal to $1.24 per share at the time of the Dividend Approval, payable in four installments; provided that each of the Swiss franc installments will be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment will equal $0.31, subject to an aggregate upward adjustment (the Dividend Cap) for the four installments of 50 percent of the Base Annual Dividend (i.e. CHF 0.68). Application of the formula will mean that the Swiss franc amount of each installment will be determined at the approximate time of distribution, while the U.S. dollar value of the installment will remain $0.31 unless and until the Dividend Cap is

reached. A par value reduction that would otherwise exceed the Dividend Cap will be reduced to equal the Swiss franc amount remaining available under the Dividend Cap, and the U.S. dollar amount distributed will be the then-applicable U.S. dollar equivalent of that Swiss franc amount. We will pay the first of the four installments of $0.31 per Common Share on August 10, 2009, and in connection with this dividend, the par value per share was reduced by CHF 0.33, based on the USD/CHF rate published on July 23, 2009.

Refer also to “AGENDA ITEM NO. 7: APPROVAL OF DISTRIBUTION TO SHAREHOLDERS IN THE FORM OF PAR VALUE REDUCTION” of the definitive proxy statement for our 2009 Annual General Meeting of Shareholders, which was filed on April 7, 2009.

Should we determine to pay dividends other than by a reduction in par value, under Swiss law, such dividends (other than by reductions in par value) may be paid out only if the corporation has sufficient distributable profits from previous business years, or if the reserves of the corporation are sufficient to allow distribution of a dividend. The board of directors of a Swiss corporation may propose that a dividend be paid, but cannot itself set the dividend. The Company auditors must confirm that the dividend proposal of the board of directors conforms with Swiss statutory law. Prior to the distribution of dividends, five percent of the annual profits must be allocated to the general reserve until the amount of general reserves has reached twenty percent of the paid-in nominal share capital. Our Swiss Articles of Association can provide for a higher general reserve or for the creation of further reserves setting forth their purpose and use. Once this level has been reached and maintained, the shareholders meeting may approve a distribution of each year’s profit within the framework of applicable legal requirements. Dividends paid from retained earnings are usually due and payable immediately after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statute of limitations in respect of claims for dividend payments is five years. As noted above, for the foreseeable future, we expect to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax.

Credit Facilities

As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. insurance and reinsurance contracts require them to provide collateral, which can be in the form of Letters of Credit (LOCs). In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs. LOCs may also be used for general corporate purposes and to provide underwriting capacity as funds at Lloyd’s.

The following table shows our main credit facilities by credit line, usage, expiry date, and purpose at June 30, 2009.


	Credit Line ⁽¹⁾		Usage		Expiry Date
	(in millions of U.S. dollars)
Unsecured Liquidity Facility
ACE Limited ⁽²⁾	$	500	$	149	Nov. 2012
Unsecured Operational LOC Facility
ACE Limited		1,000		875	Nov. 2012
Unsecured Capital Facility
ACE Limited ⁽³⁾		494		493	Dec. 2013
Unsecured Operational LOC Facility
ACE Limited		500		—	Sept. 2014

Total	$	2,494	$	1,517

⁽¹⁾	Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited.

⁽²⁾	May also be used for LOCs.

⁽³⁾	Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488.

It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by ACE. In the event that such credit support is insufficient, we could be required to provide alternative security to clients. This could take the form of additional insurance trusts supported by our investment portfolio or funds withheld using our cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business and loss experience of such business.

The facilities in the table above require that we maintain certain covenants, all of which have been met at June 30, 2009. These covenants include:

(i)

Maintenance of a minimum consolidated net worth in an amount not less than the “Minimum Amount”. For the purpose of this calculation, the Minimum Amount is an amount equal to the sum of the base amount (currently $12 billion) plus 25 percent of consolidated net income for each fiscal quarter, ending after the date on which the current base amount became effective, plus 50 percent of any increase in consolidated net worth during the same period, attributable to the issuance of Common and Preferred Shares. The Minimum Amount is subject to an annual reset provision.

(ii)

Maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.

At June 30, 2009, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $12.2 billion and our actual consolidated net worth as calculated under that covenant was $17.5 billion and (b) our ratio of debt to total capitalization was 0.173 to 1, which is below the maximum debt to total capitalization ratio of 0.35 to 1 as described in (ii) above.

Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize LOCs under such facility. A failure by ACE Limited (or any of its subsidiaries) to pay an obligation due for an amount exceeding $50 million would result in an event of default under all of the facilities described above.

Recent Accounting Pronouncements

Refer to Note 2 to the Consolidated Financial Statements, for a discussion of new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to Item 7A included in our 2008 Form 10-K and Amendment No. 1 in our 2008 Form 10-K/A.

Reinsurance of GMDB and GMIB guarantees

Our net income is directly impacted by changes in the reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GMIB. These reserves are calculated in accordance with SOP 03-1 (SOP reserves) and changes in these reserves are reflected as policy benefits expense, which is included in life underwriting income. In addition, our net income is directly impacted by the change in the fair value of the GMIB liability (FVL), which is classified as a derivative according to FAS 133. The Net FVL established for a GMIB reinsurance contract represents the difference between the fair value of the contract and the SOP reserves. Changes in the Net FVL, net of associated changes in the calculated SOP reserve, are reflected as realized gains or losses.

ACE views its variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of long-term economic loss relatively small, at the time of pricing. Adverse

100

changes in market factors and policyholder behavior will have an impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk and reward.

As of June 30, 2009, management established the SOP reserve based on the benefit ratio calculated using assumptions reflecting management’s best estimate of the future performance of the variable annuity line of business. Management’s best estimate reflected a judgment that the equity markets will be range-bound for the next 18 months and that by year-end 2010 equity market levels will be equal to or slightly higher than their June 30, 2009 levels. Management exercises judgment in determining the extent to which short-term market movements impact the SOP reserve. The SOP reserve is based on the calculation of a long-term benefit ratio (or loss ratio) for the variable annuity guarantee reinsurance. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be temporary or transient. Management, in keeping with the language in SOP 03-1, regularly examines both quantitative and qualitative analysis and management determined that no change to the benefit ratio was warranted during the second quarter of 2009. The benefit ratio used to establish the SOP reserve at June 30, 2009, has averaged less than ¹ / 2 standard deviation from the calculated benefit ratios, averaging the periodic results from the time the benefit ratio was changed during the first quarter of 2009 until June 30, 2009.

SOP 03-1 requires that ACE “regularly evaluate estimates used and adjust the liability balance… if actual experience or other evidence suggests that earlier assumptions should be revised.” ACE evaluates its estimates regularly and management uses judgment to determine the extent to which the assumptions underlying the benefit ratio calculation used to establish SOP reserves should be adjusted. The benefit ratio will be calculated based on management’s expectation for the short-term and long-term performance of the variable annuity guaranty liability. Management’s quantitative analysis includes a review of the differential between the benefit ratio used at the most recent valuation date and the benefit ratio calculated on subsequent dates. The differential is measured in terms of the standard deviation of the distribution of benefit ratios (reflecting 1,000 stochastic scenarios) calculated on the aforementioned subsequent dates. As an example, if, on average during a calendar quarter, the benefit ratio used at the most recent valuation date falls within ¹ / 2 a standard deviation of the mean of the distribution of benefit ratios calculated periodically during the quarter, management may elect not to adjust the benefit ratio used to generate the SOP reserve at the quarter-end valuation date.

Further, if, due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by less than 1 standard deviation, management will consider current market conditions when determining its expectations of future payout obligations, particularly as those market conditions relate to shorter-term payout obligations.

Finally, if, due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by more than 1 standard deviation for a sustained and prolonged period of time, management will give substantial weight to prevailing market conditions when determining its expectations of future payout obligations. As an example, based on management’s current expectations as of the publication of this document, all else being equal, the S&P 500 index would need to remain below a level of 650 for a prolonged period of time in order for management to give substantial weight to current market conditions.

The SOP reserve and FVL calculations are directly affected by market factors, including equity levels, interest rate levels, credit risk, and implied volatilities, as well as policyholder behaviors, such as annuitization and lapse rates. The table below shows the sensitivity, as of June 30, 2009, of the SOP reserves and FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below show the sensitivity of the fair value of specific derivative instruments held (hedge value), which includes only those instruments owned at the reporting date, to partially offset the risk in the variable annuity guarantee reinsurance portfolio. Although these derivatives do not receive hedge accounting treatment, some portion of the change in value may be used to offset changes in the SOP reserve.

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The following table provides more information on our exposure to variable annuity sensitivities to equity markets and interest rates at June 30, 2009.


		Worldwide Equity Shock
Interest Rate Shock		+10%		Flat		-10%		-20%		-30%		-40%
		(in millions of U.S. dollars)
+100 bps	(Increase)/decrease in SOP reserve (Increase)/decrease in net FVL Increase/(decrease) in hedge value Increase/(decrease) in net income	66 191 (110 147	)	14 108 (9 113	)	(55 24 92 61	)	(146 (59 195 (10	) ) )	(264 (127 299 (92	) ) )	(417 (169 404 (182	) ) )
Flat	(Increase)/decrease in SOP reserve (Increase)/decrease in net FVL Increase/(decrease) in hedge value Increase/(decrease) in net income	53 104 (101 56	)	— — — —		(76 (98 102 (72	) ) )	(170 (190 206 (154	) ) )	(295 (260 310 (245	) ) )	(455 (308 416 (347	) ) )
-100 bps	(Increase)/decrease in SOP reserve (Increase)/decrease in net FVL Increase/(decrease) in hedge value Increase/(decrease) in net income	36 (42 (91 (97	) ) )	(20 (158 10 (168	) ) )	(99 (266 113 (252	) ) )	(200 (371 217 (354	) ) )	(332 (453 322 (463	) ) )	(499 (501 428 (572	) ) )


	A-rated Credit Spreads			Interest Rate Volatility			Equity Volatility
Sensitivities to Other Economic Variables	+100	-100		+2%		-2%	+2%		-2%
	(in millions of U.S. dollars)
(Increase)/decrease in SOP reserve	—	—		—		—	—		—
(Increase)/decrease in net FVL	55	(62	)	(19	)	21	(13	)	11
Increase/(decrease) in hedge value	—	—		—		—	3		(3	)
Increase/(decrease) in net income	55	(62	)	(19	)	21	(10	)	8


	Mortality				Lapses			Annuitization
Sensitivities to Actuarial Assumptions	+10%		-10%		+25%	-25%		+25%		-25%
	(in millions of U.S. dollars)
(Increase)/decrease in SOP reserve	(23	)	23		19	(23	)	(9	)	11
(Increase)/decrease in net FVL	10		(9	)	106	(122	)	(55	)	55
Increase/(decrease) in hedge value	—		—		—	—		—		—
Increase/(decrease) in net income	(13	)	14		125	(145	)	(64	)	66

The above table assumes SOP reserves and net FVL using the benefit ratio calculated as of June 30, 2009. Additionally, the above table assumes equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Although our liabilities have sensitivity to global equity markets, we would suggest using the S&P 500 as a proxy and although our liabilities have sensitivity to global interest rates at various points on the yield curve, we would suggest using the 10-year U.S. Treasury yield as a proxy. A change in A-rated credit spreads impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from June 30, 2009, market levels. Because one hedge instrument was sold after June 30, 2009, the increase (decrease) in hedge value for each of the above scenarios relative to June 30, 2009, market conditions would be $3 million higher (lower).

The above sensitivities are not directly additive, because changes in one factor will affect the sensitivity to changes in other factors. Also, the sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. The calculation of the SOP reserve and FVL is based on internal models that include assumptions regarding future policyholder behavior, including lapse, annuitization, and asset allocation. These assumptions impact both the absolute level of the SOP reserve and the FVL as well as the sensitivities to changes in market factors shown above.

102

From inception (July 2000) to June 30, 2009, the variable annuity guarantee reinsurance portfolio has produced the following cumulative results. Any increase in SOP reserves and fair value liability should be taken in context of these results:

Net premiums earned $1.19 billion

Claims paid $191 million

SOP 03-1 reserves held at June 30, 2009, $332 million

Fair value GMIB liability held at June 30, 2009, $528 million

Life underwriting income $755 million

Net income $184 million

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized, and reported within time periods specified in the rules and forms of the SEC and accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2009, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

103

ACE LIMITED

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures.

While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of the matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results, or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.

Information on the insurance industry investigations and related matters is set forth in Note 6 e) to our Consolidated Financial Statements.

Item 1A. Risk Factors

The following supplements the risk factors that could have a material impact on our results of operations or financial condition as described under “Risk Factors” in Item 1A. of Part I of our 2008 Annual Report on Form 10-K and under “Risk Factors” in Item 1A. of Part II of our quarterly report on Form 10-Q for the quarter ended March 31, 2009, and should be read in conjunction with those disclosures. The Risk Factor listed in our 2008 Annual Report on Form 10-K under the subheading indicated below is amended and restated to read in its entirety as set forth below.

Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

We have substantial exposure to losses resulting from natural disasters, man-made catastrophes, and other catastrophic events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, hailstorms, explosions, severe winter weather, fires, war, acts of terrorism, political instability, and other natural or man-made disasters, including a global or other wide-impact pandemic. The incidence and severity of catastrophes are inherently unpredictable and our losses from catastrophes could be substantial. In addition, climate conditions may be worsening, primarily through increases in global temperatures, which may in the future increase the frequency and severity of natural catastrophes and the losses resulting there from. The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or financial condition for any fiscal quarter or year. Increases in the values and concentrations of insured property may also increase the severity of these occurrences in the future. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition.

104

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases by the Company of its Common Shares during the three months ended June 30, 2009.

Issuer’s Purchases of Equity Securities


Period	Total Number of Shares Purchased*	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan**	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan**
April 1 through April 30	3,487	$	42.55	—	$	250 million
May 1 through May 31	28,078	$	44.06	—	$	250 million
June 1 through June 30	2,274	$	44.28	—	$	250 million

Total	33,839

*	For the quarter ended June 30, 2009, this column represents the surrender to the Company of 33,839 Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

**	As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities, including Common Shares, up to $250 million. At June 30, 2009, this authorization had not been utilized.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual General Meeting was held on May 20, 2009.

The following matters were voted on at the Annual General Meeting (note that there were no broker non-votes in connection with any of these matters). Under Swiss Law, abstentions and broker non-votes have the effect of, and are tabulated with, shares voted against the applicable agenda item.

1.	The following directors were elected.


	Term Expiring	Shares Voted For	Shares Voted Against	Shares Abstained
Michael G. Atieh	2012	213,453,300	52,599,038	1,189,359
Mary A. Cirillo	2012	262,143,231	3,916,826	1,181,640
Bruce L. Crockett	2012	214,950,604	51,101,250	1,189,843
Thomas J. Neff	2012	215,001,702	51,055,494	1,184,501

The following table lists directors whose terms of office as directors continued after the Annual General Meeting:


		Term Expiring
Robert M. Hernandez		2010
Peter Menikoff		2010
Robert Ripp		2010
Dermot F. Smurfit		2010
Evan G. Greenberg		2011
John A. Krol		2011
Leo F. Mullin		2011
Olivier Steimer		2011

2.	Approval of the Annual Report and Financial Statements for the year ended December 31, 2008

2.1.

Approval of the Annual Report for the year ended December 31, 2008


Shares Voted For	Shares Voted Against	Shares Abstained
266,809,350	116,896	315,451

105

2.2.

Approval of the Statutory Financial Statements of ACE Limited for the year ended December 31, 2008


Shares Voted For	Shares Voted Against	Shares Abstained
265,670,812	124,421	1,446,464

2.3.

Approval of the Consolidated Financial Statements for the year ended December 31, 2008


Shares Voted For	Shares Voted Against	Shares Abstained
265,671,259	113,679	1,456,759

3.	Allocation of Disposable Profits


Shares Voted For	Shares Voted Against	Shares Abstained
266,916,012	196,409	129,276

4.	Discharge of the Board of Directors


Shares Voted For	Shares Voted Against	Shares Abstained
261,847,040	2,300,550	3,094,107

5.	Amendment of Articles of Association Relating to Special Auditor


Shares Voted For	Shares Voted Against	Shares Abstained
267,004,711	87,062	149,924

6.	Election of Auditors

6.1.

Election of PricewaterhouseCoopers AG (Zurich) as Statutory Auditor until next annual ordinary general meeting


Shares Voted For	Shares Voted Against	Shares Abstained
266,755,145	403,106	83,446

6.2.

Ratification of Appointment of Independent Registered Accounting Firm PricewaterhouseCoopers LLP (United States) for Purposes of United States Securities Law Reporting for Year Ending December 31, 2009


Shares Voted For	Shares Voted Against	Shares Abstained
266,753,815	408,428	79,454

6.3.

Election of BDO Visura (Zurich) as Special Auditing Firm until next annual ordinary general meeting


Shares Voted For	Shares Voted Against	Shares Abstained
267,048,895	71,418	121,384

7.	Approval of Distribution to Shareholders in the Form of a Par Value Reduction


Shares Voted For	Shares Voted Against	Shares Abstained
266,978,566	150,828	112,303

Item 6. Exhibits

Refer to the Exhibit Index.

106

ACE LIMITED

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				ACE LIMITED

August 7, 2009				/s/ E VAN G. G REENBERG
				Evan G. Greenberg
				Chairman and Chief Executive Officer

August 7, 2009				/s/ P HILIP V. B ANCROFT
				Philip V. Bancroft
				Chief Financial Officer

107

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Original
Number

Date Filed

SEC File
Reference
Number

Filed
Herewith

3.1

Articles of Association of the Company, as amended and restated

8-K

May 28, 2009

001-11778

3.2

Articles of Association of the Company, as amended and restated

8-K

July 28, 2009

001-11778

4.1

Articles of Association of the Company, as amended and restated

8-K

May 28, 2009

001-11778

4.2

Articles of Association of the Company, as amended and restated

8-K

July 28, 2009

001-11778

10.1

Letter of Credit Agreement for $500,000,000, dated June 16, 2009, among ACE Limited, and Deutsche Bank, New York Branch

10.2

Restricted Stock Unit Award Terms under the ACE Limited 2004 Long-term Incentive Plan for Outside Directors

31.1

Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2

Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101.1

The following financial information from ACE Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 formatted in XBRL: (i) Consolidated Balance Sheet at June 30, 2009 and December 31, 2008;; (ii) Consolidated Statement of Operations and Comprehensive Income for the three months and six months ended June 30, 2009 and 2008; (iii) Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2009 and 2008; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008; and (v) Notes to the Interim Consolidated Financial Statements, tagged as blocks of text.

108

Exhibit 10.1

EXECUTION COPY

CREDIT AGREEMENT

among

ACE LIMITED,

VARIOUS FINANCIAL INSTITUTIONS,

and

DEUTSCHE BANK AG, NEW YORK BRANCH,

as Issuing Bank and as Administrative Agent

Dated as of June 16, 2009

TABLE OF CONTENTS


		Page No.
ARTICLE I.	DEFINITIONS AND INTERPRETATION	1

1.01	Certain Defined Terms	1

1.02	Computation of Time Periods; Other Definitional Provisions	5

1.03	Accounting Terms and Determinations	6

ARTICLE II.	AMOUNTS AND TERMS OF THE LETTERS OF CREDIT	6

2.01	The Letters of Credit	6

2.02	Issuance and Extensions and Drawings, Participations and Reimbursement with Respect to Letters of Credit	7

2.03	Reimbursement Obligations	9

2.04	Termination or Reduction of the Commitments	11

2.05	Fees	11

2.06	Increased Costs, Etc.	11

2.07	Payments and Computations	12

2.08	Taxes	13

2.09	Sharing of Payments, Etc.	15

2.10	Use of Letters of Credit	15

2.11	Replacement of Affected Bank or Nonconsenting Bank	15

2.12	Certain Provisions Relating to the Issuing Bank and LOCs	16

2.13	Failure of Issuing Bank to be an Eligible Issuer	18

ARTICLE III.	CONDITIONS	18

3.01	Conditions Precedent to Closing Date	18

3.02	Conditions Precedent to Each Issuance, Extension or Increase of an LOC	19

ARTICLE IV.	REPRESENTATIONS AND WARRANTIES	19

4.01	Existence, Etc.	19

4.02	Authority and Authorization	20

4.03	Approvals	20

4.04	Enforceability	20

4.05	Litigation	20

4.06	Financials	20

4.07	Accuracy of Information	21

4.08	Margin Stock	21

4.09	Compliance with Certain Acts	21

4.10	Reimbursement Agreement Representations and Warranties	21

TABLE OF CONTENTS


		Page No.
ARTICLE V.	COVENANTS	21

5.01	Pari Passu Ranking	21

5.02	Other Covenants	21

ARTICLE VI.	EVENTS OF DEFAULT	22

6.01	Events of Default and Their Effect	22

6.02	Actions in Respect of the Letters of Credit upon Default	23

ARTICLE VII.	THE ADMINISTRATIVE AGENT	23

7.01	Authorization and Action	23

7.02	Administrative Agent’s Reliance, Etc.	23

7.03	The Administrative Agent and Affiliates	24

7.04	Bank Credit Decision	24

7.05	Successor Administrative Agent	25

ARTICLE VIII.	MISCELLANEOUS	25

8.01	Amendments, Etc.	25

8.02	Notices, Etc.	26

8.03	No Waiver; Remedies	27

8.04	Costs and Expenses	27

8.05	Right of Set-off	28

8.06	Binding Effect	28

8.07	Assignments and Participations	28

8.08	Execution in Counterparts	31

8.09	No Liability of the Issuing Bank	31

8.10	Confidentiality	31

8.11	Jurisdiction, Etc.	32

8.12	Governing Law	32

8.13	WAIVER OF JURY TRIAL	33

8.14	Disclosure of Information	33

TABLE OF CONTENTS


SCHEDULE I		Commitment Amounts

EXHIBIT A		Form of Assignment and Acceptance
EXHIBIT B-1		Form of Letter of Credit (No Reinsurance Trust) Irrevocable Standby Letter of Credit
EXHIBIT B-2		Form of Letter of Credit (Reinsurance Trust) Irrevocable Standby Letter of Credit
EXHIBIT C		Reinsurance Trust Agreement (Excerpt)
EXHIBIT D		Form of LOC Application
EXHIBIT E-1		Form of Opinion of Niederer Kraft & Frey AG
EXHIBIT E-2		Form of Opinion of Mayer Brown LLP

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (this “ Agreement ”) dated as of June 16, 2009 is among ACE Limited, a Swiss company (“ ACE ”), the financial institutions that from time to time are parties hereto (the “ Banks ”) and Deutsche Bank AG, New York Branch (“ DB ”), as sole initial Bank, as the Issuing Bank (as defined below) and as administrative agent (together with any successor in such capacity, the “ Administrative Agent ”).

As contemplated by the Pricing Agreement (as defined below), the parties hereto have agreed to enter into this Agreement to provide for the issuance of letters of credit from time to time for the account of ACE.

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I.

DEFINITIONS AND INTERPRETATION

1.01 Certain Defined Terms . As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“ ACE ” - see the Preamble .

“ Administrative Agent ” - see the Preamble .

“ Advance ” has the meaning specified in Section 2.02(g) .

“ Affected Bank ” means any Bank, other than the Issuing Bank, that has made, or notified ACE that an event or circumstance has occurred that may give rise to, a demand for compensation under Section 2.06(a) or (b) or Section 2.08 (but only so long as the event or circumstance giving rise to such demand or notice is continuing).

“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to vote 5% or more of the equity interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of equity interests, by contract or otherwise.

“ Agreement ” - see the Preamble .

“ Assignment and Acceptance ” means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Administrative Agent, in accordance with Section 8.07 and in substantially the form of Exhibit A .

“ Available Amount ” means, with respect to any LOC, the maximum amount available to be drawn under such LOC under any circumstance, including any amount that has been the subject of a drawing by the applicable beneficiary but has not yet been paid by the Issuing Bank.

“ Bankruptcy Law ” means Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors.

“ Banks ” - see the Preamble . For the avoidance of doubt, references herein to Banks shall include the Issuing Bank unless otherwise specified.

“ Base Rate ” means a fluctuating interest rate per annum equal to at any time the higher of (a) the sum of the Federal Funds Rate plus 0.5% and (b) the prime lending rate most recently announced by DB (or any U.S. Affiliate of DB if no such rate is announced by DB) as its prime lending rate, which rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer.

“ Business Day ” means a day of the year on which banks are not required or authorized by law to close in New York, New York, London, England, or Bermuda.

“ Closing Date ” means the first date on which the conditions set forth in Article III shall have been satisfied.

“ Commitment ” means, with respect to any Bank, the commitment of such Bank to issue (in the case of the Issuing Bank) or participate in LOCs hereunder in an amount equal to its Commitment Amount.

“ Commitment Amount ” means, with respect to any Bank at any time, the amount set forth opposite such Bank’s name on Schedule I under the caption “Commitment Amount” or, if such Bank has entered into one or more Assignment and Acceptances, the amount set forth for such Bank in the Register maintained by the Administrative Agent pursuant to Section 8.07(d) as such Bank’s “Commitment Amount”, as such amount may be reduced at or prior to such time pursuant to Section 2.04 .

“ Confidential Information ” means information that ACE or any Affiliate thereof furnishes to the Administrative Agent or any Bank, but does not include any such information that is or becomes generally available to the public other than as a result of a breach by the Administrative Agent or any Bank of its obligations hereunder or that is or becomes available to the Administrative Agent or such Bank from a source other than ACE or an Affiliate thereof that is not, to the best of the Administrative Agent’s or such Bank’s knowledge, acting in violation of a confidentiality agreement with ACE or any Affiliate thereof.

“ Consolidated ” refers to the consolidation of accounts in accordance with GAAP.

“ Credit Exposure ” means at any time the sum at such time of (a) the aggregate outstanding amount of all Advances, (b) the aggregate Available Amounts of all outstanding LOCs and (c) the aggregate Available Amounts of all LOCs that have been requested by ACE to be issued hereunder but have not yet been so issued.

“ DB ” - see the Preamble .

“ Default ” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.

“ Eligible Assignee ” means (i) a Bank, (ii) an Affiliate of a Bank, or (iii) a commercial bank, a savings bank or other financial institution that is approved by the Administrative Agent, the Issuing Bank and, unless an Event of Default has occurred and is continuing at the time any assignment is effected pursuant to Section 8.07 , ACE (such approvals not to be unreasonably withheld or delayed); provided that neither ACE nor any Affiliate thereof shall qualify as an Eligible Assignee.

“ Event of Default ” has the meaning specified in Section 6.01 .

“ Federal Funds Rate ” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it.

“ Indemnified Party ” has the meaning specified in Section 8.04(b) .

“ Internal Revenue Code ” means the Internal Revenue Code of 1986.

“ Issuing Bank ” means DB in its capacity as the issuer of LOCs hereunder.

“ Lending Office ” means, with respect to a Bank, the office of such Bank that is to make and receive payments hereunder as specified to the Administrative Agent from time to time.

“ Lien ” means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.

“ Loan Documents ” means (i) this Agreement, (ii) the Pricing Agreement and (iii) each LOC Application.

“ LOC ” has the meaning specified in Section 2.01 .

“ LOC Application ” has the meaning specified in Section 2.02(a) .

“ LOC Participating Interest ” has the meaning specified in Section 2.02(e) .

“ LOC Related Documents ” has the meaning specified in Section 2.03(b) .

“ Material Adverse Change ” means any material adverse change in the business, financial condition, operations or properties of ACE and its Subsidiaries, taken as a whole.

“ Material Adverse Effect ” means a material adverse effect on (a) the business, condition, operations or properties of ACE and its Subsidiaries, taken as a whole, (b) the rights and remedies of the Administrative Agent or any Bank under any Loan Document or (c) the ability of ACE to perform its obligations under the Loan Documents.

“ Material Subsidiary ” means (i) any Subsidiary of ACE that has more than $10,000,000 in assets or that had more than $10,000,000 of revenue during the most recent period of four fiscal quarters for which financial statements are available, and (ii) any Subsidiary that is the direct or indirect parent company of any Subsidiary that qualified as a “Material Subsidiary” under clause (i) above.

“ Nonconsenting Bank ” means any Bank, other than the Issuing Bank, that does not approve a consent, waiver or amendment to any Loan Document requested by ACE or the Administrative Agent and that requires the approval of all Banks under Section 8.01 (or all Banks directly affected thereby) when the Super-Majority Banks have agreed to such consent, waiver or amendment.

“ OFAC ” means the U.S. Department of the Treasury’s Office of Foreign Assets Control, and any successor thereto.

“ Other Taxes ” has the meaning specified in Section 2.08(b) .

“ Patriot Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act, Title III of Pub. L. 107-56 (signed into law October 26, 2001)).

“ Person ” means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.

“ Pricing Agreement ” means the Amended and Restated Fee Pricing Agreement dated as of June 16, 2009 between ACE and DB.

“ Pro Rata Share ” means, for any Bank, the percentage share that its Commitment Amount is of the aggregate Commitment Amount of all Banks (or, if the Commitments have terminated, that the amount of such Bank’s participating interest in the Advances and LOCs is of the Credit Exposure).

“ Qualifying Issuing Bank ” means a financial institution that is included on the “Bank List” maintained by the National Association of Insurance Commissioners (“ NAIC ”) pursuant to the Purposes and Procedures Manual of the NAIC Securities Valuation Office (or any replacement thereof or any similar list, or set of eligibility standards, maintained by the NAIC for purposes of determining whether banks are qualified to issue or confirm letters of credit for reinsurance purposes).

“ Register ” has the meaning specified in Section 8.07(d) .

“ Reimbursement Agreement ” means the Second Amended and Restated Reimbursement Agreement dated as of November 8, 2007 among ACE, various subsidiaries thereof, various financial institutions and Wachovia Bank, National Association, as Administrative Agent, as such Agreement is in effect on the date hereof, without giving effect to (a) any amendment or other modification thereto or waiver thereunder unless the Required Banks hereunder (or if such amendment, modification or waiver thereunder requires the consent of all “Banks” thereunder, all Banks hereunder) have agreed to such amendment, modification or waiver (in which case such amendment, modification or waiver shall automatically become effective hereunder, mutatis mutandis ) or (b) any termination thereof.

“ Required Banks ” means, at any time, Banks with aggregate Pro Rata Shares of more than 50%.

“ Responsible Officer ” means the Chairman, Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Treasurer or General Counsel of ACE.

“ Sanctioned Country ” means a country subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/ , or as otherwise published by OFAC from time to time.

“ Sanctioned Person ” means (i) a Person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf , or as otherwise published by OFAC from time to time, or (ii) (A) an agency of the government of a Sanctioned Country, or (B) a Person resident in a Sanctioned Country, to the extent subject to a sanctions program administered by OFAC.

“ Subsidiary ” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries.

“ Super-Majority Banks ” means Banks with aggregate Pro Rata Shares of 66 ² / 3 % or more.

“ Taxes ” has the meaning specified in Section 2.08(a) .

“ Termination Date ” means September 20, 2014.

1.02 Computation of Time Periods; Other Definitional Provisions . In this Agreement and the other Loan Documents in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until”

each mean “to but excluding”. Except as otherwise expressly provided herein, any reference to (a) an agreement or contract shall mean such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time; (b) a law shall mean such law as amended, supplemented or otherwise modified from time to time (including any successor thereto) and all rules, regulations, guidelines and decisions interpreting or implementing such law; (c) an Article , a Section , an Exhibit or a Schedule shall mean an Article or a Section hereof or an Exhibit or a Schedule hereto, and (d) a time of day shall mean such time in New York, New York. The term “including” means “including without limitation” and derivatives of such term have a corresponding meaning.

1.03 Accounting Terms and Determinations . For purposes of interpreting any provision of the Reimbursement Agreement incorporated herein by reference and for dealing with any change in GAAP (as defined in the Reimbursement Agreement), the provisions of Section 1.03 of the Reimbursement Agreement are incorporated herein by reference, mutatis mutandis .

ARTICLE II.

AMOUNTS AND TERMS OF

THE LETTERS OF CREDIT

2.01 The Letters of Credit . The Issuing Bank agrees, on the terms and subject to the conditions herein set forth, to issue standby letters of credit, substantially in the form of Exhibit B-1 or Exhibit B-2 , or in such other form as the Issuing Bank may approve (such approval not to be unreasonably withheld or delayed so long as such form complies with the following provisions of this Section 2.01 ) (each an “ LOC ” and collectively the “ LOCs ”), and extend or increase the amount of LOCs, for the account of ACE on any Business Day from time to time during the period from the Closing Date to the Termination Date; provided that (a) the Issuing Bank shall not have any obligation to issue, extend or increase the amount of any LOC if (i) the aggregate Credit Exposure (after giving effect to such issuance, extension or increase) would exceed the LOC Availability Amount (as defined in the Pricing Agreement) scheduled to be outstanding at any time during the period from the date of such issuance, extension or increase to the stated expiration date of such LOC; or (ii) such issuance, extension or increase would conflict with or cause the Issuing Bank to exceed any limit imposed by applicable law or any applicable requirement thereof; (b) each LOC shall be denominated in U.S. dollars and shall be in a face amount not less than $50,000 (or such lesser amount as the Issuing Bank may agree); (c) each LOC shall be payable only against sight drafts (and not time drafts); (d) no LOC shall have a scheduled expiration date (including all rights of ACE or the beneficiary to require extension thereof) later than the fifth (5 ^th ) Business Day prior to the date on which the aggregate Credit Exposure (including the subject LOC) would exceed the aggregate LOC Availability Amount scheduled to be outstanding at any time during such period if such subject LOC remained outstanding on such date; (e) the Issuing Bank shall not have any obligation to issue any LOC that the Issuing Bank determines, in the exercise of its reasonable judgment consistent with its customary practice, is unsatisfactory in form or substance or is to be issued in favor of a beneficiary that is a Sanctioned Person, is organized under the laws of a Sanctioned Country or is otherwise unsatisfactory to the Issuing Bank; (f) each LOC issued in the form of Exhibit B-1 shall provide that such LOC shall expire on the thirtieth (30 ^th ) day following written notice by

the Issuing Lender to the beneficiary of the occurrence of a “Credit Event” with respect to ACE consisting of a “Failure to Pay” or a “Bankruptcy” (as each such term is defined in the 2003 ISDA Credit Derivatives Definitions published by the International Swaps and Derivatives Association, Inc.); and (g) prior to issuing any LOC in the form of Exhibit B-2 , the Issuing Bank or Administrative Agent shall have entered into a reinsurance trust agreement with a reinsurance trustee, in form and substance satisfactory to the Issuing Bank and Administrative Agent and containing terms substantially similar to those set forth on Exhibit C , and, upon issuance of such LOC, such LOC shall be immediately deposited into the reinsurance trust account governed by the terms of such reinsurance trust agreement, and shall at all times thereafter be held in such reinsurance trust account. An LOC may by its terms be automatically extendible annually; provided , that the Issuing Bank shall not permit any such automatic extension if it has determined that such extension would not be permitted, or the Issuing Bank would have no obligation, at such time to issue such LOC as extended under the terms hereof, in which case the Issuing Bank shall notify the beneficiary thereof of its election not to extend such LOC (which the Issuing Bank agrees to do on and subject to the terms of Section 2.02(c) ). LOCs may be issued for the benefit of any wholly-owned Subsidiary of ACE; provided that ACE shall be the account party with respect to any such LOC.

2.02 Issuance and Extensions and Drawings, Participations and Reimbursement with Respect to Letters of Credit .

(a) Request for Issuance . ACE may from time to time request, upon at least three Business Days’ notice (given not later than 11:00 A.M.), that the Issuing Bank issue an LOC by delivering to the Issuing Bank (i) a written request substantially in the form of Exhibit D (an “ LOC Application ”) specifying the date on which such LOC is to be issued (which shall be a Business Day), the expiration date thereof, the Available Amount thereof and the name and address of the beneficiary thereof; and (ii) such other documents as may be required pursuant to the Issuing Bank’s customary practices for the issuance of letters of credit.

If the requirements set forth in the proviso to the first sentence of Section 2.01 and in Article III are satisfied, the Issuing Bank shall issue the applicable LOC on the date requested in such LOC Application. Upon the issuance of an LOC, the Issuing Bank shall (A) deliver the original of such LOC to the beneficiary thereof or as ACE shall otherwise direct and (B) promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent. The Issuing Bank may issue LOCs through any of its branches or Affiliates (whether domestic or foreign) that issue letters of credit.

(b) Request for Extension or Increase . ACE may from time to time request, upon at least three Business Days’ notice (given not later than 11:00 A.M.), that the Issuing Bank extend the expiration date of an outstanding LOC or increase (or, with the consent of the beneficiary, decrease) the Available Amount of an outstanding LOC by delivering to the Issuing Bank a written request therefor. Any such request for an extension or increase shall for all purposes hereof (including for purposes of Section 2.02(a) ) be treated as though ACE had requested issuance of a replacement LOC (except that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new LOC in substitution for the outstanding LOC).

(c) Automatic Extensions . If any LOC shall provide for the automatic extension of the expiry date thereof unless the Issuing Bank gives notice that such expiry date shall not be extended, then the Issuing Bank shall allow such LOC to be extended unless it shall have received, at least five days prior to the date on which such notice of non-extension must be delivered under such LOC (or such shorter period acceptable to the Issuing Bank), (i) notice from the Required Banks (or the Administrative Agent on their behalf) stating that the conditions precedent to the extension of such LOC have not been satisfied or (ii) notice from ACE directing the Issuing Bank not to permit the extension of such LOC (and the Issuing Bank shall not permit any LOC to be automatically extended if it has received a timely notice of the type described in the foregoing clause (i) or (ii)).

(d) Limitations on Issuance, Extension and Increase of LOCs . As between the Issuing Bank, on the one hand, and the Administrative Agent and the other Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing a proposed LOC, extending the expiration date or increasing the Available Amount of an outstanding LOC or permitting an outstanding LOC to be automatically extended if the Issuing Bank has not received notice that it is not authorized to issue, increase the Available Amount of or extend such LOC as described in the foregoing provisions of this Section 2.02 , in each case notwithstanding any subsequent notice to the Issuing Bank, any knowledge the Issuing Bank may have of a Default or of the failure of any condition specified the proviso to the first sentence of Section 2.01 or in Article III to be satisfied, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement LOCs or LOC Applications, or waive compliance with any condition of issuance, extension or payment, without the consent of, and without liability to, the Administrative Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Available Amount of or the amount available to be drawn on an outstanding LOC shall be subject to Section 2.01 .

(e) Letter of Credit Participating Interests . Concurrently with the issuance of each LOC, the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank’s Pro Rata Share, in all of the Issuing Bank’s rights and obligations in, to or under such LOC, the related LOC Application, all reimbursement obligations with respect to such LOC, and all collateral, guarantees and other rights from time to time directly or indirectly securing or supporting the foregoing (such interest of each Bank being referred to herein as an “ LOC Participating Interest ”, it being understood that the LOC Participating Interest of the Issuing Bank is the interest not otherwise attributable to the LOC Participating Interests of the other Banks). On the date that any assignee becomes a party to this Agreement in accordance with Section 8.07 , LOC Participating Interests in all outstanding LOCs held by the Bank from which such assignee acquired its interest hereunder shall be proportionately reallocated between such assignee and such assignor Bank. Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each LOC, its obligation to make the payments specified in Section 2.02(f) and the right of the Issuing Bank to receive such payments in the manner specified therein are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such

payment shall not relieve any other Bank of its funding obligation hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder.

(f) Payment by Banks on Account of Unreimbursed Draws . If the Issuing Bank makes a payment under an LOC and is not reimbursed in full therefor in accordance with Section 2.03 , the Issuing Bank may notify the Administrative Agent thereof (which notice may be by telephone), and the Administrative Agent shall forthwith notify each Bank thereof (which notice may be by telephone promptly confirmed in writing). No later than the Administrative Agent’s close of business on the date such notice is given (if notice is given by 2:00 P.M. on a Business Day) or 10:00 A.M. on the following Business Day (if notice is given after 2:00 P.M. on a Business Day), each Bank will pay to the Administrative Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank’s Pro Rata Share of the unreimbursed portion of such payment by the Issuing Bank. Amounts received by the Administrative Agent for the account of the Issuing Bank shall be forthwith transferred, in immediately available funds, to the Issuing Bank. To the extent that any Bank fails to make such payment to the Administrative Agent for the account of the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank’s own account, from the date such payment is due from such Bank to the Issuing Bank to the date of payment to the Issuing Bank (before and after judgment) at a rate per annum for each day (i) from the date such payment is due from such Bank to the Issuing Bank to the third Business Day thereafter equal to the Federal Funds Rate and (ii) thereafter equal to the Base Rate.

(g) Advances . The term “ Advance ” is used in this Agreement in accordance with the meanings set forth in this Section 2.02(g) . The making of any payment by the Issuing Bank under an LOC is sometimes referred to herein as the making of an Advance by the Issuing Bank in the amount of such payment. The making of any payment by a Bank for the account of the Issuing Bank under Section 2.02(f) on account of an unreimbursed drawing on an LOC is sometimes referred to as the making of an Advance by such Bank. The making of an Advance by a Bank with respect to an unreimbursed drawing on an LOC shall reduce, by a like amount, the outstanding Advance of the Issuing Bank with respect to such unreimbursed drawing.

(h) LOC Reports . The Issuing Bank will furnish to the Administrative Agent prompt written notice of each issuance or extension, or increase in the amount, of an LOC (including the Available Amount and expiration date thereof), amendment to an LOC, cancellation of an LOC and payment on an LOC. The Administrative Agent will furnish to each Bank prior to the fifteenth Business Day of each calendar quarter a written report summarizing issuance, extension and expiration dates of LOCs issued or extended during the preceding calendar quarter and payments and reductions in Available Amounts during such calendar quarter on all LOCs.

2.03 Reimbursement Obligations .

(a) ACE agrees to reimburse the Issuing Bank (by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.07 ) in the amount of each Advance made by the Issuing Bank, such reimbursement to be made on the date such Advance is made by the Issuing Bank (but not earlier than one Business Day after notice of the drawing giving rise to such Advance is given to ACE). Such reimbursement obligation shall

be payable without further notice, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. To the extent such payment by ACE is not timely made, ACE agrees to pay to the Administrative Agent, for the respective accounts of the Issuing Bank and the Banks that have funded their respective shares of such amount remaining unpaid by ACE, on demand, default interest at a rate per annum equal to the Base Rate plus 2% for each day from the date on which ACE is to reimburse the Issuing Bank to the date such obligation is paid in full. For the avoidance of doubt, the payment by ACE of default interest pursuant to this Section 2.03(a) shall not affect the calculation of fees under the Loan Documents.

(b) The obligation of ACE to reimburse the Issuing Bank for any Advance made by the Issuing Bank, and the obligation of each Bank under Section 2.02(f) with respect thereto, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, the applicable LOC Application and any other applicable agreement or instrument under all circumstances, including the following circumstances:

(i) any lack of validity or enforceability of any Loan Document, any LOC Application, any LOC or any other agreement or instrument relating thereto (all of the foregoing, collectively, the “ LOC Related Documents ”);

(ii) any change in the time, manner or place of payment of, or in any other term of, any obligation of ACE or any other Person in respect of any LOC Related Document or any other amendment or waiver of or any consent to departure from any LOC Related Document;

(iii) the existence of any claim, set-off, defense or other right that ACE or any other Person may have at any time against any beneficiary or any transferee of an LOC (or any Person for which any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with the transactions contemplated by the LOC Related Documents or any unrelated transaction;

(iv) any statement or any other document presented under an LOC proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

(v) payment by the Issuing Bank under an LOC against presentation of a draft or certificate that does not strictly comply with the terms of such LOC;

(vi) any exchange, release or non-perfection of any collateral granted to secure any obligation of ACE or any other Person in connection with any Loan Document; or

(vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, ACE.

(c) If any amount received by the Issuing Bank on account of any Advance shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such

matter has been adjudicated), each Bank will (except to the extent a corresponding amount received by such Bank on account of its Advance relating to the same payment on an LOC has been avoided, rescinded or otherwise returned or paid over by such Bank), promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative Agent for the account of the Issuing Bank its Pro Rata Share of such amount, together with its Pro Rata Share of any interest or penalties payable with respect thereto.

2.04 Termination or Reduction of the Commitments . Subject to the Pricing Agreement, ACE may at any time, upon at least five Business Days’ notice to the Administrative Agent, terminate the Commitments in whole or reduce in part the unused portion of the Commitment Amounts; provided that each partial reduction (i) shall be in an aggregate amount of $10,000,000 or a higher integral multiple of $1,000,000 and (ii) shall be made ratably among the Banks in accordance with their Commitment Amounts. Concurrently with any termination of the Commitments in whole pursuant to this Section 2.04 , ACE shall (a) surrender to the Issuing Bank, or provide cash collateral or backup letters of credit (in each case pursuant to documentation reasonably acceptable to the Administrative Agent and, in the case of backup letters of credit, from a financial institution acceptable to the Issuing Bank) in an amount equal to 102% of the Available Amount of, all outstanding LOCs and (b) pay the principal amount of all outstanding Advances, all accrued and unpaid default interest thereon, all accrued and unpaid fees payable pursuant to Section 2.05 and all other obligations then payable hereunder and under the other Loan Documents. If any LOCs remain outstanding at the time of termination of the Commitments pursuant to this Section 2.04 , the Issuing Bank shall use reasonable commercial efforts to assist ACE in replacing such LOCs with letters of credit issued by other institutions.

2.05 Fees . ACE agrees to pay the fees set forth in the Pricing Agreement.

2.06 Increased Costs, Etc.

(a) If, due to either (i) the introduction of or any change in or in the interpretation of, in each case after the date hereof, any law or regulation or (ii) compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to issue or of issuing or maintaining or participating in LOCs or the making of Advances (excluding, for purposes of this Section 2.06 , any such increased costs resulting from (x) Taxes or Other Taxes (as to which Section 2.08 shall govern) and (y) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Bank is organized or has its Lending Office or any political subdivision thereof), then ACE agrees to pay, from time to time, within five days after demand by such Bank (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, to the Administrative Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. A certificate as to the amount of such increased cost, submitted to ACE by such Bank, shall be conclusive and binding for all purposes, absent manifest error.

(b) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation, in each case after the date hereof, or (ii) compliance with any guideline or

request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the amount of capital required or expected to be maintained by any Bank or any corporation controlling such Bank as a result of or based upon the existence of such Bank’s commitment to extend credit hereunder and other commitments of such type, then, within ten days after demand by such Bank or such corporation (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, ACE agrees to pay to the Administrative Agent for the account of such Bank, from time to time as specified by such Bank, additional amounts sufficient to compensate such Bank in the light of such circumstances, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank’s commitment to issue or participate in LOCs hereunder or to the issuance or maintenance of or participation in any LOC. A certificate as to such amounts submitted to ACE by such Bank shall be conclusive and binding for all purposes, absent manifest error.

(c) Each Bank shall promptly notify ACE and the Administrative Agent of any event of which it has actual knowledge that will result in, and will use reasonable commercial efforts available to it (and not, in such Bank’s good faith judgment, otherwise disadvantageous to such Bank) to mitigate or avoid, any obligation of ACE to pay any amount pursuant to Section 2.06(a) or 2.06(b) above or pursuant to Section 2.08 (and, if any Bank has given notice of any such event and thereafter such event ceases to exist, such Bank shall promptly so notify ACE and the Administrative Agent). Without limiting the foregoing, each Bank will designate a different Lending Office if such designation will avoid (or reduce the cost to ACE of) any event described in the preceding sentence and such designation will not, in such Bank’s good faith judgment, be otherwise disadvantageous to such Bank.

(d) Notwithstanding the provisions of Section 2.06(a) , 2.06(b) or 2.08 (and without limiting Section 2.06(c) above), if any Bank fails to notify ACE of any event or circumstance that will entitle such Bank to compensation pursuant to Section 2.06(a) , 2.06(b) or 2.08 within 120 days after such Bank obtains actual knowledge of such event or circumstance, then such Bank shall not be entitled to compensation from ACE for any amount arising prior to the date that is 120 days before the date on which such Bank notifies ACE of such event or circumstance.

2.07 Payments and Computations .

(a) ACE shall make each payment hereunder irrespective of any right of counterclaim or set-off not later than 11:00 A.M. on the day when due, in U.S. dollars, to the Administrative Agent at such account as the Administrative Agent shall reasonably direct in immediately available funds, with payments being received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter distribute to each Bank its portion of such payment in accordance with the terms hereof. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Bank assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.

(b) All computations of default interest on Advances when the Base Rate is determined by reference to DB’s prime rate shall be made by the Administrative Agent on the basis of a year of 365 or, if applicable, 366 days; all other computations of default interest shall be made by the Administrative Agent on the basis of a year of 360 days. All such computations shall be made for the actual number of days (including the first day but excluding the last day) occurring in the period for which such default interest is payable. Each determination by the Administrative Agent of a default interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.

(c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of any payment of default interest or fees.

2.08 Taxes .

(a) All payments by ACE hereunder shall be made, in accordance with Section 2.07 , free and clear of and without deduction for, any present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Administrative Agent, taxes that are imposed on its overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction under the laws of which such Bank or the Administrative Agent, as the case may be, is organized or any political subdivision thereof and, in the case of each Bank, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state or foreign jurisdiction of such Bank’s Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder, “ Taxes ”). If ACE shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Administrative Agent, (i) the sum payable by ACE shall be increased as may be necessary so that after ACE and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.08 ) such Bank or the Administrative Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) ACE shall make all such deductions and (iii) ACE shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.

(b) In addition, ACE shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Agreement or any other Loan Document (any of the foregoing, “ Other Taxes ”).

(c) ACE shall indemnify each Bank and the Administrative Agent for and hold each of them harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.08 , imposed on or paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. Any such indemnification payment shall be made within 30 days from the date such Bank or the Administrative Agent (as the case may be) makes written demand therefor.

(d) Within 30 days after the date of any payment of Taxes, ACE shall furnish to the Administrative Agent, at its address referred to in Section 8.02 , the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder by or on behalf of ACE through an account or branch outside the United States or by or on behalf of ACE by a payor that is not a United States person, if ACE determines that no Taxes are payable in respect thereof, ACE shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this Section 2.08(d) and Section 2.08(e) , the terms “United States” and “United States person” shall have the meanings specified in Sections 7701(a)(9) and 7701(a)(10) of the Internal Revenue Code, respectively.

(e) Each Bank organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each initial Bank, and on the date of the Assignment and Acceptance pursuant to which it becomes a Bank in the case of each other Bank, and from time to time thereafter as requested in writing by ACE (but only so long as such Bank remains lawfully able to do so), provide each of the Administrative Agent and ACE with two original Internal Revenue Service forms W-8BEN or W-8ECI or (in the case of a Bank that has certified in writing to the Administrative Agent that it is not a “bank” as defined in Section 881(c)(3)(A) of the Internal Revenue Code) form W-8 (and, if such Bank delivers a form W-8, a certificate representing that such Bank is not a “bank” for purposes of Section 881(c)(3)(A) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of ACE and is not a controlled foreign corporation related to ACE (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Bank is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or, in the case of a Bank providing a form W-8, certifying that such Bank is a foreign corporation, partnership, estate or trust. If the forms provided by a Bank at the time such Bank first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Bank provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate shall be considered excluded from Taxes only for periods governed by such forms; provided that if, at the effective date of the Assignment and Acceptance pursuant to which a Bank becomes a party to this Agreement, the Bank assignor was entitled to payments under Section 2.08(a) in respect of United States withholding tax with respect to default interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Bank assignee on such date. If any form or document referred to in this Section 2.08(e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form W-8BEN, W-8ECI or W-8 (and the related certificate described above), that the Bank reasonably considers to be confidential, the Bank shall give notice thereof to ACE and shall not be obligated to include in such form or document such confidential information.

(f) For any period with respect to which a Bank which may lawfully do so has failed to provide ACE with the appropriate form described in Section 2.08(e) above ( other than if such

failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under Section 2.08(e) above), such Bank shall not be entitled to indemnification under Sections 2.08(a) or 2.08(c) with respect to Taxes imposed by the United States by reason of such failure; provided that should a Bank become subject to Taxes because of its failure to deliver a form required hereunder, ACE shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes.

(g) Each Bank represents and warrants to ACE that, as of the date such Bank becomes a party to this Agreement, such Bank is entitled to receive payments hereunder from ACE without deduction or withholding for or on account of any Taxes.

2.09 Sharing of Payments, Etc. If any Bank shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, other than as a result of an assignment pursuant to Section 8.07 ) (a) on account of obligations due and payable to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations due and payable to such Bank at such time to (ii) the aggregate amount of the obligations due and payable to all Banks hereunder at such time) of payments on account of the obligations due and payable to all Banks hereunder at such time obtained by all the Banks at such time or (b) on account of obligations owing (but not due and payable) to such Bank hereunder at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations owing to such Bank at such time to (ii) the aggregate amount of the obligations owing (but not due and payable) to all Banks hereunder at such time) of payments on account of the obligations owing (but not due and payable) to all Banks hereunder at such time obtained by all of the Banks at such time, such Bank shall forthwith purchase from the other Banks such interests or participating interests in the obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank’s ratable share (according to the proportion of (i) the purchase price paid to such Bank to (ii) the aggregate purchase price paid to all Banks) of such recovery together with an amount equal to such Bank’s ratable share (according to the proportion of (A) the amount of such other Bank’s required repayment to (B) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. ACE agrees that any Bank so purchasing an interest or participating interest from another Bank pursuant to this Section 2.09 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such interest or participating interest, as the case may be, as fully as if such Bank were the direct creditor of ACE in the amount of such interest or participating interest, as the case may be.

2.10 Use of Letters of Credit . The LOCs shall be used for general corporate purposes of ACE and its Subsidiaries.

2.11 Replacement of Affected Bank or Nonconsenting Bank . At any time any Bank (other than the Issuing Bank) is an Affected Bank or a Nonconsenting Bank, ACE may, at its sole expense (including the assignment fee specified in Section 8.07(a) ) and effort, replace such

Affected Bank or Nonconsenting Bank as a party to this Agreement with one or more other Banks and/or Eligible Assignees, and upon notice from ACE such Affected Bank or Nonconsenting Bank shall assign pursuant to an Assignment and Acceptance, and without recourse or warranty, its Commitment Amount, its LOC Participating Interests, its Advances and all of its other rights and obligations hereunder to such other Banks and/or Eligible Assignees for a purchase price equal to the sum of the principal amount of the Advances so assigned, all accrued and unpaid default interest thereon, such Affected Bank’s or Nonconsenting Bank’s ratable share of all accrued and unpaid fees payable pursuant to Section 2.05 and all other obligations owed to such Affected Bank or Nonconsenting Bank hereunder and under the other Loan Documents. Notwithstanding the foregoing, (i) no Affected Bank or Nonconsenting Bank shall be required to make any such assignment if, prior to its receipt of the notice from ACE referred to in the foregoing sentence, as a result of a waiver or otherwise, the circumstances entitling ACE to require such assignment cease to apply, and (ii) no Nonconsenting Bank shall be required to make any such assignment if at the time of any such proposed assignment, any Default under this Agreement has occurred and is continuing.

2.12 Certain Provisions Relating to the Issuing Bank and LOCs .

(a) LOC Applications . The representations, warranties and covenants by ACE under, and the rights and remedies of the Issuing Bank under, any LOC Application relating to any LOC are in addition to, and not in limitation or derogation of, representations, warranties and covenants by ACE under, and rights and remedies of the Issuing Bank and the other Banks under, this Agreement and applicable law. ACE acknowledges and agrees that all rights of the Issuing Bank under any LOC Application shall inure to the benefit of each Bank to the extent of its LOC Participating Interest in and Advances in connection with the applicable LOC as fully as if such Bank were a party to such LOC Application. In the event of any inconsistency between the terms of this Agreement and any LOC Application, this Agreement shall prevail.

(b) Certain Provisions . The Issuing Bank shall have no duties or responsibilities to the Administrative Agent or any Bank except those expressly set forth in this Agreement, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the Banks and the Administrative Agent under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of the Administrative Agent, any Bank or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any Loan Document or LOC, except to the extent resulting from its gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to the Administrative Agent or any Bank relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of ACE, (ii) the business, operations, condition (financial or otherwise) or prospects of ACE or any other Person, or (iii) the existence of any Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide the Administrative Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any Loan Document.

(c) Administration . The Issuing Bank may rely upon any notice or other communication of any nature (written, electronic or oral, including telephone conversations and transmissions through the Issuing Bank’s remote access system, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including its in-house counsel or in-house or other counsel for ACE), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to ACE, the Administrative Agent or any Bank, such matter may be established by a certificate of ACE, the Administrative Agent or such Bank, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Default unless the Issuing Bank has received notice from a Bank, the Administrative Agent or ACE referring to this Agreement, describing such Default, and stating that such notice is a “notice of default”.

(d) Indemnification of Issuing Bank by Banks . Each Bank hereby agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by ACE and without limitation of the obligations of ACE to do so), in accordance with its Pro Rata Share, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document or any LOC, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any LOC, provided that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction.

(e) Issuing Bank in its Individual Capacity . With respect to its commitments and the obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Loan Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term “Banks” and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its Affiliates may, without liability to account to any Person, make loans to, accept deposits from, acquire debt or equity

interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, ACE and any stockholder, Subsidiary or Affiliate of ACE, as though the Issuing Bank were not the Issuing Bank hereunder.

2.13 Failure of Issuing Bank to be an Eligible Issuer . If at any time the Issuing Bank ceases to be a Qualifying Issuing Bank, then (a) at the request of ACE, Deutsche Bank AG, New York Branch shall cause Deutsche Bank Trust Company Americas, if it then is a Qualifying Issuing Bank, to be substituted as the Issuing Bank as promptly as practicable thereafter with respect to all subsequent LOCs issued pursuant to this Agreement and (b) if Deutsche Bank Trust Company Americas is not, or subsequently ceases to be, a Qualifying Issuing Bank, the Issuing Bank shall use reasonable commercial efforts in cooperation with ACE to find a substitute Qualifying Issuing Bank as promptly as practicable thereafter which is reasonably satisfactory to ACE to replace the Issuing Bank with respect to all subsequent LOCs issued pursuant to this Agreement. With respect to any LOC outstanding at the time a substitute Qualifying Issuing Bank becomes the Issuing Bank hereunder, the existing Issuing Bank shall use reasonable commercial efforts to assist ACE in replacing such existing LOC with a letter of credit issued by the new Issuing Bank.

ARTICLE III.

CONDITIONS

3.01 Conditions Precedent to Closing Date . The occurrence of the Closing Date, and the obligation of the Issuing Bank to issue any LOC, is subject to the satisfaction of the following conditions precedent:

(a) The Administrative Agent shall have received the following, each dated the Closing Date (unless otherwise specified), in form and substance reasonably satisfactory to the Administrative Agent (unless otherwise specified) and in sufficient copies for each Bank:

(i) Certified copies of the resolutions of the Board of Directors of ACE approving the transactions contemplated by the Loan Documents.

(ii) A certificate of ACE, signed by a Responsible Officer, certifying as to (1) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the Closing Date and (2) the absence of any Default.

(iii) A certificate of the Secretary or an Assistant Secretary and a Responsible Officer of ACE certifying the names and true signatures of the officers of ACE that are authorized to sign the Loan Documents and the other documents to be delivered hereunder.

(iv) Favorable opinions of (1) Niederer Kraft & Frey AG, Swiss counsel for ACE, in substantially the form of Exhibit E-1, and (2) Mayer Brown LLP, New York counsel for ACE, in substantially the form of Exhibit E-2 .

(b) There shall exist no action, suit, investigation, litigation or proceeding affecting ACE or any of its Subsidiaries pending or threatened before any court, governmental agency or

arbitrator that (x) would be reasonably expected to have a Material Adverse Effect or (y) would reasonably be expected to materially adversely affect the legality, validity or enforceability of any Loan Document or the transactions contemplated thereby.

(c) ACE shall have paid all fees of the Administrative Agent and the Banks and all expenses of the Administrative Agent (including the fees and expenses of counsel to the Administrative Agent), in each case to the extent then due and payable.

3.02 Conditions Precedent to Each Issuance, Extension or Increase of an LOC . In addition to the conditions to issuance, extension or increase set forth in Section 2.01 , the obligation of the Issuing Bank to issue, extend or increase the amount of an LOC (including any issuance on the Closing Date) shall be subject to the further conditions precedent that on the date of such issuance, extension or increase (a) the following statements shall be true (and each request for issuance, extension or increase of an LOC and each automatic extension of an LOC shall constitute a representation and warranty by ACE that both on the date of such notice and on the date of such issuance, extension or increase such statements are true):

(i) the representations and warranties contained in each Loan Document are correct in all material respects on and as of such date, before and after giving effect to such issuance, extension or increase, as though made on and as of such date, other than any such representation or warranty that, by its terms, refers to a specific date other than the date of such issuance, extension or increase, in which case as of such specific date ( provided that the representation and warranty contained in the last sentence of Section 4.06 shall be excluded from this clause (i) at all times after (but shall be included on and as of) the Closing Date); and

(ii) no Default has occurred and is continuing or would result from such issuance, extension or increase; and

(b) the Administrative Agent shall have received such other approvals, opinions or documents as any Bank through the Administrative Agent may reasonably request.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES

ACE represents and warrants as follows:

4.01 Existence, Etc . ACE and each of its Material Subsidiaries (i) is duly organized or formed, validly existing and, to the extent such concept applies, in good standing under the laws of the jurisdiction of its incorporation or formation, except, in the case of any Material Subsidiary, where the failure to do so would not be reasonably likely to have a Material Adverse Effect, (ii) is duly qualified and in good standing as a foreign corporation or other entity in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not be reasonably likely to have a Material Adverse Effect and (iii) has all requisite power and authority (including all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except where the failure to have any license, permit or other approval would not be reasonably likely to have a Material Adverse Effect.

4.02 Authority and Authorization . The execution, delivery and performance by ACE of each Loan Document, and the consummation of the transactions contemplated thereby, are within the organizational powers of ACE, have been duly authorized by all necessary organizational action, and do not (i) contravene the constitutional documents of ACE, (ii) violate any law, rule, regulation (including Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting ACE or any of its Subsidiaries or any of their respective properties or (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the properties of ACE or any of its Subsidiaries. Neither ACE nor any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which would be reasonably likely to have a Material Adverse Effect.

4.03 Approvals . No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the due execution, delivery or performance by ACE of any Loan Document or the consummation of the transactions contemplated thereby or (ii) the exercise by the Administrative Agent or any Bank of its rights under the Loan Documents, except for the authorizations, approvals, actions, notices and filings that have been duly obtained, taken, given or made and are in full force and effect, subject to bankruptcy, insolvency and similar laws of general application relating to creditors’ rights and to general principles of equity.

4.04 Enforceability . This Agreement has been, and each other Loan Document has been or when delivered hereunder will have been, duly executed and delivered by ACE. This Agreement is, and each other Loan Document is or when delivered hereunder will be, the legal, valid and binding obligation of ACE, enforceable against ACE in accordance with its terms.

4.05 Litigation . There is no action, suit, investigation, litigation or proceeding affecting ACE or any of its Subsidiaries pending or, to the knowledge of ACE, threatened before any court, governmental agency or arbitrator that (i) would be reasonably likely to have a Material Adverse Effect or (ii) would reasonably be expected to affect the legality, validity or enforceability of any Loan Document or the transactions contemplated by the Loan Documents.

4.06 Financials . The Consolidated balance sheet of ACE and its Subsidiaries as at December 31, 2008, and the related Consolidated statements of income and of cash flows of ACE and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of PricewaterhouseCoopers LLP, independent public accountants, and the Consolidated balance sheet of ACE and its Subsidiaries as at March 31, 2009, and the related Consolidated statements of income and cash flows of ACE and its Subsidiaries for the three months then ended, duly certified by the Chief Financial Officer of ACE, copies of which have been furnished to each Bank, fairly present, subject, in the case of said balance sheet as at March 31, 2009, and said statements of income and cash flows for the three months then ended, to year-end audit

adjustments, the Consolidated financial condition of ACE and its Subsidiaries as at such dates, and the Consolidated results of operations of ACE and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP applied on a consistent basis (subject in the case of the March 31, 2009 balance sheet and statements of income and cash flows, to the absence of footnotes). Since December 31, 2008, there has been no Material Adverse Change.

4.07 Accuracy of Information . No written information, exhibit or report furnished by or on behalf of ACE to the Administrative Agent or any Bank in connection with the negotiation of the Loan Documents or pursuant to the terms of the Loan Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading as at the date it was dated (or if not dated, so delivered).

4.08 Margin Stock . Margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) constitutes less than 25% of the value of those assets of ACE that are subject to any limitation on sale, pledge or other disposition hereunder.

4.09 Compliance with Certain Acts . ACE and each of its Subsidiaries is in compliance in all material respects with the Patriot Act. No part of any payment under any LOC will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977.

4.10 Reimbursement Agreement Representations and Warranties . Each representation and warranty of ACE set forth in clauses (j), (k), (l), (m), (n) and (p) of Section 4.01 of the Reimbursement Agreement is true and correct in all material respects as if set forth in full herein, mutatis mutandis.

ARTICLE V.

COVENANTS

So long as any Advance or any other obligation of ACE under any Loan Document shall remain unpaid, any LOC shall be outstanding or the Issuing Bank shall have any commitment to issue any LOC, ACE will:

5.01 Pari Passu Ranking . Ensure that at all times the claims of the Banks, the Issuing Bank and the Administrative Agent against it under the Loan Documents will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors, except for claims that are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application.

5.02 Other Covenants . Comply with all covenants set forth in Article V of the Reimbursement Agreement as if such covenants were set forth in full herein, mutatis mutandis.

ARTICLE VI.

EVENTS OF DEFAULT

6.01 Events of Default and Their Effect . If any of the following events (each an “ Event of Default ”) shall occur and be continuing:

(a) ACE shall fail to pay any reimbursement obligation in respect of any Advance made by the Issuing Bank pursuant to an LOC when and as the same shall become due and payable; or ACE shall fail to pay any other amount payable by ACE under any Loan Document within five Business Days after the same becomes due and payable;

(b) Any representation or warranty made by ACE (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made;

(c) (i) ACE shall fail to perform or observe any term, covenant or agreement contained in Section 2.10, or in Section 5.01(d) (solely with respect to ACE), 5.02, 5.03(a) or 5.04 of the Reimbursement Agreement as incorporated herein by reference; (ii) ACE shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(e) of the Reimbursement Agreement if such failure shall remain unremedied for five Business Days after written notice thereof shall have been given to ACE by the Administrative Agent or any Bank; or (iii) ACE shall fail to perform or observe any other term, covenant or agreement contained or incorporated by reference herein or contained in any Loan Document on its part to be performed or observed if such failure shall remain unremedied for 30 days after the earlier of the date on which (A) a Responsible Officer becomes aware of such failure or (B) written notice thereof shall have been given to ACE by the Administrative Agent or any Bank;

(d) Any “Event of Default” (under and as defined in the Reimbursement Agreement) shall occur and be continuing under Section 6.01(f), (g), (h), (j), (k) or (l) of the Reimbursement Agreement; or

(e) Any event of the type described in Section 6.01(f) of the Reimbursement Agreement shall occur with respect to the Reimbursement Agreement; provided , that for purposes of this Section 6.01(e) only, the references to “Reimbursement Agreement” herein shall include any modifications or amendments to the Reimbursement Agreement as in effect on any determination date;

then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Banks, by notice to ACE, declare the obligation of the Issuing Bank to issue, extend or increase the amount of any LOC to be terminated, whereupon the same shall forthwith terminate, and/or (ii) shall at the request, or may with the consent, of the Required Banks, by notice to ACE, declare all amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by ACE, and/or (iii) may require the beneficiary of any LOC to draw the entire amount available to be drawn under such LOC in accordance with (and

to the extent permitted by) such LOC; provided that in the event of an actual or deemed entry of an order for relief with respect to ACE under the federal Bankruptcy Law, (x) the obligation of the Issuing Bank to issue, extend or increase the amount of any LOC shall automatically terminate, (y) all such amounts shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by ACE and (z) the obligation of ACE to provide cash collateral under Section 6.02 shall automatically become effective.

6.02 Actions in Respect of the Letters of Credit upon Default . If any Event of Default shall have occurred and be continuing, the Administrative Agent may, or shall at the request of the Required Banks, whether before or after taking any of the actions described in Section 6.01 , demand that ACE, and forthwith upon such demand ACE will, pay to the Administrative Agent on behalf of the Banks in immediately available funds an amount equal to the aggregate Available Amount of all LOCs then outstanding as cash collateral. If at any time during the continuance of an Event of Default the Administrative Agent determines that such funds are subject to any right or claim of any Person other than the Administrative Agent and the Banks or that the total amount of such funds is less than the aggregate Available Amount of all LOCs, ACE will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional cash collateral, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, that the Administrative Agent determines to be free and clear of any such right and claim. Upon the drawing of any LOC, such funds shall be applied to reimburse the Issuing Bank, to the extent permitted by applicable law.

ARTICLE VII.

THE ADMINISTRATIVE AGENT

7.01 Authorization and Action . Each Bank (in its capacity as a Bank) hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents, the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in acting or refraining from acting) upon the instructions of the Required Banks (or all Banks where unanimity is required), and such instructions shall be binding upon all Banks; provided that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable law. The Administrative Agent agrees to give each Bank prompt notice of each notice given to it by ACE pursuant to the terms of this Agreement.

7.02 Administrative Agent’s Reliance, Etc . Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (a) may consult with legal counsel (including counsel for ACE), independent public accountants and other experts selected by it and shall not be liable for any

action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statement, warranty or representation (whether written or oral) made in or in connection with the Loan Documents (except for statements, warranties and representations made to ACE in the Pricing Agreement); (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of ACE or to inspect the property (including the books and records) of ACE; (d) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any Lien created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (e) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by facsimile) reasonably believed by it to be genuine and signed or sent by the proper party or parties.

7.03 The Administrative Agent and Affiliates . With respect to its Commitment, its Participating Interests and the Advances, the Administrative Agent shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Administrative Agent; and the term “Bank” or “Banks” shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, ACE, any of its Subsidiaries and any Person that may do business with or own securities of ACE or any such Subsidiary, all as if the Administrative Agent were not the Administrative Agent and without any duty to account therefor to the Banks.

7.04 Bank Credit Decision . Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank and based on the financial statements and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.

(a) Indemnification . Each Bank severally agrees to indemnify the Administrative Agent and its officers, directors, employees, agents, advisors and Affiliates (to the extent not promptly reimbursed by ACE) from and against such Bank’s Pro Rata Share of all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Administrative Agent or any such other Person in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Administrative Agent under the Loan Documents; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent’s or such other Person’s gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse the Administrative Agent promptly upon demand for its Pro Rata Share of any costs and expenses (including fees and expenses of counsel) payable by ACE under Section 8.04 , to the extent that

the Administrative Agent is not promptly reimbursed for such costs and expenses by ACE. The failure of any Bank to reimburse the Administrative Agent promptly upon demand for its Pro Rata Share of any amount required to be paid by the Banks to the Administrative Agent as provided herein shall not relieve any other Bank of its obligation hereunder to reimburse the Administrative Agent for its Pro Rata Share of such amount, but no Bank shall be responsible for the failure of any other Bank to reimburse the Administrative Agent for such other Bank’s Pro Rata Share of such amount. Without prejudice to the survival of any other agreement of any Bank hereunder, the agreement and obligations of each Bank contained in this Section 7.04(a) shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents.

7.05 Successor Administrative Agent . The Administrative Agent may resign at any time by giving written notice thereof to the Banks and ACE. Upon any such resignation or removal of the Administrative Agent, the Required Banks shall have the right to appoint a successor Administrative Agent, subject (so long as no Event of Default exists) to the consent of ACE (which consent shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent’s giving of notice of resignation or the Required Banks’ removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent such successor Administrative Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents. If within 45 days after written notice is given of the retiring Administrative Agent’s resignation or removal under this Section 7.05 no successor Administrative Agent shall have been appointed and shall have accepted such appointment, then on such 45 ^th day (i) the retiring Administrative Agent’s resignation or removal shall become effective, (ii) the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (iii) the Required Banks shall thereafter perform all duties of the retiring Administrative Agent under the Loan Documents until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. After any retiring Administrative Agent’s resignation or removal hereunder as Administrative Agent shall have become effective, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.

ARTICLE VIII.

MISCELLANEOUS

8.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by ACE therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Banks (and, in the case of an amendment, ACE), and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no amendment, waiver or consent shall:

(a) unless in writing and signed by all of the Banks, do any of the following at any time: (i) waive any of the conditions specified in Section 2.01 , 3.01 or 3.02 , (ii) change the number of Banks or the percentage of (x) the Commitment Amounts, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding LOCs that, in each case, shall be required for the Banks or any of them to take any action hereunder, (iii) release ACE or otherwise limit ACE’s liability with respect to the obligations owing to the Administrative Agent and the Banks, (iv) amend this Section 8.01 or any of the definitions herein that would have such effect, (v) extend the Termination Date, (vi) limit the liability of ACE under any of the Loan Documents or (vii) change or waive any provision of Section 2.07(a) or any other provision of this Agreement requiring the ratable treatment of the Banks;

(b) unless in writing and signed by each affected Bank, do any of the following at any time: (i) subject such Bank to any additional obligation, (ii) reduce the principal of, or interest on, any reimbursement obligation or any fee or other amount payable to such Bank hereunder, or increase such Bank’s Commitment Amount, or (iii) postpone any date fixed for any payment of principal of, or interest on, any reimbursement obligation, fee or other amount payable to such Bank hereunder;

provided , further , that (x) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Banks required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document and (y) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Bank in addition to the Banks required above to take such action, affect the rights or duties of the Issuing Bank under this Agreement or any other Loan Document.

8.02 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including facsimile or e-mail) and mailed or sent to, in the case of ACE, at its address set forth below its signature hereto, in the case of the Issuing Bank or the Administrative Agent, at Deutsche Bank AG, Loan Operations, Letter of Credit, 60 Wall Street, 9th Floor, New York, NY, 10005, Attention: Everardus (Joe) Rozing (Phone: (212) 250-1014; Facsimile: (212) 797-0403; email: everardus.rozing@db.com), with copies to each of: (a) Deutsche Bank Securities, Inc., 60 Wall Street, New York, NY 10005, Attention: Debt Capital Markets, Craig Wenzel (Facsimile: (212) 797-2202, email: craig.wenzel@db.com ) and (b) Deutsche Bank Securities Inc., 60 Wall Street, New York, NY 10005, Attention: Global Credit Solutions, Elliott Horner (Facsimile: (732) 460-5216, email: elliott.horner@db.com) and Benjamin Robbins (Facsimile: (646) 593-8194, email: benjamin.robbins@db.com ), and in the case of any Bank that is not a party hereto on the Closing Date, at its address specified in the Assignment and Acceptance pursuant to which it becomes a Bank, or at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective (a) if mailed, three Business Days after the date deposited in the mail, (b) if sent by messenger or courier, when delivered, or (c) if sent by facsimile or e-mail, when the sender receives electronic confirmation of receipt, except that (i) notices and communications to the Administrative Agent pursuant to Article II, shall not be effective until received by the Administrative Agent; and (ii) any notice or other communication received at a time when the recipient is not open for its regular business shall be deemed received one hour after such recipient is again open for its regular business.

8.03 No Waiver; Remedies . No failure on the part of any Bank or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

8.04 Costs and Expenses .

(a) ACE agrees to pay on demand (i) all reasonable and documented costs and expenses of the Administrative Agent and the Issuing Bank (including the reasonable and documented fees and expenses of a single counsel for the Administrative Agent and the Issuing Bank) in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents; and (ii) all reasonable and documented costs and expenses of the Administrative Agent and each Bank in connection with the enforcement of the Loan Documents, whether in any action, suit or litigation, or any bankruptcy, insolvency or other similar proceeding affecting creditors’ rights generally (including the reasonable and documented fees and expenses of counsel for the Administrative Agent and each Bank with respect thereto); provided that ACE shall only be obligated to pay the fees and expenses of a single counsel for the Banks (as opposed to the Administrative Agent and the Issuing Bank) unless, and to the extent that, such counsel reasonably determines that a conflict requires the engagement of additional counsel.

(b) ACE agrees to indemnify and hold harmless the Administrative Agent and each Bank and each of their respective Affiliates and the officers, directors, employees, agents and advisors of any of the foregoing (each an “ Indemnified Party ”) from and against all claims, damages, losses, liabilities and expenses (including reasonable and documented fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party arising out of or in connection with or by reason of (including in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) this Agreement, the actual or proposed use of the proceeds of the Advances, the other Loan Documents or any transaction contemplated hereby or thereby, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party or any of its Affiliates; provided that ACE shall only be obligated to pay the fees and expenses of a single counsel for the Indemnified Parties (other than the Administrative Agent and the Issuing Bank, which may engage separate counsel) unless, and to the extent that, such counsel reasonably determines that a conflict requires the engagement of additional counsel. In the case of any investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by ACE, its directors, shareholders or creditors or an Indemnified Party or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated by the Loan Documents are consummated. ACE also agrees not to assert any claim against any Indemnified Party, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to this Agreement, any other Loan Document, any transaction contemplated hereby or thereby or the actual or proposed use of the Advances or any LOC.

(c) Without prejudice to the survival of any other agreement of ACE hereunder or under any other Loan Document, the agreements and obligations of ACE contained in Section 2.06 and this Section 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any other Loan Document.

8.05 Right of Set-off . Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare amounts owing hereunder to be due and payable pursuant to the provisions of Section 6.01 , the Administrative Agent and each Bank and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent, such Bank or such Affiliate to or for the credit or the account of ACE against any obligations of ACE now or hereafter existing under the Loan Documents, irrespective of whether the Administrative Agent or such Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The Administrative Agent and each Bank agree promptly to notify ACE after any such set-off and application; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Bank and their respective Affiliates under this Section 8.05 are in addition to other rights and remedies (including other rights of set-off) that the Administrative Agent, such Bank and their respective Affiliates may have.

8.06 Binding Effect . This Agreement shall become effective when it shall have been executed by ACE, each Bank and the Administrative Agent and thereafter shall be binding upon and inure to the benefit of ACE, each Bank and the Administrative Agent and their respective successors and assigns, except that ACE shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Banks.

8.07 Assignments and Participations .

(a) Each Bank may, and so long as no Default shall have occurred and be continuing, if demanded by ACE (following a demand by such Bank pursuant to Section 2.11 ) upon at least five Business Days’ notice to such Bank and the Administrative Agent, will, assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, its LOC Participating Interests and the Advances owing to it); provided that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations of such Bank hereunder, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was (x) a Bank or an Affiliate of a Bank, the aggregate amount of the Commitment being assigned to such Eligible Assignee pursuant to such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $1,000,000 unless it is an assignment of the entire amount of such assignor’s Commitment, or (y) not a Bank or an Affiliate of any Bank, the aggregate amount of the Commitment being assigned to such Eligible Assignee

pursuant to such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 unless it is an assignment of the entire amount of such assignor’s Commitment, (iii) each such assignment shall be to an Eligible Assignee, (iv) each assignment made as a result of a demand by ACE pursuant to Section 2.11 shall be arranged by ACE after consultation with the Administrative Agent and shall be either an assignment of all of the rights and obligations of the assigning Bank under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Bank under this Agreement, (v) no Bank shall be obligated to make any such assignment as a result of a demand by ACE pursuant to Section 2.11 unless and until such Bank shall have received one or more payments from either ACE or other Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances made by such Bank, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Bank under this Agreement, (vi) as a result of such assignment, ACE shall not be subject to additional amounts under Section 2.06 or 2.08 and (vii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $3,500.

(b) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank, hereunder and (ii) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.06 , 2.08 and 8.04 to the extent any claim thereunder relates to an event arising prior to such assignment and any other rights that are expressly provided hereunder to survive) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto).

(c) By executing and delivering an Assignment and Acceptance, each Bank assignor thereunder and each assignee thereunder confirm to and agree with each other and the other parties thereto and hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any Lien created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of ACE or the performance or observance by ACE of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will,

independently and without reliance upon the Administrative Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank.

(d) The Administrative Agent, acting for this purpose (but only for this purpose) as the agent of ACE, shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment Amount of, and principal amount of the Advances owing to, each Bank from time to time (the “ Register ”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and ACE, the Administrative Agent and the Banks shall treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by ACE or any Bank at any reasonable time and from time to time upon reasonable prior notice.

(e) Upon its receipt of a completed Assignment and Acceptance executed by an assigning Bank and an assignee, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to ACE and to the parties to such Assignment and Acceptance.

(f) Each Bank may sell participations to one or more Persons (other than ACE or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment, its LOC Participating Interests and the Advances owing to it; provided that (i) such Bank’s obligations under this Agreement (including its Commitment and its LOC Participating Interests) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) ACE, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement and (iv) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by ACE therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, postpone any date fixed for any payment of principal of, or interest on, the reimbursement obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Each Bank shall, as agent of ACE solely for the purposes of this Section 8.07 , record in book entries maintained by such Bank, the name and amount of the participating interest of each Person entitled to receive payments in respect of any participating interests sold pursuant to this Section 8.07 .

(g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07 , disclose to the assignee or participant or proposed assignee or participant any information relating to ACE or any of its Subsidiaries furnished to such Bank by or on behalf of ACE or any such Subsidiary; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Confidential Information received by it from such Bank.

(h) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in all or any portion of its rights under this Agreement (including the Advances owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.

8.08 Execution in Counterparts . This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement (or any related agreement, including any amendment hereto or waiver hereunder) by facsimile or e-mail (in a pdf or similar file) shall be effective as delivery of an original executed counterpart of this Agreement (or such related agreement).

8.09 No Liability of the Issuing Bank . ACE assumes all risks of the acts or omissions of any beneficiary or transferee of any LOC with respect to its use of such LOC. Neither the Issuing Bank nor any of its officers, directors, employees or agents shall be liable or responsible for: (a) the use that may be made of any LOC or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents that do not strictly comply with the terms of an LOC, including failure of any documents to bear any reference or adequate reference to the LOC; or (d) any other circumstances whatsoever in making or failing to make payment under any LOC, except that ACE shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to ACE, to the extent of any direct, but not consequential, damages suffered by ACE that ACE proves were caused by (i) the Issuing Bank’s willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any LOC comply with the terms of the LOC or (ii) the Issuing Bank’s willful failure to make lawful payment under an LOC after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the LOC. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary.

8.10 Confidentiality . Neither the Administrative Agent nor any Bank shall disclose any Confidential Information to any Person without the consent of ACE, other than (a) to the Administrative Agent’s or such Bank’s Affiliates and their officers, directors, employees, agents and advisors, to actual or prospective Eligible Assignees and participants, and to any direct, indirect, actual or prospective counterparty (and its advisor) to any swap, derivative or securitization transaction related to the obligations under this Agreement, and in each case then

only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, federal or foreign authority or examiner regulating such Bank or pursuant to any request of any self-regulatory body having or claiming authority to regulate or oversee any aspect of a Bank’s business or that of any of its Affiliates and (d) to any rating agency when required by it, provided that, prior to any such disclosure, such rating agency shall undertake to preserve the confidentiality of any Confidential Information relating to ACE and its Subsidiaries received by it from such Bank.

8.11 Jurisdiction, Etc. Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York state court or federal court of the United States of America sitting in the Borough of Manhattan in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York state court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction.

(a) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York state or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court sitting in the Borough of Manhattan in New York City.

(b) ACE hereby irrevocably appoints Mayer Brown LLP, with offices on the Closing Date at 1675 Broadway, New York, New York, 10019, USA as its agent to receive, accept and acknowledge for and on its behalf services of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. If for any reason such agent shall cease to be available to act as such, ACE agrees to promptly designate a new agent satisfactory to the Administrative Agent in the Borough of Manhattan, The City of New York, to receive, accept and acknowledge for and on its behalf service of any legal process, summons, notice or document that may be served in any such action or proceeding pursuant to the terms of this Section 8.11 . In the event that ACE shall fail to designate such new agent, service of process in any such action or proceeding may be made on ACE by the mailing of copies thereof by express or overnight mail or courier, postage prepaid, to ACE at its address set forth opposite its signature below.

8.12 Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

8.13 WAIVER OF JURY TRIAL . EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS, THE ADVANCES OR THE ACTIONS OF THE ADMINISTRATIVE AGENT OR ANY BANK IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

8.14 Disclosure of Information . ACE agrees and consents to the Administrative Agent’s disclosure of information relating to this transaction to Gold Sheets and other similar bank trade publications. Such information will consist of deal terms and other information customarily found in such publications. ACE shall have the right to review and approve any such disclosure made by the Administrative Agent before such disclosure is made (such approval not to be unreasonably withheld).

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.


ACE LIMITED

By:		/s/ Paul Medini
Name:		Paul Medini
Title:		Chief Accounting Officer

By:		/s/ Robert Cusumano
Name:		Robert Cusumano
Title:		General Counsel and Secretary

Address:
Bärengasse 32
CH-8001 Zürich
Switzerland
Fax: +41 (0) 43 456 76 01

Signature Page to Credit Agreement


DEUTSCHE BANK AG, NEW YORK BRANCH , as Administrative Agent, as Issuing Bank and as the sole initial Bank

By:		/s/ Suzanne Greenberg
Name:		Suzanne Greenberg
Title:		Director

By:		/s/ Gad Caspy
Name:		Gad Caspy
Title:		Director

Signature Page to Credit Agreement

SCHEDULE I

COMMITMENT AMOUNTS


Deutsche Bank AG New York Branch	$	500,000,000

Total	$	500,000,000

EXHIBIT A

FORM OF ASSIGNMENT AND ACCEPTANCE

ASSIGNMENT AND ACCEPTANCE dated as of , 20 between (the “ Assignor ”) and (the “ Assignee ”), and [consented to and] accepted by Deutsche Bank AG, New York Branch, as administrative agent (the “ Administrative Agent ”)[, and ACE Limited (“ ACE ”)].

W I T N E S S E T H

WHEREAS, this Assignment and Acceptance (the “ Agreement ”) relates to the Credit Agreement dated as of June 16, 2009 among ACE, the Assignor and the other Banks party thereto, and the Administrative Agent, providing for an unsecured letter of credit facility for the benefit of ACE (as amended or otherwise modified from time to time, the “ Credit Agreement ”);

WHEREAS, as provided under the Credit Agreement, the Assignor has a commitment to participate in LOCs and make Advances to ACE in an aggregate principal amount at any time outstanding not to exceed $ ;

WHEREAS, LOCs with a total amount available for drawing thereunder of $ are outstanding at the date hereof;

WHEREAS, Advances made to ACE by the Assignor under the Credit Agreement in the aggregate principal amount of $ are outstanding at the date hereof; and

WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement and the other Loan Documents in respect of a portion of its Commitment thereunder in an amount equal to $ (the “ Assigned Amount ”), together with a corresponding portion of its outstanding LOC Participating Interests, and Advances, if any, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms.

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows:

1. Definitions . All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement.

2. Assignment . The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement and the other Loan Documents to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the outstanding LOC Participating Interests and the amount of the Advances, if any, outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Administrative Agent and ACE] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date

hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with an Commitment Amount (in addition to any Commitment Amount theretofore held by it) equal to the Assigned Amount, and (ii) the Commitment Amount of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor shall be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor.

3. Payments . As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof the amount heretofore agreed between them. ¹ The parties hereto agree that fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and fees accruing from the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party’s interest therein and shall promptly pay the same to such other party.

4. Consent of the Administrative Agent and ACE . Pursuant to the Credit Agreement, this Agreement is conditioned upon the consent of the Administrative Agent and, so long as no Default has occurred and is continuing, ACE. The execution of this Agreement by the Administrative Agent and, if applicable, ACE is evidence of this consent.

5. Non-Reliance on Assignor . The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of ACE or any of its Subsidiaries, or the validity and enforceability of the obligations of ACE or any of its Subsidiaries in respect of any Loan Document. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of ACE and its Subsidiaries.

6. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

7. Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Remainder of page intentionally left blank.]

Amount should combine the principal amount of any Advances made by the Assignor together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written.


[ASSIGNOR]

By:
Title:

[ASSIGNEE]

By:
Title:

[ACE LIMITED]

By:
Title:

DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent

By:
Title:				]

EXHIBIT B-1

FORM OF LETTER OF CREDIT (NO REINSURANCE TRUST)

IRREVOCABLE STANDBY LETTER OF CREDIT


For internal identification purposes only.

[Beneficiary Information],		Effective Date: [DATE OF ISSUANCE]
[ADDRESS]
		Letter of Credit No.: DBS-

At the request of [ ACE Limited or ACE Subsidiary ] on behalf, and for the benefit of [ Beneficiary ], for the account of [ ACE Limited ], we, Deutsche Bank AG New York Branch, hereby issue this irrevocable Letter of Credit No. DBS- in your favor as beneficiary available for an aggregate amount up to the maximum amount of US$ ( United States Dollars), effective as of the date first set forth above and expiring at our office located at 60 Wall Street, New York, New York 10005, Attention Global Loan Operations, Standby Letter of Credit Unit, MS NYC60-0629 or such other office in the United States as we shall notify you in writing, on the Expiration Date (as defined below).

Funds under this Letter of Credit are available to you on or prior to the Expiration Date as then in effect against your sight draft(s) drawn on us, signed by your duly authorized officer, bearing the clause “Drawn under Letter of Credit No. DBS- .” Partial and multiple drawings are permitted. All drafts must be presented to us at our address at 60 Wall Street, New York, New York 10005, Attention Global Loan Operations, Standby Letter of Credit Unit or such other office in the United States as we shall notify you in writing, in one lot along with this original Letter of Credit and amendments hereto, if any.

This Letter of Credit sets forth in full the terms of our undertaking to you and, except as expressly set forth herein, is not subject to any condition or qualifications. Such undertaking to you shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit relates and any such reference shall not be deemed to incorporate herein by reference any document or instrument. Our obligations under this Letter of Credit are in no way contingent upon reimbursement of this Letter of Credit.

This Letter of Credit may expire or be extended from time to time as provided in the immediately succeeding paragraph.

[ In the event that we notify you in writing no later than the thirtieth (30 ^th ) day prior to the Expiration Date then in effect that we elect not to extend this Letter of Credit, then ] this Letter of Credit shall expire on the Expiration Date [ then in effect. In the event that we fail to notify you in writing prior to such thirtieth (30 ^th ) day preceding to the Expiration Date then in effect that we have elected not to extend the Letter of Credit, or such notice fails to meet the requirements of this paragraph, this Letter of Credit shall be automatically extended for a period of one year from the Expiration Date then in effect. ] ² Notwithstanding the foregoing, this Letter of Credit shall expire prior to the Expiration Date then in effect on the thirtieth (30 ^th ) day following the date on which Deutsche Bank AG, New York Branch furnishes to you a written “Notice of Credit Event” substantially in form of Exhibit A hereto.

²	Insert bracketed language in this paragraph if the LOC is to be “yearly renewable”. Otherwise, delete bracketed language.

“ Expiration Date ” means the earlier of (i) [ insert DATE not later than the fifth (5 ^th ) Business Day prior to the date on which the aggregate Credit Exposure (including this LOC) would exceed the aggregate LOC Availability Amount scheduled to be outstanding at any time during such period if this LOC remained outstanding on such date] ³ / [insert DATE that is 1 year from the Effective Date, or, if this Letter of Credit is extended from time to time as provided in the immediately preceding paragraph, the latest date to which this Letter of Credit is extended ] ⁴ or (ii) the thirtieth (30 ^th ) calendar day following the date on which Deutsche Bank AG, New York Branch furnishes to you a written “Notice of Credit Event” substantially in form of Exhibit A hereto, if applicable.

This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600 (“UCP 600”). If this Letter of Credit expires during an interruption of business as described in Article 36 of UCP 600, we hereby specifically agree to effect payment if this Letter of Credit is drawn upon within three (3) business days after our resumption of business.

Except in the case of sight drafts presented under this Letter of Credit, all notices provided for in this Letter of Credit shall be in writing and delivered by overnight courier service or certified mail, return receipt requested. All notices given hereunder shall be deemed to have been given on the date of receipt.


Yours faithfully,

Deutsche Bank AG New York Branch


Authorized Signature				Authorized Signature

³	Insert this clause to the extent such LOC is not to be issued on a yearly-renewable basis.

⁴	Insert this clause to the extent such LOC is to be issued on a yearly-renewable basis.

Exhibit A

to Form of Letter of Credit (No Reinsurance Trust)

FORM OF NOTICE OF CREDIT EVENT

[DATE]

[Beneficiary Name]

[Address]

Attention: [ ]

Ladies, Gentlemen:

Reference is hereby made to that certain Letter of Credit No. [ ] (the “Applicable LOC”), with an Effective Date as of , 20 , issued by Deutsche Bank AG, New York Branch for the account of [ ACE Limited ].

The undersigned, on behalf of Deutsche Bank AG, New York Branch, hereby certifies to you that the following statements are true and accurate:

1. The undersigned is an Authorized Representative of Deutsche Bank AG, New York Branch and has full power and authority to execute and deliver this Notice of Credit Event.

2. A Credit Event which constitutes a “Failure to Pay” or a “Bankruptcy” event (as each such term is defined in the 2003 ISDA Credit Derivatives definitions or any applicable successor definitions) has occurred and is presently continuing with respect to the senior unsecured obligations of [ ACE Limited ].

You are hereby notified that, pursuant to its terms, the Applicable LOC will expire as of [INSERT DATE 30 DAYS FOLLOWING NOTICE DATE], being the thirtieth (30 ^th ) calendar day following the date of this Notice of Credit Event.

IN WITNESS WHEREOF, Deutsche Bank AG, New York Branch has executed and delivered this Notice of Credit Event as of the day of , 20 .


Deutsche Bank AG, New York Branch

By:
Name:
Its:

EXHIBIT B-2

FORM OF LETTER OF CREDIT (REINSURANCE TRUST)

IRREVOCABLE STANDBY LETTER OF CREDIT


For internal identification purposes only.

[Beneficiary Information],		Effective Date: [ DATE OF ISSUANCE ]
[ TRUSTEE NAME ]
As Reinsurance Trustee of [ ]
Reinsurance Trust
[ADDRESS]
		Letter of Credit No.: DBS-

At the request of [ ACE Limited or ACE Subsidiary ] on behalf, and for the benefit of [ Beneficiary ], for the account of [ACE Limited], we, Deutsche Bank AG New York Branch, hereby issue this irrevocable Letter of Credit No. DBS- in your favor as beneficiary available for an aggregate amount up to the maximum amount of US$ ( United States Dollars), effective as of the date first set forth above and expiring at our office located at 60 Wall Street, New York, New York 10005, Attention Global Loan Operations, Standby Letter of Credit Unit, MS NYC60-0629 or such other office in the United States as we shall notify you in writing, on the Expiration Date (as defined below).

This Letter of Credit may expire or be extended from time to time as provided in the immediately succeeding paragraph.

“ Expiration Date ” means [ insert DATE not later than the fifth (5 ^th ) Business Day prior to the date on which the aggregate Credit Exposure (including this LOC) would exceed the aggregate LOC

⁵	Insert bracketed language in this paragraph if the LOC is to be “yearly renewable”. Otherwise, delete bracketed language.

Availability Amount scheduled to be outstanding at any time during such period if this LOC remained outstanding on such date] ⁶ / [insert DATE that is 1 year from the Effective Date, or, if this Letter of Credit is extended from time to time as provided in the immediately preceding paragraph, the latest date to which this Letter of Credit is extended ] ⁷ .


Yours faithfully,

Deutsche Bank AG New York Branch


Authorized Signature				Authorized Signature

⁶	Insert this clause to the extent such LOC is not to be issued on a yearly-renewable basis.

⁷	Insert this clause to the extent such LOC is to be issued on a yearly-renewable basis.

EXHIBIT C

REINSURANCE TRUST AGREEMENT (EXCERPT)

. . . . .

3. Letters of Credit .

(a) On the Effective Date, the Grantor will provide to the Trustee to be held in the Trust Account one or more letters of credit issued by Deutsche Bank AG, New York Branch (each a “Letter of Credit”). On the Effective Date and from time to time thereafter, the Grantor may provide to the Trustee to be held in the Trust Account additional Letters of Credit

(b) Any Letter of Credit provided by the Grantor to the Trustee to be held in the Trust Account may be drawn upon by the Trustee pursuant to a Withdrawal Notice from the Beneficiary only when the proceeds of such draw will be utilized for one or more of the following purposes:

(i) For the purposes set forth in [applicable section] of this Agreement; or

(ii) In the event a Letter of Credit will expire without renewal or be reduced or replaced by another Letter of Credit for a reduced amount and where all or part of the Grantor’s obligations under the Reinsurance Agreement remain unliquidated and undischarged ten (10) days prior to the termination date of such Letter of Credit, to draw down the full amount of the Letter of Credit to the extent that such obligations have not yet been funded by the Grantor and exceed the amount of Assets and other Letters of Credit in the Trust Account (including any reduced or replacement Letters of Credit), and deposit those amounts in the Trust Account for the purposes set forth in [applicable section] of this Agreement.

. . . . . .

(d) Upon receipt by the Trustee of a written “Notice of Credit Event,” substantially in the form of Exhibit B, from either the Beneficiary or Deutsche Bank AG, New York Branch, the Beneficiary hereby authorizes and directs the Trustee to draw in full all Letters of Credit then in the Trust Account and deposit the proceeds thereof into the Trust Account. The Beneficiary shall apply such proceeds in a manner consistent with the terms of Section [ ]. On the Effective Date, the Beneficiary will furnish to the Trustee an incumbency certificate duly executed by an authorized representative of Deutsche Bank AG, New York Branch, setting forth the name[s] and specimen signature[s] of any officer of Deutsche Bank AG, New York Branch, authorized to issue a Notice of Credit Event to the Trustee under this Agreement.

( e) Notwithstanding the preceding provisions of this Section 3, the Trustee shall have no responsibility to determine whether the Trustee should draw upon a Letter of Credit and the Trustee shall draw upon a Letter of Credit only upon the written direction of the Beneficiary or Deutsche Bank AG, New York Branch, pursuant to Section 3(d) or as otherwise provided herein, and the Trustee shall have no responsibility whatsoever to determine that any Assets withdrawn from the Trust Account pursuant to this Section 3 will be used and applied in the manner contemplated by this Agreement.

(f) No provision of this Agreement relating to the Letter of Credit may be amended, modified, removed or waived without the prior written consent of the Trustee, the Beneficiary, the Grantor and Deutsche Bank AG, New York Branch.

. . . . .

Exhibit B

to Reinsurance Trust Agreement (excerpt)

FORM OF NOTICE OF CREDIT EVENT

[TRUSTEE NAME]

[TRUSTEE ADDRESS]

Attention: [•]

Ladies, Gentlemen:

Reference is hereby made to that certain Trust Agreement dated as of [•], by and among [•] (the “Trustee”), [•] (the “Grantor”) and [•] (the “Beneficiary”) (the “Trust Agreement”). All terms used herein without definition shall have the meanings in the Trust Agreement.

The undersigned, on behalf of [Deutsche Bank AG, New York Branch]/[the Beneficiary], hereby certifies to the Trustee and other Parties that the following statements are true and accurate:

1. The undersigned is an Authorized Representative of [Deutsche Bank AG, New York Branch]/[the Beneficiary] and has full power and authority to execute and deliver this Notice of Credit Event.

2. A Credit Event which constitutes a “Failure to Pay” or a “Bankruptcy” event (as each such term is defined in the 2003 ISDA Credit Derivatives definitions) has occurred and is presently continuing with respect to the senior unsecured obligations of ACE (as defined in the Credit Agreement, dated as of June 16, 2009).

Immediately upon receipt of this Notice of Credit Event by the Trustee, the Trustee is hereby directed, pursuant to the terms of Section 3(d) of the Trust Agreement, to draw in full all Letters of Credit then in the Trust Account and deposit the proceeds thereof into the Trust Account.

IN WITNESS WHEREOF, [Deutsche Bank AG, New York Branch]/[the Beneficiary] has executed and delivered this Notice of Credit Event as of the day of , 20 .


[Deutsche Bank AG, New York Branch]/[Beneficiary]

By:
Name:
Its:

EXHIBIT D

FORM OF LOC APPLICATION


To:	Deutsche Bank AG, New York Branch
	Loan Operations, Letter of Credit
	60 Wall Street, 9 ^th Floor
	New York, NY 10005
	Attention:	Everadus (Joe) Rozing
	Telephone:	(212) 250-1014
	Facsimile:	(212) 797-0403:
	Electronic Mail: everardus.rozing@db.com

CC:	Deutsche Bank Securities, Inc.
	60 Wall Street
	New York, NY 10005
	Attention:	Debt Capital Markets, Craig Wenzel
	Facsimile:	(212) 797-2202
	Electronic Mail: craig.wenzel@db.com

Ladies and Gentlemen:

This notice shall constitute a “Request for Issuance” of a Letter of Credit pursuant to Section 2.02(a) of the U.S.$500,000,000 Credit Agreement dated as of June 16, 2009 (as amended, modified or supplemented from time to time, the “ Credit Agreement ”) among ACE Limited, as Borrower thereunder, the Banks from time to time named therein, and Deutsche Bank AG, New York Branch, as Issuing Bank and Administrative Agent thereunder. Capitalized terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein.

The undersigned hereby requests that the Issuing Bank issue a Letter of Credit in the form of Exhibit [B-1]/[B-2] to the Credit Agreement ⁸ for the account of the Borrower on [•] ⁹ in the aggregate Available Amount of [•] ¹⁰ . The beneficiary of the requested Letter of Credit will be [INSERT NAME AND ADDRESS OF BENEFICIARY]/[as Reinsurance Trustee of the [•], ] ¹¹ . Such Letter of Credit will be in support of [•] ¹² and will have a stated expiration date of [•] ¹³ and will have a stated effective date of [•]. ¹⁴ [ The undersigned hereby represents and warrants to the Issuing Bank that, upon issuance of such Letter of Credit, such Letter of Credit shall be immediately deposited into a reinsurance trust account governed by a reinsurance trust agreement by and among the applicable grantor, the applicable

⁸	Insert Exhibit B-1 if the Letter of Credit is to be held outside of a Reinsurance Trust Account. Insert Exhibit B-2 if the Letter of Credit is to be held in a Reinsurance Trust Account; provided, that proviso (g) in the first sentence of Section 2.01 also must be satisfied for use of Exhibit B-2.

⁹	Insert proposed date of issuance, which must be a Business Day and must be no earlier than the third (3 ^rd ) Business Day following receipt by the Issuing Bank of the Request for Issuance.

¹⁰	Insert Available Amount in USD of the Letter of Credit.

¹¹	Insert bracketed text if the Letter of Credit is to be held in a Reinsurance Trust Account.

¹²	Insert brief description of obligation to be supported by the Letter of Credit.

¹³	Insert date which cannot be later than the third (3 ^rd ) Business Day prior to the maturity date of the LOC Availability Amount corresponding to LOCs of such series.

¹⁴	Insert issuance date or, if different, the effective date.

beneficiary of the reinsurance trust account, the applicable reinsurance trustee, the Issuing Bank and the Administrative Agent, in form and substance satisfactory to the Issuing Bank and Administrative Agent and containing terms substantially similar to those set forth on Exhibit C to the Credit Agreement. ] ¹⁵

ACE LIMITED

Name:

Title:

¹⁵	Insert bracketed text to the extent a Letter of Credit in the form of Exhibit B-2 is requested.

EXHIBIT E-1

FORM OF OPINION OF NIEDERER KRAFT & FREY AG

EXHIBIT E-2

FORM OF OPINION OF MAYER BROWN LLP

Exhibit 10.2

Outside Director Awards

Restricted Stock Unit Award Terms

under the

ACE Limited 2004 Long-Term Incentive Plan

The Participant has been granted a Restricted Stock Unit Award by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Restricted Stock Unit Award shall be subject to the following Restricted Stock Unit Award Terms:

1. Terms of Award . Subject to the following Restricted Stock Unit Award Terms, the Participant has been granted the right to receive shares of Stock of the Company (“Units”) as of the Delivery Date. Each “Unit” represents the right to receive one share of Stock. The number of Units awarded to the Participant on the Grant Date is the number reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records. The following words and phrases used in these Restricted Stock Unit Award Terms shall have the meanings set forth in this paragraph 1:

(a) The “Participant” is the individual recipient of the Restricted Stock Unit Award on the Grant Date.

(b) The “Grant Date” is [Insert the date] .

(c) The “Delivery Date” is the six month anniversary date of the Director’s termination from the Board, or such later
date(s) as the Director may elect pursuant to administrative procedures established under the Plan.

(d) Other words and phrases used in these Restricted Stock Unit Award Terms are defined in paragraph 9 or elsewhere in these Restricted Stock Unit Award Terms.

2. Restricted Period . Subject to the limitations of these Restricted Stock Unit Award Terms, the "Restricted Period" for the Units shall begin on the date of the annual shareholders’ meeting held in [year] and end on the date of the annual shareholders’ meeting held in the immediately following year.*

Notwithstanding the foregoing, the Restricted Period shall end earlier to the extent set forth below:

(a) The Restricted Period shall end upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death.

(b) The Restricted Period shall end upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s Long-Term Disability.

(c) The Restricted Period shall end upon a Change in Control, provided that such Change in Control occurs on or before the Date of Termination.

3. Forfeiture or Delivery of Shares . Except as otherwise determined by the Committee in its sole discretion, if the Date of Termination occurs prior to the last day of the

With respect to restricted stock unit awards granted under the ACE Limited 2004 Long-Term Incentive Plan on July 14, 2008 and on August 15, 2008 to each member of the Board of Directors who was not an employee of ACE Limited or one of its subsidiaries on the applicable grant date, the last day of the “Restricted Period” (as defined by the terms of the applicable Restricted Stock Unit Award) was changed to December 31, 2008.

Restricted Period, the Participant shall forfeit the Units as of the Date of Termination. If the Date of Termination has not occurred prior to the last day of the Restricted Period, the Units shall be delivered to the Participant on the Delivery Date in the form of Stock free of all restrictions. For the avoidance of doubt, if the Date of Termination is the last day of the Restricted Period, the Units shall be delivered in accordance with the immediately preceding sentence.

4. Withholding . All deliveries and distributions under these Restricted Stock Unit Award Terms are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan.

5. Transferability . Except as otherwise provided by the Committee, the Units may not be sold, assigned, transferred, pledged or otherwise encumbered .

6. Dividends . The Participant shall receive additional Units (and not cash) equal to the dividends and distributions paid on shares of Stock to the same extent as if each Unit was a Share of Stock, and those shares were not subject to the restrictions imposed by this Agreement and the Plan; provided, however, that no dividends or distributions shall be payable to or for the benefit of the Participant with respect to record dates for such dividends or distributions occurring on or after the date, if any, on which the Participant has forfeited the Units.

7. Voting . The Participant shall not be a shareholder of record with respect to the Units and shall have no voting rights with respect to the Units during the Restricted Period.

8. Participant’s Rights to Shares . Prior to the delivery of shares of Stock which are to be delivered pursuant to this Agreement, (a) the Participant shall not be treated as owner of the shares, shall not have any rights as a shareholder as to those shares, and shall have only a contractual right to receive them, unsecured by any assets of the Company or its subsidiaries; and (b) the Participant’s right to receive such shares will be subject to the adjustment provisions relating to mergers, reorganizations, and similar events set forth in the Plan.

9. Definitions . For purposes of these Restricted Stock Unit Award Terms, words and phrases shall be defined as follows:

(a) Change in Control . The term “Change in Control” shall be defined as set forth in the Plan.

(b) Date of Termination . The “Date of Termination” means the date the Director resigns or otherwise ceases to perform services as a Director for the Company or a Related Company for any reason.

(c) Director . The term “Director” means a member of the Board who is not an employee of the Company or a Related Company.

(d) Long-Term Disability . A Participant shall be considered to have a “Long-Term Disability” if the Committee determines, using standards comparable to those used in any long-term disability plan of the Company, that the Participant would be eligible for long-term disability benefits if he or she participated in such plan.

(e) Record-Keeping System . The term “Record-Keeping System” means the record-keeping system developed and maintained by third parties contracted by the Company to keep records and facilitate Participant interfaces with respect to the Plan and awards granted thereunder.

10. Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in these Restricted Stock Unit Award Terms.

11. Heirs and Successors . These Restricted Stock Unit Award Terms shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. If any benefits deliverable to the Participant under these Restricted Stock Unit Award Terms have not been delivered at the time of the Participant's death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Restricted Stock Unit Award Terms and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the complete distribution of benefits to the Designated Beneficiary under these Restricted Stock Unit Award Terms, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.

12. Administration . The authority to manage and control the operation and administration of these Restricted Stock Unit Award Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Restricted Stock Unit Award Terms as it has with respect to the Plan. Any interpretation of these Restricted Stock Unit Award Terms by the Committee and any decision made by it with respect to these Restricted Stock Unit Award Terms are final and binding on all persons.

13. Plan and Corporate Records Govern . Notwithstanding anything in these Restricted Stock Unit Award Terms to the contrary, these Restricted Stock Unit Award Terms shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and these Restricted Stock Unit Award Terms are subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. Notwithstanding anything in the Restricted Stock Unit Terms to the contrary, in the event of any discrepancies between the corporate records regarding this award and the Record-Keeping System, the corporate records shall control.

14. Not An Employment Contract . The Restricted Stock Unit Award will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right the Company or any Related Company would otherwise have to terminate or modify the terms of such Participant's employment or other service at any time.

15. Notices . Any written notices provided for in these Restricted Stock Unit Award Terms or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant's address indicated by the Company's records, or if to the Company, at the Company's principal executive office.

16. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Unit Award pursuant to paragraph 5.2(f) of the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.

17. Amendment . The Restricted Stock Unit Award Terms may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Evan G. Greenberg, certify that:

I have reviewed this quarterly report on Form 10-Q of ACE Limited;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date August 7, 2009

/s/ E VAN G. G REENBERG

Evan G. Greenberg

Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Philip V. Bancroft, certify that:

I have reviewed this quarterly report on Form 10-Q of ACE Limited;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date August 7, 2009

/s/ P HILIP V. B ANCROFT

Philip V. Bancroft

Chief Financial Officer

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.


Dated: August 7, 2009		/s/ E VAN G. G REENBERG
		Evan G. Greenberg
		Chairman and Chief Executive Officer

Exhibit 32.2

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


Dated: August 7, 2009		/s/ P HILIP V. B ANCROFT
		Philip V. Bancroft
		Chief Financial Officer