ACE Ltd (Form: 10-Q, Received: 08/04/2011 15:57:21)

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, 2011

¨	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

ACE LIMITED

(Exact name of registrant as specified in its charter)

Switzerland

98-0091805

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Baerengasse 32

Zurich, Switzerland CH-8001

(Address of principal executive offices) (Zip Code)

+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 ¨		Smaller reporting company ¨

(Do not check if a 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 30.27 par value) outstanding as of July 29, 2011 was 337,967,945.

ACE LIMITED

INDEX TO FORM 10-Q


			Page No.
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets (Unaudited) June 30, 2011 and December 31, 2010		3

	Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2011 and 2010		4

	Consolidated Statements of Shareholders’ Equity (Unaudited) Six Months Ended June 30, 2011 and 2010		5

	Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2011 and 2010		7

	Notes to Consolidated Financial Statements (Unaudited)
	Note 1.	General	8
	Note 2.	Accounting guidance not yet adopted	8
	Note 3.	Acquisitions	8
	Note 4.	Investments	9
	Note 5.	Fair value measurements	15
	Note 6.	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts	25
	Note 7.	Commitments, contingencies, and guarantees	27
	Note 8.	Shareholders’ equity	34
	Note 9.	Share-based compensation	34
	Note 10.	Segment information	35
	Note 11.	Earnings per share	38
	Note 12.	Information provided in connection with outstanding debt of subsidiaries	39

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		84

Item 4.	Controls and Procedures		87

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings		88

Item 1A.	Risk Factors		88

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		88

Item 6.	Exhibits		88

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30 2011			December 31 2010
	(in millions of U.S. dollars, except share and per share data)
Assets
Investments

Fixed maturities available for sale, at fair value (amortized cost – $39,862 and $36,542) (includes hybrid financial instruments of $398 and $416)	$	41,038		$	37,539
Fixed maturities held to maturity, at amortized cost (fair value – $9,078 and $9,461)		9,033			9,501
Equity securities, at fair value (cost – $549 and $666)		582			692
Short-term investments, at fair value and amortized cost		2,380			1,983
Other investments (cost – $1,916 and $1,511)		2,156			1,692

Total investments		55,189			51,407
Cash		833			772
Securities lending collateral		1,593			1,495
Accrued investment income		538			521
Insurance and reinsurance balances receivable		4,923			4,233
Reinsurance recoverable on losses and loss expenses		13,375			12,871
Reinsurance recoverable on policy benefits		250			281
Deferred policy acquisition costs		1,821			1,641
Value of business acquired		796			634
Goodwill and other intangible assets		4,858			4,664
Prepaid reinsurance premiums		1,711			1,511
Deferred tax assets		586			769
Investments in partially-owned insurance companies (cost – $349 and $357)		353			360
Other assets		2,428			2,196

Total assets	$	89,254		$	83,355

Liabilities
Unpaid losses and loss expenses	$	38,951		$	37,391
Unearned premiums		6,913			6,330
Future policy benefits		4,384			3,106
Insurance and reinsurance balances payable		3,785			3,282
Deposit liabilities		700			421
Securities lending payable		1,610			1,518
Payable for securities purchased		418			292
Accounts payable, accrued expenses, and other liabilities		3,288			2,958
Income taxes payable		23			116
Short-term debt		1,400			1,300
Long-term debt		3,360			3,358
Trust preferred securities		309			309

Total liabilities		65,141			60,381

Commitments and contingencies
Shareholders’ equity
Common Shares (CHF 30.27 and CHF 30.57 par value, 342,775,070 and 341,094,559 shares issued, 337,912,324 and 334,942,852 shares outstanding)		10,098			10,161
Common Shares in treasury (4,862,746 and 6,151,707 shares)		(250	)		(330	)
Additional paid-in capital		5,484			5,623
Retained earnings		6,792			5,926
Deferred compensation obligation		2			2
Accumulated other comprehensive income (AOCI)		1,989			1,594
Common Shares issued to employee trust		(2	)		(2	)

Total shareholders’ equity		24,113			22,974

Total liabilities and shareholders’ equity	$	89,254		$	83,355

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars, except per share data)
Revenues
Net premiums written	$	3,953		$	3,420		$	7,399		$	6,991
Change in unearned premiums		(196	)		(187	)		(333	)		(481	)

Net premiums earned		3,757			3,233			7,066			6,510
Net investment income		569			518			1,113			1,022
Net realized gains (losses):
Other-than-temporary impairment (OTTI) losses gross		(9	)		(31	)		(14	)		(81	)
Portion of OTTI losses recognized in other comprehensive income (OCI)		1			13			2			45

Net OTTI losses recognized in income		(8	)		(18	)		(12	)		(36	)
Net realized gains (losses) excluding OTTI losses		(65	)		27			(106	)		213

Total net realized gains (losses)		(73	)		9			(118	)		177

Total revenues		4,253			3,760			8,061			7,709

Expenses
Losses and loss expenses		2,226			1,800			4,489			3,721
Policy benefits		108			87			199			174
Policy acquisition costs		604			536			1,159			1,090
Administrative expenses		515			463			1,009			923
Interest expense		62			52			125			104
Other (income) expense		9			3			(5	)		(1	)

Total expenses		3,524			2,941			6,976			6,011

Income before income tax		729			819			1,085			1,698
Income tax expense		122			142			219			266

Net income	$	607		$	677		$	866		$	1,432

Other comprehensive income
Unrealized appreciation	$	303		$	487		$	369		$	1,070
Reclassification adjustment for net realized gains included in net income		(78	)		(97	)		(134	)		(226	)

		225			390			235			844
Change in:
Cumulative translation adjustment		69			(169	)		301			(259	)
Pension liability		1			2			(5	)		8

Other comprehensive income, before income tax		295			223			531			593
Income tax expense related to OCI items		(88	)		(55	)		(136	)		(122	)

Other comprehensive income		207			168			395			471

Comprehensive income	$	814		$	845		$	1,261		$	1,903

Earnings per share
Basic earnings per share	$	1.79		$	1.99		$	2.56		$	4.22

Diluted earnings per share	$	1.77		$	1.98		$	2.54		$	4.21

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Six Months Ended June 30
	2011			2010
	(in millions of U.S. dollars)
Common Shares
Balance – beginning of period	$	10,161		$	10,503
Net shares issued under employee share-based compensation plans		—			71
Exercise of stock options		50			9
Dividends declared on Common Shares-par value reduction		(113	)		(218	)

Balance – end of period		10,098			10,365

Common Shares in treasury
Balance – beginning of period		(330	)		(3	)
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans		80			(26	)

Balance – end of period		(250	)		(29	)

Additional paid-in capital
Balance – beginning of period		5,623			5,526
Net shares redeemed under employee share-based compensation plans		(111	)		(69	)
Exercise of stock options		20			5
Share-based compensation expense and other		71			68
Funding of dividends declared to Retained earnings		(119	)		—

Balance – end of period		5,484			5,530

Retained earnings
Balance – beginning of period		5,926			2,818
Net income		866			1,432
Funding of dividends declared from Additional paid-in capital		119			—
Dividends declared on Common Shares		(119	)		—

Balance – end of period		6,792			4,250

Deferred compensation obligation
Balance – beginning and end of period	$	2		$	2

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)

(Unaudited)


	Six Months Ended June 30
	2011			2010
	(in millions of U.S. dollars)
Accumulated other comprehensive income (loss)
Net unrealized appreciation (depreciation) on investments
Balance – beginning of period	$	1,399		$	657
Change in period, net of income tax expense of $(60) and $(213)		175			631

Balance – end of period		1,574			1,288

Cumulative translation adjustment
Balance – beginning of period		262			240
Change in period, net of income tax (expense) benefit of $(77) and $94		224			(165	)

Balance – end of period		486			75

Pension liability adjustment
Balance – beginning of period		(67	)		(74	)
Change in period, net of income tax benefit (expense) of $1 and $(3)		(4	)		5

Balance – end of period		(71	)		(69	)

Accumulated other comprehensive income		1,989			1,294

Common Shares issued to employee trust
Balance – beginning and end of period		(2	)		(2	)

Total shareholders’ equity	$	24,113		$	21,410

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30
	2011			2010
	(in millions of U.S. dollars)
Cash flows from operating activities
Net income	$	866		$	1,432
Adjustments to reconcile net income to net cash flows from operating activities
Net realized losses (gains)		118			(177	)
Amortization of premiums/discounts on fixed maturities		63			61
Deferred income taxes		47			(48	)
Unpaid losses and loss expenses		1,001			(452	)
Unearned premiums		478			818
Future policy benefits		37			40
Insurance and reinsurance balances payable		449			(16	)
Accounts payable, accrued expenses, and other liabilities		3			33
Income taxes payable		(91	)		60
Insurance and reinsurance balances receivable		(578	)		(316	)
Reinsurance recoverable on losses and loss expenses		(296	)		346
Reinsurance recoverable on policy benefits		29			11
Deferred policy acquisition costs		(149	)		(167	)
Prepaid reinsurance premiums		(156	)		(411	)
Other		242			477

Net cash flows from operating activities		2,063			1,691

Cash flows from investing activities
Purchases of fixed maturities available for sale		(13,041	)		(16,623	)
Purchases of to be announced mortgage-backed securities		(642	)		(720	)
Purchases of fixed maturities held to maturity		(234	)		(324	)
Purchases of equity securities		(170	)		(38	)
Sales of fixed maturities available for sale		9,346			12,866
Sales of to be announced mortgage-backed securities		639			684
Sales of equity securities		347			311
Maturities and redemptions of fixed maturities available for sale		1,758			1,776
Maturities and redemptions of fixed maturities held to maturity		656			570
Net derivative instruments settlements		(46	)		131
Acquisition of subsidiaries (net of cash acquired of $95 in 2011)		(380	)		—
Other		(132	)		(100	)

Net cash flows used for investing activities		(1,899	)		(1,467	)

Cash flows from financing activities
Dividends paid on Common Shares		(223	)		(210	)
Common Shares repurchased		(68	)		—
Proceeds from issuance of short-term debt		3,311			175
Repayment of short-term debt		(3,211	)		(175	)
Proceeds from share-based compensation plans		76			19

Net cash flows used for financing activities		(115	)		(191	)

Effect of foreign currency rate changes on cash and cash equivalents		12			(34	)

Net increase (decrease) in cash		61			(1	)
Cash – beginning of period		772			669

Cash – end of period	$	833		$	668

Supplemental cash flow information
Taxes paid	$	265		$	256
Interest paid	$	112		$	101

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited and its subsidiaries (collectively, ACE, we, us, or our) provide 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.

The interim unaudited consolidated financial statements, which include the accounts of ACE 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. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

2. Accounting guidance not yet adopted

Accounting for costs associated with acquiring or renewing insurance contracts

In October 2010, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. This guidance is effective for interim and annual reporting periods beginning on January 1, 2012, and may be applied prospectively or retrospectively. The amount of acquisition costs we will defer under the new guidance will be less than the amount deferred under our current accounting practice. We are in the process of assessing the impact that this guidance will have on our financial condition and results of operations.

Fair value measurements

In May 2011, the FASB issued new guidance on fair value measurements to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. The guidance is not necessarily intended to result in a significant change in the application of the current requirements. Instead it is intended to clarify the intended application of existing fair value measurement requirements. It also changes certain principles or requirements for measuring fair value and disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011. We are in the process of assessing the impact this amendment will have on our financial statements.

3. Acquisitions

ACE acquired New York Life’s Korea operations on February 1, 2011 and New York Life’s Hong Kong operations on April 1, 2011 for approximately $425 million in cash. These acquired businesses, now operating under our Life segment, expand our presence in the North Asia market and complement our life insurance business established in that region. These acquisitions generated approximately $123 million of goodwill, none of which is expected to be deductible for income tax purposes, and approximately $207 million of intangible assets. The most significant intangible asset is the value of business acquired (VOBA). VOBA represents the fair value of the future profits of the in-force long duration contracts and is amortized in relation to the premium or profit emergence of the underlying contracts, depending on the nature of the product, in a manner similar to deferred acquisition costs.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Prior year acquisitions

On December 28, 2010, ACE acquired all the outstanding common stock of Rain and Hail Insurance Service, Inc. (Rain and Hail) not previously owned by ACE for approximately $1.1 billion in cash. Rain and Hail has served America’s farmers since 1919, providing comprehensive multiple peril crop and crop/hail insurance protection to customers in the U.S. and Canada. This acquisition is consistent with ACE’s strategy to expand its specialty lines business and provides further diversification of ACE’s global product mix. The acquisition of Rain and Hail generated $129 million of goodwill, none of which is expected to be deductible for income tax purposes, and $523 million of other intangible assets. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – North American segment.

On December 1, 2010, ACE acquired Jerneh Insurance Berhad (Jerneh), a general insurance company in Malaysia, for approximately $218 million in cash. The acquisitions of Rain and Hail and Jerneh were financed with cash on hand and the use of reverse repurchase agreements of $1 billion.

4. Investments

a) Fixed maturities

The following tables present the fair value and amortized cost of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI:


	June 30, 2011
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	2,423	$	80	$	(8	)	$	2,495	$	—
Foreign		12,341		389		(51	)		12,679		(12	)
Corporate securities		13,853		723		(63	)		14,513		(14	)
Mortgage-backed securities		9,932		259		(180	)		10,011		(191	)
States, municipalities, and political subdivisions		1,313		36		(9	)		1,340		—

	$	39,862	$	1,487	$	(311	)	$	41,038	$	(217	)

Held to maturity
U.S. Treasury and agency	$	1,067	$	30	$	(5	)	$	1,092	$	—
Foreign		1,051		1		(24	)		1,028		—
Corporate securities		2,311		15		(34	)		2,292		—
Mortgage-backed securities		3,414		69		(11	)		3,472		—
States, municipalities, and political subdivisions		1,190		10		(6	)		1,194		—

	$	9,033	$	125	$	(80	)	$	9,078	$	—

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	December 31, 2010
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	2,904	$	74	$	(15	)	$	2,963	$	—
Foreign		10,926		340		(80	)		11,186		(28	)
Corporate securities		12,902		754		(69	)		13,587		(29	)
Mortgage-backed securities		8,508		213		(205	)		8,516		(228	)
States, municipalities, and political subdivisions		1,302		15		(30	)		1,287		—

	$	36,542	$	1,396	$	(399	)	$	37,539	$	(285	)

Held to maturity
U.S. Treasury and agency	$	1,105	$	32	$	(10	)	$	1,127	$	—
Foreign		1,049		1		(37	)		1,013		—
Corporate securities		2,361		12		(60	)		2,313		—
Mortgage-backed securities		3,811		62		(27	)		3,846		—
States, municipalities, and political subdivisions		1,175		5		(18	)		1,162		—

	$	9,501	$	112	$	(152	)	$	9,461	$	—

As discussed in Note 4 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above is the cumulative amount of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI Recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders’ equity. For the three and six months ended June 30, 2011, $25 million and $8 million, respectively, of net unrealized depreciation related to such securities is included in OCI. For the three and six months ended June 30, 2010, $33 million and $96 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At June 30, 2011 and December 31, 2010, AOCI includes net unrealized depreciation of $109 million and $99 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.

Mortgage-backed securities issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 81 percent and 79 percent of the total mortgage-backed securities at June 30, 2011 and December 31, 2010, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and nongovernment mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table presents fixed maturities by contractual maturity. 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 2011				December 31 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions of U.S. dollars)
Available for sale; maturity period
Due in 1 year or less	$	2,046	$	2,074	$	1,846	$	1,985
Due after 1 year through 5 years		12,962		13,446		13,094		13,444
Due after 5 years through 10 years		11,468		11,972		10,276		10,782
Due after 10 years		3,454		3,535		2,818		2,812

		29,930		31,027		28,034		29,023
Mortgage-backed securities		9,932		10,011		8,508		8,516

	$	39,862	$	41,038	$	36,542	$	37,539

Held to maturity; maturity period
Due in 1 year or less	$	310	$	312	$	400	$	404
Due after 1 year through 5 years		2,127		2,163		1,983		2,010
Due after 5 years through 10 years		2,512		2,468		2,613		2,524
Due after 10 years		670		663		694		677

		5,619		5,606		5,690		5,615
Mortgage-backed securities		3,414		3,472		3,811		3,846

	$	9,033	$	9,078	$	9,501	$	9,461

b) Equity securities

The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities:


	June 30 2011			December 31 2010
	(in millions of U.S. dollars)
Cost	$	549		$	666
Gross unrealized appreciation		37			28
Gross unrealized depreciation		(4	)		(2	)

Fair value	$	582		$	692

c) Net realized gains (losses)

In accordance with guidance related to the recognition and presentation of OTTI, when an OTTI related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.

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

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

•

the amount of time a security has been in a loss position and the magnitude of the loss position;

•

the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and

•

ACE’s ability and intent to hold the security to the expected recovery period.

As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.

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

Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. We develop 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.

There were no credit losses recognized in net income for corporate securities in 2011. For the three and six months ended June 30, 2010, credit losses recognized in net income for corporate securities were nil and $1 million, respectively.

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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2011 were $2 million and $3 million, respectively. Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2010 were $5 million and $22 million, respectively.

The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused management to conclude the decline in fair value of certain investments was “other-than-temporary”:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Fixed maturities:
OTTI on fixed maturities, gross	$	(6	)	$	(18	)	$	(11	)	$	(68	)
OTTI on fixed maturities recognized in OCI (pre-tax)		1			13			2			45

OTTI on fixed maturities, net		(5	)		(5	)		(9	)		(23	)
Gross realized gains excluding OTTI		108			128			217			296
Gross realized losses excluding OTTI		(29	)		(46	)		(85	)		(115	)

Total fixed maturities		74			77			123			158

Equity securities:
Gross realized gains excluding OTTI		4			32			12			77
Gross realized losses excluding OTTI		—			—			(1	)		—

Total equity securities		4			32			11			77

OTTI on other investments		(3	)		(13	)		(3	)		(13	)
Foreign exchange gains (losses)		(30	)		61			(109	)		52
Investment and embedded derivative instruments		(48	)		5			(68	)		24
Fair value adjustments on insurance derivative		(70	)		(301	)		1			(205	)
S&P put options and futures		3			143			(68	)		84
Other derivative instruments		(2	)		4			(3	)		(5	)
Other		(1	)		1			(2	)		5

Net realized gains (losses)	$	(73	)	$	9		$	(118	)	$	177

The following table presents a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Balance of credit losses related to securities still held- beginning of period	$	96		$	163		$	137		$	174
Additions where no OTTI was previously recorded		2			5			2			22
Additions where an OTTI was previously recorded		—			—			1			1
Reductions for securities sold during the period		(4	)		(31	)		(46	)		(60	)

Balance of credit losses related to securities still held- end of period	$	94		$	137		$	94		$	137

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

d) Gross unrealized loss

At June 30, 2011, there were 4,348 fixed maturities out of a total of 21,493 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $8 million. Fixed maturities in an unrealized loss position at June 30, 2011, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:


	0 – 12 Months					Over 12 Months					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in millions of U.S. dollars)
June 30, 2011
U.S. Treasury and agency	$	551	$	(13.3	)	$	—	$	—		$	551	$	(13.3	)
Foreign		3,136		(60.7	)		264		(14.1	)		3,400		(74.8	)
Corporate securities		3,709		(73.2	)		152		(23.9	)		3,861		(97.1	)
Mortgage-backed securities		2,638		(35.1	)		825		(155.4	)		3,463		(190.5	)
States, municipalities, and political subdivisions		663		(10.8	)		62		(4.6	)		725		(15.4	)

Total fixed maturities		10,697		(193.1	)		1,303		(198.0	)		12,000		(391.1	)
Equity securities		44		(3.3	)		1		(0.4	)		45		(3.7	)
Other investments		19		(1.0	)		—		—			19		(1.0	)

Total	$	10,760	$	(197.4	)	$	1,304	$	(198.4	)	$	12,064	$	(395.8	)


	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, 2010
U.S. Treasury and agency	$	864	$	(24.6	)	$	—	$	—		$	864	$	(24.6	)
Foreign		4,409		(79.0	)		312		(37.6	)		4,721		(116.6	)
Corporate securities		3,553		(85.1	)		273		(43.9	)		3,826		(129.0	)
Mortgage-backed securities		3,904		(67.3	)		1,031		(165.1	)		4,935		(232.4	)
States, municipalities, and political subdivisions		1,115		(36.2	)		79		(11.9	)		1,194		(48.1	)

Total fixed maturities		13,845		(292.2	)		1,695		(258.5	)		15,540		(550.7	)
Equity securities		45		(1.9	)		1		(0.3	)		46		(2.2	)
Other investments		66		(8.7	)		—		—			66		(8.7	)

Total	$	13,956	$	(302.8	)	$	1,696	$	(258.8	)	$	15,652	$	(561.6	)

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

e) Restricted assets

ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at June 30, 2011 and December 31, 2010, are fixed maturities and short-term investments totaling $12.8 billion and $12.0 billion, respectively, and cash of $97 million and $104 million, respectively.

The following table presents the components of restricted assets:


	June 30 2011		December 31 2010
	(in millions of U.S. dollars)
Trust funds	$	9,143	$	8,200
Deposits with U.S. regulatory authorities		1,254		1,384
Deposits with non-U.S. regulatory authorities		2,264		2,289
Other pledged assets		273		190

	$	12,934	$	12,063

5. Fair value measurements

a) Fair value hierarchy

Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability 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. The three levels of the hierarchy are as follows:

•

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

•

Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and

•

Level 3 – Inputs that are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability.

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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

We use one or more pricing services to obtain fair value measurements for the majority of the investment securities we hold. Based on management’s understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP. The following is a description of the valuation techniques and inputs used to determine fair value for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities

We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that may be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Additionally, given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. 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. Equity securities for which pricing is unobservable are classified within Level 3.

Short-term investments

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

Other investments

Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which NAV was used as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investment or will not have the contractual option to redeem the investments in the near term. The remainder of such investments are classified within Level 2. Equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans as well as other portfolios, and included in Other investments, are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.

ACE LIMITED AND SUBSIDIARIES

NOTES TO 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 other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE’s obligation to return the collateral plus interest.

Investment derivative instruments

Actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts are classified within Level 1 as fair values are based on quoted market prices.

Guaranteed living benefits

The liability for Guaranteed Living Benefits (GLB) arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of Guaranteed Minimum Income Benefits (GMIB) and Guaranteed Minimum Accumulation Benefits (GMAB) associated with variable annuity contracts. For GLB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality.

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

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the GMIB contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values) by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

currently observable relevant annuitization behavior data and so we use a weighted-average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize using the GMIB). The GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.

The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as appropriate with industry estimates. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. Based on our first and second quarter 2011 review, no changes were made to actuarial or behavior assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $0.3 million and $6.3 million for the three and six months ended June 30, 2011, respectively.

We view the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3.

Other derivative instruments

We maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for Guaranteed Minimum Death Benefits (GMDB) and GLB reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Our position in credit default swaps is typically included within Level 3.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:


	Level 1			Level 2		Level 3		Total
	(in millions of U.S. dollars)
June 30, 2011
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,245		$	1,250	$	—	$	2,495
Foreign		207			12,445		27		12,679
Corporate securities		43			14,328		142		14,513
Mortgage-backed securities		—			9,977		34		10,011
States, municipalities, and political subdivisions		—			1,339		1		1,340

		1,495			39,339		204		41,038

Equity securities		567			5		10		582
Short-term investments		1,266			1,114		—		2,380
Other investments		239			237		1,680		2,156
Securities lending collateral		—			1,593		—		1,593
Investment derivative instruments		3			—		—		3
Other derivative instruments		(37	)		41		4		8

Total assets measured at fair value	$	3,533		$	42,329	$	1,898	$	47,760

Liabilities:
GLB ⁽¹⁾	$	—		$	—	$	524	$	524

⁽¹⁾

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Level 1			Level 2		Level 3		Total
	(in millions of U.S. dollars)
December 31, 2010
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,564		$	1,399	$	—	$	2,963
Foreign		187			10,973		26		11,186
Corporate securities		31			13,441		115		13,587
Mortgage-backed securities		—			8,477		39		8,516
States, municipalities, and political subdivisions		—			1,285		2		1,287

		1,782			35,575		182		37,539

Equity securities		676			3		13		692
Short-term investments		903			1,080		—		1,983
Other investments		39			221		1,432		1,692
Securities lending collateral		—			1,495		—		1,495
Investment derivative instruments		11			—		—		11
Other derivative instruments		(25	)		46		4		25

Total assets measured at fair value	$	3,386		$	38,420	$	1,631	$	43,437

Liabilities:
GLB ⁽¹⁾	$	—		$	—	$	507	$	507

⁽¹⁾

There were no significant gross transfers between Level 1 and Level 2 during the three and six months ended June 30, 2011 and 2010.

Fair value of alternative investments

Included in Other investments in the fair value hierarchy at June 30, 2011 and December 31, 2010 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At June 30, 2011 and December 31, 2010, there were no probable or pending sales related to any of the investments measured at fair value using NAV.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table presents, by investment category, the fair value and maximum future funding commitments related to these investments. The table also shows the expected liquidation period from June 30, 2011.


	Expected Liquidation Period		June 30, 2011				December 31, 2010
	Expected Liquidation Period		Fair Value		Maximum Future Funding Commitments		Fair Value		Maximum Future Funding Commitments
			(in millions of U.S. dollars)
Financial		5 to 9 Years	$	207	$	163	$	192	$	151
Real estate		3 to 9 Years		261		89		168		92
Distressed		6 to 9 Years		221		219		243		43
Mezzanine		6 to 9 Years		126		299		135		173
Traditional		3 to 8 Years		457		410		376		291
Vintage		1 to 3 Years		27		6		27		3
Investment funds		Not Applicable		338		—		329		—

			$	1,637	$	1,186	$	1,470	$	753

Included in all categories in the above table except for Investment funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Included in the “Expected Liquidation Period” column above is the range in years over which ACE expects the majority of underlying assets in the respective categories to be liquidated. Further, for all categories except for Investment funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.

Financial

Financial consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world.

Real estate

Real estate consists of investments in private equity funds targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market.

Distressed

Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S.

Mezzanine

Mezzanine consists of investments in private equity funds targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide.

Traditional

Traditional consists of investments in private equity funds employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Vintage

Vintage consists of investments in private equity funds made before 2002 and where the funds’ commitment periods had already expired.

Investment funds

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

Level 3 financial instruments

The following tables present a reconciliation of the beginning and ending balances of financial instruments measured at fair value using significant unobservable inputs (Level 3):


	Three Months Ended June 30, 2011
	Assets																			Liabilities
	Available-for-Sale Debt Securities											Equity securities			Other investments			Other derivative instruments		GLB ⁽¹⁾
	Foreign			Corporate securities			Mortgage- backed securities			States, municipalities, and political subdivisions		Equity securities			Other investments			Other derivative instruments		GLB ⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	26		$	113		$	81		$	1	$	10		$	1,564		$	4	$	449
Transfers into Level 3		5			29			3			—		—			—			—		—
Transfers out of Level 3		(6	)		—			(35	)		—		—			—			—		—
Change in Net Unrealized Gains (Losses) included in OCI		—			—			—			—		—			9			—		—
Net Realized Gains/Losses		1			(1	)		—			—		2			(3	)		—		75
Purchases		5			3			—			—		2			243			—		—
Issuances		—			—			—			—		—			—			—		—
Sales		(2	)		(1	)		(12	)		—		(4	)		(55	)		—		—
Settlements		(2	)		(1	)		(3	)		—		—			(78	)		—		—

Balance-End of Period	$	27		$	142		$	34		$	1	$	10		$	1,680		$	4	$	524

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—	$	—		$	(3	)	$	—	$	75

⁽¹⁾

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Three Months Ended June 30, 2010
	Assets																		Liabilities
	Available-for-Sale Debt Securities									Equity securities			Other investments			Other derivative instruments			GLB ⁽¹⁾
	Foreign		Corporate securities			Mortgage- backed securities		States, municipalities, and political subdivisions		Equity securities			Other investments			Other derivative instruments			GLB ⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	21	$	133		$	12	$	2	$	13		$	1,236		$	14		$	347
Transfers into (Out of) Level 3		6		—			—		—		—			—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		1		3			—		—		(1	)		14			—			—
Net Realized Gains/Losses		—		(1	)		—		—		1			(14	)		12			301
Purchases, Sales, Issuances, and Settlements, Net		—		(14	)		—		1		3			(9	)		(12	)

Balance-End of Period	$	28	$	121		$	12	$	3	$	16		$	1,227		$	14		$	648

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—	$	—		$	—	$	—	$	—		$	(14	)	$	12		$	301

⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $776 million at June 30, 2010, and $469 million at March 31, 2010, which includes a fair value derivative adjustment of $648 million and $347 million, respectively.


	Six Months Ended June 30, 2011
	Assets																					Liabilities
	Available-for-Sale Debt Securities												Equity securities			Other investments			Other derivative instruments			GLB ⁽¹⁾
	Foreign			Corporate securities			Mortgage- backed securities			States, municipalities, and political subdivisions			Equity securities			Other investments			Other derivative instruments			GLB ⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	26		$	115		$	39		$	2		$	13		$	1,432		$	4			507
Transfers into Level 3		9			34			4			—			—			—			—			—
Transfers out of Level 3		(7	)		(4	)		(35	)		—			—			—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		(1	)		1			—			—			(1	)		51			—			—
Net Realized Gains/Losses		1			(2	)		—			—			4			(3	)		1			17
Purchases		5			22			46			—			2			333			—			—
Sales		(3	)		(20	)		(15	)		—			(8	)		(55	)		—			—
Settlements		(3	)		(4	)		(5	)		(1	)		—			(78	)		(1	)		—

Balance-End of Period	$	27		$	142		$	34		$	1		$	10		$	1,680		$	4		$	524

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	(3	)	$	1		$	17

⁽¹⁾

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Six Months Ended June 30, 2010
	Assets																			Liabilities
	Available-for-Sale Debt Securities											Equity securities		Other investments			Other derivative instruments			GLB ⁽¹⁾
	Foreign			Corporate securities			Mortgage- backed securities			States, municipalities, and political subdivisions		Equity securities		Other investments			Other derivative instruments			GLB ⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	59		$	168		$	21		$	3	$	12	$	1,149		$	14		$	443
Transfers into (Out of) Level 3		(31	)		(35	)		—			—		—		—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		1			6			—			—		—		33			—			—
Net Realized Gains/Losses		(1	)		(1	)		—			—		1		(13	)		12			205
Purchases, Sales, Issuances, and Settlements, Net		—			(17	)		(9	)		—		3		58			(12	)

Balance-End of Period	$	28		$	121		$	12		$	3	$	16	$	1,227		$	14		$	648

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—	$	—	$	(13	)	$	12		$	205

⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits. The liability for GLB reinsurance was $776 million at June 30, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $648 million and $443 million, respectively.

b) Financial instruments disclosed, but not carried, at fair value

ACE uses various financial instruments in the normal course of its business. Our insurance contracts are excluded from fair value of financial instruments accounting guidance, and therefore excluded from the discussion below.

The carrying values of cash, other assets, other liabilities, and other financial instruments not included below approximated their fair values.

Investments in partially-owned insurance companies

Fair values for investments in partially-owned insurance companies are based on ACE’s share of the net assets based on the financial statements provided by those companies.

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 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table presents carrying values and fair values of financial instruments not measured at fair value:


	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions of U.S. dollars)
Assets:
Fixed maturities held to maturity
U.S. Treasury and agency	$	1,067	$	1,092	$	1,105	$	1,127
Foreign		1,051		1,028		1,049		1,013
Corporate securities		2,311		2,292		2,361		2,313
Mortgage-backed securities		3,414		3,472		3,811		3,846
States, municipalities, and political subdivisions		1,190		1,194		1,175		1,162

Total assets		9,033		9,078		9,501		9,461

Liabilities:
Short-term debt		1,400		1,400		1,300		1,300
Long-term debt		3,360		3,719		3,358		3,846
Trust preferred securities		309		385		309		376

Total liabilities	$	5,069	$	5,504	$	4,967	$	5,522

6. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts

The following table presents income and expenses relating to GMDB and GLB reinsurance. GLBs include GMIBs as well as some GMABs originating in Japan.


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
GMDB
Net premiums earned	$	25		$	27		$	51		$	56
Policy benefits and other reserve adjustments	$	21		$	22		$	43		$	46
GLB
Net premiums earned	$	41		$	40		$	82		$	81
Policy benefits and other reserve adjustments		6			6			12			13
Net realized gains (losses)		(75	)		(301	)		(17	)		(205	)

Gain (loss) recognized in income	$	(40	)	$	(267	)	$	53		$	(137	)
Net cash received	$	40		$	40		$	81		$	80
Net increase in liability	$	(80	)	$	(307	)	$	(28	)	$	(217	)

At June 30, 2011, reported liabilities for GMDB and GLB reinsurance were $181 million and $676 million, respectively, compared with $185 million and $648 million, respectively, at December 31, 2010. The reported liability for GLB reinsurance of $676 million at June 30, 2011, and $648 million at December 31, 2010, includes a fair value derivative adjustment of $524 million and $507 million, respectively. Included in Net realized gains (losses) in the table above are gains (losses) related to foreign exchange and other fair value derivative adjustments. Reported liabilities for both GMDB and GLB 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 information, such as market conditions and demographics of in-force annuities.

a) GMDB reinsurance

At June 30, 2011 and December 31, 2010, the net amount at risk from GMDB reinsurance programs was $3.1 billion and $2.9 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, 2011 and December 31, 2010, 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 benefit reserve averaging between 1 and 2 percent.

At June 30, 2011, if all of the cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable, taking into account all appropriate claims limits, would be approximately $1.5 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.

b) GLB reinsurance

At June 30, 2011 and December 31, 2010, the net amount at risk from GLB reinsurance programs was $789 million and $719 million, respectively. For GLB 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, 2011 and December 31, 2010, 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 reinsurance contracts;

•

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

•

future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 0 and 1 percent.

The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 67 years.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

7. Commitments, contingencies, and guarantees

a) Derivative instruments

Derivative instruments employed

ACE 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 (TBA), discussed below, these are the most numerous and frequent derivative transactions.

ACE maintains positions in convertible bond investments that contain embedded derivatives. In addition, we purchase TBAs as part of our investing activities. These securities are included within the fixed maturities available for sale (FM AFS) portfolio.

Under reinsurance programs covering GLBs, ACE assumes the risk of GLBs, including GMIB and GMAB, associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GMAB risk is triggered if, at contract maturity, the contract holder’s account value is less than a guaranteed minimum value. The GLB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GLBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). ACE also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity exposure in the GMDB and GLB blocks of business.

In relation to certain debt issuances, ACE, from time to time, has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. Although the use of these interest rate swaps has the economic effect of fixing or reducing borrowing costs on a net basis, gross interest expense on the related debt issuances is included in Interest expense while the settlements related to the interest rate swaps are reflected in Net realized gains (losses) in the consolidated statements of operations. At June 30, 2011 and December 31, 2010, ACE had no in force interest rate swaps, having exited such positions upon the repayment of related debt issuances during the fourth quarter of 2010.

ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverables.

All derivative instruments are carried 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 designated as hedges for accounting purposes.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table presents the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of our derivative instruments:


	Consolidated Balance Sheet Location		June 30, 2011					December 31, 2010
	Consolidated Balance Sheet Location		Fair Value			Notional Value/ Payment Provision		Fair Value			Notional Value/ Payment Provision
			(in millions of U.S. dollars)
Investment and embedded derivative instruments
Foreign currency forward contracts		AP	$	1		$	753	$	3		$	729
Futures contracts on money market instruments		AP		2			10,098		3			4,297
Futures contracts on notes and bonds		AP		—			1,158		5			676
Options on money market instruments		AP		—			528		—			1
Convertible bonds		FM AFS		398			367		416			382
TBAs		FM AFS		123			117		101			98

			$	524		$	13,021	$	528		$	6,183

Other derivative instruments
Futures contracts on equities		AP	$	(37	)	$	1,110	$	(25	)	$	1,069
Options on equity market indices		AP		41			250		46			250
Credit default swaps		AP		4			350		4			350
Other		AP		—			6		—			17

			$	8		$	1,716	$	25		$	1,686

GLB ⁽¹⁾		AP/FPB	$	(676	)	$	789	$	(648	)	$	719

⁽¹⁾	Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 6 for additional information. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Investment and embedded derivative instruments
Foreign currency forward contracts	$	(3	)	$	23		$	(18	)	$	36
All other futures contracts and options		(24	)		2			(27	)		10
Convertible bonds		(21	)		(20	)		(22	)		(22	)
TBAs		—			—			(1	)		—

	$	(48	)	$	5		$	(68	)	$	24

GLB and other derivative instruments
GLB	$	(75	)	$	(301	)	$	(17	)	$	(205	)
Futures contracts on equities		—			117			(63	)		66
Options on equity market indices		3			26			(5	)		18
Interest rate swaps		—			(8	)		—			(17	)
Credit default swaps		(2	)		11			(3	)		11
Other		—			1			—			1

	$	(74	)	$	(154	)	$	(88	)	$	(126	)

	$	(122	)	$	(149	)	$	(156	)	$	(102	)

Derivative instrument objectives

(i) Foreign currency exposure management

A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. ACE uses forwards to minimize the effect of fluctuating foreign currencies.

(ii) Duration management and market exposure

Futures

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. Exchange-traded bond and note futures contracts are 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 are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business.

Options

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. 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 synthetic strategy as described above. Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business. 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 creditworthiness of its counterparties and obtains collateral. 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 our investment guidelines.

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. Interest rate swaps are also employed related to certain debt issuances 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 pays the protection buyer the difference between the fair value of assets and the principal amount. We have purchased a credit default swap to mitigate our global credit risk exposure to one of our reinsurers.

(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 within the fixed maturity host instruments which are classified in the investment portfolio as available for sale. ACE purchases convertible bonds for their total return and not specifically for the conversion feature.

(iv) TBA

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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

(v) GLB

Under the GLB program, as the assuming entity, ACE is obligated to provide coverage until the expiration or maturity 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 management’s estimate of exit price and thus, includes a risk margin. We may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (e.g., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (e.g., increased annuitization or decreased lapse rates) although we expect the business to be profitable. We believe this presentation provides the most meaningful disclosure of changes in the underlying risk within the GLB reinsurance programs for a given reporting period.

b) Other investments

Included in Other investments are investments in limited partnerships and partially-owned investment companies with a carrying value of $1,299 million. In connection with these investments, we have commitments that may require funding of up to $1,186 million over the next several years.

c) Taxation

In 2010, ACE reached final settlement with the Internal Revenue Service (IRS) Appeals Division regarding its federal tax returns for 2002, 2003, and 2004. As a result of the settlement, the amount of unrecognized tax benefits was reduced by approximately $21 million. Additionally, in June 2010, the IRS completed its field examination of ACE’s federal tax returns for 2005, 2006, and 2007 and has proposed several adjustments principally involving transfer pricing and other insurance-related matters. In July 2010, we filed a written protest with the IRS, and the case is currently being reviewed by the IRS Appeals Division. The IRS commenced its field examination of ACE’s federal tax returns for 2008 and 2009 during January 2011. While it is reasonably possible that a significant change in the unrecognized tax benefits could occur in the next 12 months, we believe that the outcome of the appeal and the current examination will not have a material impact on our financial condition or results of operations. With few exceptions, our significant U.K. subsidiaries remain subject to examination for tax years 2007 and later.

d) Legal proceedings

(i) Claims and other litigation

ACE’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 ACE’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in ACE’s loss and loss expense reserves. In addition to claims litigation, ACE 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

(ii) Business practices litigation

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, they 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 brokers and insurers. 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. In 2007, the Court granted defendants’ motions to dismiss plaintiffs’ antitrust and RICO claims with prejudice. The Court also declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit. On August 16, 2010, the Third Circuit affirmed, in part, and vacated, in part, the District Court’s previous dismissals with instructions for further briefing at the District Court on remand. Defendants renewed their motions consistent with the Third Circuit’s instructions. On June 28, 2011, the District Court administratively terminated defendants’ motions without prejudice to re-file after adjudication of issues related to a proposed class settlement involving a number of other parties. The Court set September 14, 2011 for a fairness hearing on the proposed settlement, but did not indicate when it would finally resolve all issues such that ACE may re-file its motions to dismiss.

As of August 3, 2011, plaintiffs have not specified an amount of alleged damages and the Court has not decided defendants’ renewed motions to dismiss. The Court has also not determined if this case may proceed as a class action and has, therefore, not determined the size or scope of any class. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.

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 (“tag-along cases”). All proceedings in these tag-along cases 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 LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

•

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.

As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in any of the tag-along cases. The proceedings in the tag-along cases were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, motions to dismiss. Also, the scope of the tag-along cases, in large part, will be affected by the outcome of the MDL Court’s decision on defendants’ renewed motions to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from these litigations.

In addition to the related federal cases, there are two pending state cases 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.

As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in this case. The proceedings were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, a motion to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.

•

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. Trial is set for September 12, 2011.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

In January 2011, plaintiff submitted an expert report in which it claims that ACE should be liable for $11.3 million in overcharges to Ohio public entities; plaintiffs may claim that this amount should be trebled pursuant to Ohio antitrust law. Plaintiff also seeks to impose a $10.3 million penalty on ACE related to ACE’s sales of private insurance in Ohio. ACE believes that these claims are without merit and continues to defend them vigorously.

In all of the lawsuits described above, except where specifically noted, 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.

8. Shareholders’ equity

All of ACE’s Common Shares are registered common shares under Swiss corporate law. Though the par value of Common Shares is stated in Swiss francs, ACE continues to use U.S. dollars as its reporting currency for preparing the consolidated financial statements. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions) or from legal reserves, must be declared by ACE in Swiss francs though dividend payments are made by ACE in U.S. dollars. In light of a January 1, 2011 Swiss tax law change, at our May 2011 Annual General Meeting our shareholders approved a dividend for the coming year from our capital contributions reserves (additional paid in capital), a subaccount of legal reserves. Dividends declared in the first quarter of 2011 of CHF 0.30 ($0.33) per Common Share were paid in the form of a par value distribution (under the method approved by our shareholders at our May 2010 Annual General Meeting) and had the effect of reducing par value per Common Share to CHF 30.27. Dividends declared in the second quarter of 2011 of CHF 0.29 ($0.35) per Common Share were funded from capital contributions reserves (additional paid in capital) and paid from free reserves (retained earnings).

For the three and six months ended June 30, 2010, dividends declared per Common Share amounted to CHF 0.34 ($0.33), and CHF 0.67 ($0.64), respectively, and were paid by way of a par value distribution.

Common Shares in treasury are used principally for issuance upon the exercise of employee stock options. At June 30, 2011, 4,862,746 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.

9. Share-based compensation

The ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP) provides for grants of both incentive and non-qualified stock options principally at an option price per share equal to the fair value of ACE’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 24, 2011, ACE granted 1,620,954 stock options with a weighted-average grant date fair value of $14.63 each. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.

The 2004 LTIP also provides for grants of restricted stock and restricted stock units. ACE generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

restricted stock is granted at market close price on the day of grant. On February 24, 2011, ACE granted 1,667,653 restricted stock awards and 249,660 restricted stock units to employees and officers of ACE and its subsidiaries with a grant date fair value of $62.64 each. Each restricted stock unit represents our obligation to deliver to the holder one Common Share upon vesting. On May 18, 2011, the date of the Company’s annual general meeting, 32,660 restricted stock awards were granted to ACE’s outside directors with a grant date fair value of $69.35 each. Such awards will vest at the 2012 annual general meeting.

10. Segment information

ACE 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.

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 present the operations by segment:

Statement of Operations by Segment

For the Three Months Ended June 30, 2011

(in millions of U.S. dollars)


	Insurance – North American		Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Net premiums written	$	1,735	$	1,477		$	282		$	459		$	—		$	3,953
Net premiums earned		1,604		1,447			254			452			—			3,757
Losses and loss expenses		1,233		733			112			147			1			2,226
Policy benefits		—		—			—			108			—			108
Policy acquisition costs		143		348			47			66			—			604
Administrative expenses		147		242			14			72			40			515

Underwriting income (loss)		81		124			81			59			(41	)		304

Net investment income		300		138			71			59			1			569
Net realized gains (losses) including OTTI		21		(10	)		(14	)		(68	)		(2	)		(73	)
Interest expense		3		1			1			3			54			62
Other (income) expense		3		(5	)		1			8			2			9
Income tax expense (benefit)		95		40			8			14			(35	)		122

Net income (loss)	$	301	$	216		$	128		$	25		$	(63	)	$	607

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Statement of Operations by Segment

For the Three Months Ended June 30, 2010

(in millions of U.S. dollars)


	Insurance – North American		Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Net premiums written	$	1,438	$	1,302		$	289		$	391		$	—		$	3,420
Net premiums earned		1,326		1,263			256			388			—			3,233
Losses and loss expenses		924		644			103			129			—			1,800
Policy benefits		—		1			—			86			—			87
Policy acquisition costs		126		296			48			66			—			536
Administrative expenses		147		207			15			54			40			463

Underwriting income (loss)		129		115			90			53			(40	)		347

Net investment income		287		115			73			43			—			518
Net realized gains (losses) including OTTI		85		48			28			(155	)		3			9
Interest expense		—		—			—			—			52			52
Other (income) expense		4		(3	)		(2	)		3			1			3
Income tax expense (benefit)		110		59			9			16			(52	)		142

Net income (loss)	$	387	$	222		$	184		$	(78	)	$	(38	)	$	677

Statement of Operations by Segment

For the Six Months Ended June 30, 2011

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Net premiums written	$	3,020		$	2,914		$	597		$	868		$	—		$	7,399
Net premiums earned		2,950			2,751			514			851			—			7,066
Losses and loss expenses		2,227			1,595			391			275			1			4,489
Policy benefits		—			—			—			199			—			199
Policy acquisition costs		279			660			93			127			—			1,159
Administrative expenses		295			466			26			140			82			1,009

Underwriting income (loss)		149			30			4			110			(83	)		210

Net investment income		595			269			143			105			1			1,113
Net realized gains (losses) including OTTI		10			(19	)		(27	)		(81	)		(1	)		(118	)
Interest expense		7			2			1			6			109			125
Other (income) expense		(13	)		(7	)		(5	)		13			7			(5	)
Income tax expense (benefit)		184			59			18			27			(69	)		219

Net income (loss)	$	576		$	226		$	106		$	88		$	(130	)	$	866

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Statement of Operations by Segment

For the Six Months Ended June 30, 2010

(in millions of U.S. dollars)


	Insurance – North American			Insurance – Overseas General			Global Reinsurance			Life			Corporate and Other			ACE Consolidated
Net premiums written	$	2,833		$	2,722		$	660		$	776		$	—		$	6,991
Net premiums earned		2,696			2,514			532			768			—			6,510
Losses and loss expenses		1,862			1,345			254			260			—			3,721
Policy benefits		—			4			—			170			—			174
Policy acquisition costs		282			579			102			127			—			1,090
Administrative expenses		295			409			27			112			80			923

Underwriting income (loss)		257			177			149			99			(80	)		602

Net investment income		565			229			142			86			—			1,022
Net realized gains (losses) including OTTI		165			70			59			(112	)		(5	)		177
Interest expense		—			—			—			—			104			104
Other (income) expense		(1	)		(1	)		(6	)		6			1			(1	)
Income tax expense (benefit)		214			73			19			30			(70	)		266

Net income (loss)	$	774		$	404		$	337		$	37		$	(120	)	$	1,432

Underwriting assets are reviewed in total by management for purpose of decision-making. Other than goodwill, ACE does not allocate assets to its segments.

The following table presents the net premiums earned for each segment by product:


	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
	(in millions of U.S. dollars)
For the Three Months Ended June 30, 2011
Insurance – North American	$	657	$	865	$	82	$	1,604
Insurance – Overseas General		533		348		566		1,447
Global Reinsurance		115		139		—		254
Life		—		—		452		452

	$	1,305	$	1,352	$	1,100	$	3,757

For the Three Months Ended June 30, 2010
Insurance – North American	$	355	$	895	$	76	$	1,326
Insurance – Overseas General		424		349		490		1,263
Global Reinsurance		120		136		—		256
Life		—		—		388		388

	$	899	$	1,380	$	954	$	3,233

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
	(in millions of U.S. dollars)
For the Six Months Ended June 30, 2011
Insurance – North American	$	1,035	$	1,755	$	160	$	2,950
Insurance – Overseas General		964		690		1,097		2,751
Global Reinsurance		227		287		—		514
Life		—		—		851		851

	$	2,226	$	2,732	$	2,108	$	7,066

For the Six Months Ended June 30, 2010
Insurance – North American	$	713	$	1,839	$	144	$	2,696
Insurance – Overseas General		844		694		976		2,514
Global Reinsurance		258		274		—		532
Life		—		—		768		768

	$	1,815	$	2,807	$	1,888	$	6,510

11. Earnings per share

The following table presents the computation of basic and diluted earnings per share:


	Three Months Ended June 30				Six Months Ended June 30
	2011		2010		2011		2010
	(in millions of U.S. dollars, except share and per share data)
Numerator:
Net Income	$	607	$	677	$	866	$	1,432

Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding		338,920,580		339,975,261		338,021,487		339,202,374
Denominator for diluted earnings per share:
Share-based compensation plans		2,768,388		1,268,395		2,596,909		1,185,944

Adjusted weighted-average shares outstanding and assumed conversions		341,688,968		341,243,656		340,618,396		340,388,318

Basic earnings per share	$	1.79	$	1.99	$	2.56	$	4.22

Diluted earnings per share	$	1.77	$	1.98	$	2.54	$	4.21

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, 2011 and 2010, the potential anti-dilutive share conversions were 1,212 shares and 426,167 shares, respectively. The potential anti-dilutive share conversions for the six months ended June 30, 2011 and 2010, were 81,718 shares and 429,990 shares, respectively.

ACE LIMITED AND SUBSIDIARIES

NOTES TO 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, 2011 and December 31, 2010, and for the three and six months ended June 30, 2011 and 2010, for ACE Limited (the Parent Guarantor) and ACE INA Holdings Inc. (the Subsidiary Issuer). 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 financial information of the Subsidiary Issuer is presented on a consolidated basis and consists principally of the net assets, results of operations, and cash flows of operating insurance company subsidiaries.

Condensed Consolidating Balance Sheet at June 30, 2011

(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	$	40		$	29,095	$	26,054		$	—		$	55,189
Cash		(185	)		664		354			—			833
Insurance and reinsurance balances receivable		—			4,329		594			—			4,923
Reinsurance recoverable on losses and loss expenses		—			17,722		(4,347	)		—			13,375
Reinsurance recoverable on policy benefits		—			941		(691	)		—			250
Value of business acquired		—			796		—			—			796
Goodwill and other intangible assets		—			4,301		557			—			4,858
Investments in subsidiaries		23,590			—		—			(23,590	)		—
Due from (to) subsidiaries and affiliates, net		853			—		—			(853	)		—
Other assets		6			7,471		1,553			—			9,030

Total assets	$	24,304		$	65,319	$	24,074		$	(24,443	)	$	89,254

Liabilities
Unpaid losses and loss expenses	$	—		$	31,820	$	7,131		$	—		$	38,951
Unearned premiums		—			5,820		1,093			—			6,913
Future policy benefits		—			3,767		617			—			4,384
Due (from) to subsidiaries and affiliates, net		—			907		(907	)		—			—
Short-term debt		—			1,000		400			—			1,400
Long-term debt		—			3,360		—			—			3,360
Trust preferred securities		—			309		—			—			309
Other liabilities		191			8,060		1,573			—			9,824

Total liabilities		191			55,043		9,907			—			65,141

Total shareholders’ equity		24,113			10,276		14,167			(24,443	)		24,113

Total liabilities and shareholders’ equity	$	24,304		$	65,319	$	24,074		$	(24,443	)	$	89,254

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Balance Sheet at December 31, 2010

(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	$	47	$	26,718		$	24,642		$	—		$	51,407
Cash		308		573			(109	)		—			772
Insurance and reinsurance balances receivable		—		3,710			523			—			4,233
Reinsurance recoverable on losses and loss expenses		—		16,877			(4,006	)		—			12,871
Reinsurance recoverable on policy benefits		—		959			(678	)		—			281
Value of business acquired		—		634			—			—			634
Goodwill and other intangible assets		—		4,113			551			—			4,664
Investments in subsidiaries		22,529		—			—			(22,529	)		—
Due from (to) subsidiaries and affiliates, net		564		(555	)		555			(564	)		—
Other assets		14		7,045			1,434			—			8,493

Total assets	$	23,462	$	60,074		$	22,912		$	(23,093	)	$	83,355

Liabilities
Unpaid losses and loss expenses	$	—	$	30,430		$	6,961		$	—		$	37,391
Unearned premiums		—		5,379			951			—			6,330
Future policy benefits		—		2,495			611			—			3,106
Short-term debt		300		1,000			—			—			1,300
Long-term debt		—		3,358			—			—			3,358
Trust preferred securities		—		309			—			—			309
Other liabilities		188		7,394			1,005			—			8,587

Total liabilities		488		50,365			9,528			—			60,381

Total shareholders’ equity		22,974		9,709			13,384			(23,093	)		22,974

Total liabilities and shareholders’ equity	$	23,462	$	60,074		$	22,912		$	(23,093	)	$	83,355

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2011

(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	$	—		$	2,306	$	1,647		$	—		$	3,953
Net premiums earned		—			2,225		1,532			—			3,757
Net investment income		—			282		287			—			569
Equity in earnings of subsidiaries		579			—		—			(579	)		—
Net realized gains (losses) including OTTI		(1	)		17		(89	)		—			(73	)
Losses and loss expenses		—			1,438		788			—			2,226
Policy benefits		—			59		49			—			108
Policy acquisition costs and administrative expenses		18			609		504			(12	)		1,119
Interest expense		(10	)		66		(3	)		9			62
Other (income) expense		(40	)		20		29			—			9
Income tax expense		3			110		9			—			122

Net income	$	607		$	222	$	354		$	(576	)	$	607

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2010

(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	$	—		$	1,993	$	1,427		$	—		$	3,420
Net premiums earned		—			1,894		1,339			—			3,233
Net investment income		—			253		265			—			518
Equity in earnings of subsidiaries		648			—		—			(648	)		—
Net realized gains (losses) including OTTI		12			63		(66	)		—			9
Losses and loss expenses		—			1,147		653			—			1,800
Policy benefits		—			33		54			—			87
Policy acquisition costs and administrative expenses		16			583		410			(10	)		999
Interest expense		(10	)		61		(9	)		10			52
Other (income) expense		(26	)		19		10			—			3
Income tax expense		3			107		32			—			142

Net income	$	677		$	260	$	388		$	(648	)	$	677

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2011

(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	$	—		$	4,329	$	3,070		$	—		$	7,399
Net premiums earned		—			4,163		2,903			—			7,066
Net investment income		1			544		568			—			1,113
Equity in earnings of subsidiaries		827			—		—			(827	)		—
Net realized gains (losses) including OTTI		(2	)		4		(120	)		—			(118	)
Losses and loss expenses		—			2,739		1,750			—			4,489
Policy benefits		—			99		100			—			199
Policy acquisition costs and administrative expenses		36			1,188		965			(21	)		2,168
Interest expense		(18	)		133		(8	)		18			125
Other (income) expense		(62	)		32		25			—			(5	)
Income tax expense		4			179		36			—			219

Net income	$	866		$	341	$	483		$	(824	)	$	866

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2010

(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	$	—		$	4,220	$	2,771		$	—		$	6,991
Net premiums earned		—			3,850		2,660			—			6,510
Net investment income		—			507		515			—			1,022
Equity in earnings of subsidiaries		1,383			—		—			(1,383	)		—
Net realized gains (losses) including OTTI		11			73		93			—			177
Losses and loss expenses		—			2,463		1,258			—			3,721
Policy benefits		—			66		108			—			174
Policy acquisition costs and administrative expenses		32			1,144		854			(17	)		2,013
Interest expense		(19	)		121		(17	)		19			104
Other (income) expense		(54	)		38		15			—			(1	)
Income tax expense (benefit)		3			203		60			—			266

Net income	$	1,432		$	395	$	990		$	(1,385	)	$	1,432

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2011

(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 cash flows from operating activities	$	117		$	677		$	1,949		$	(680	)	$	2,063

Cash flows from (used for) investing activities
Purchases of fixed maturities available for sale		—			(6,330	)		(7,353	)		—			(13,683	)
Purchases of fixed maturities held to maturity		—			(233	)		(1	)		—			(234	)
Purchases of equity securities		—			(138	)		(32	)		—			(170	)
Sales of fixed maturities available for sale		8			5,022			4,955			—			9,985
Sales of equity securities		—			332			15			—			347
Maturities and redemptions of fixed maturities available for sale		—			847			911			—			1,758
Maturities and redemptions of fixed maturities held to maturity		—			475			181			—			656
Net derivative instruments settlements		(1	)		(7	)		(38	)		—			(46	)
Capital contribution to subsidiary		(385	)		—			—			385			—
Advances (to) from affiliates		283			—			(283	)		—			—
Acquisition of subsidiaries (net of cash acquired of $95)		—			(343	)		(37	)		—			(380	)
Other		—			(449	)		317			—			(132	)

Net cash flows from (used for) investing activities		(95	)		(824	)		(1,365	)		385			(1,899	)

Cash flows from (used for) financing activities
Dividends paid on Common Shares		(223	)		—			—			—			(223	)
Common Shares repurchased		(68	)		—			—			—			(68	)
Net proceeds from issuance (repayment) of short-term debt		(300	)		—			400			—			100
Proceeds from share based compensation plans		76			—			—			—			76
Advances (to) from affiliates		—			226			(226	)		—			—
Dividends to parent company		—			—			(680	)		680			—
Capital contribution from parent		—			—			385			(385	)		—

Net cash flows from (used for) financing activities		(515	)		226			(121	)		295			(115	)

Effect of foreign currency rate changes on cash and cash equivalents		—			12			—			—			12

Net increase (decrease) in cash		(493	)		91			463			—			61
Cash – beginning of period		308			573			(109	)		—			772

Cash – end of period	$	(185	)	$	664		$	354		$	—		$	833

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

⁽²⁾	Includes elimination of dividends paid from subsidiaries to ACE Limited and capital contribution to subsidiaries by ACE Limited.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2010

(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		ACE Limited Consolidated
Net cash flows from operating activities	$	25		$	677		$	989		$	—	$	1,691

Cash flows from (used for) investing activities
Purchases of fixed maturities available for sale		—			(8,133	)		(9,210	)		—		(17,343	)
Purchases of fixed maturities held to maturity		—			(323	)		(1	)		—		(324	)
Purchases of equity securities		—			(28	)		(10	)		—		(38	)
Sales of fixed maturities available for sale		2			6,491			7,057			—		13,550
Sales of equity securities		—			2			309			—		311
Maturities and redemptions of fixed maturities available for sale		—			926			850			—		1,776
Maturities and redemptions of fixed maturities held to maturity		—			461			109			—		570
Net derivative instruments settlements		(1	)		(3	)		135			—		131
Advances (to) from affiliates		196			—			(196	)		—		—
Other		—			(80	)		(20	)		—		(100	)

Net cash flows from (used for) investing activities		197			(687	)		(977	)		—		(1,467	)

Cash flows from (used for) financing activities
Dividends paid on Common Shares		(210	)		—			—			—		(210	)
Proceeds from share based compensation plans		19			—			—			—		19
Advances (to) from affiliates		—			3			(3	)		—		—

Net cash flows from (used for) financing activities		(191	)		3			(3	)		—		(191	)

Effect of foreign currency rate changes on cash and cash equivalents		—			(15	)		(19	)		—		(34	)

Net increase (decrease) in cash		31			(22	)		(10	)		—		(1	)
Cash – beginning of period		(1	)		400			270			—		669

Cash – end of period	$	30		$	378		$	260		$	—	$	668

⁽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 for the three and six months ended June 30, 2011. 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, 2010 (2010 Form 10-K).

Other Information

We routinely post important information for investors on our website (www.acegroup.com) under the Investor Information section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Securities and Exchange Commission (SEC) Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Information 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 SEC) include but are not limited to:

•

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 we refer to in this report as foreign exchange and foreign currency exchange), which could affect our statement of operations, investment portfolio, financial position, and financing plans;

•

general economic and business conditions resulting from volatility in the stock and credit markets and the depth and duration of recession;

•

losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, climate change (including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow), nuclear accidents or terrorism which could be affected by:

•

the number of insureds and ceding companies affected;

•

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

•

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

•

the cost of building materials and labor to reconstruct properties or to perform environmental remediation following a catastrophic event; and

•

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

•

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;

•

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;

•

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

•

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 (D&O) and errors and omissions (E&O) 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, the impact of acquisitions on our pre-existing organization or announced acquisitions not closing;

•

risks associated with being a Swiss corporation, including 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,” “foresee,” “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 Swiss-incorporated holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain operations in Bermuda. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, we, us, or our) are a global insurance and reinsurance organization, serving the needs of commercial and individual customers in more than 170 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. At June 30, 2011, ACE had total assets of $89 billion and shareholders’ equity of $24 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.

We operate through the following business segments: Insurance—North American, Insurance—Overseas General, Global Reinsurance, and Life. The Insurance—North American segment includes our wholesale divisions ACE Westchester and ACE Bermuda; and our retail divisions ACE USA (including ACE Canada), Commercial Risk, Agriculture, ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine). The Insurance—Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international accident & health (A&H) and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets. The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, ACE Tempest Re Canada, and the reinsurance operation of ACE Global Markets. The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), the acquired business of New York Life’s Korea operations and Hong Kong operations, and the North American supplemental A&H and life business of Combined Insurance. For more information on each of our segments refer to “Segment Information” in our 2010 Form 10-K.

Significant Events

The impact of natural catastrophes

We experienced a higher number of natural catastrophes in the first six months of 2011 compared to the first six months of 2010. Results for the three and six months ended June 30, 2011 were adversely impacted by net

after-tax losses of $101 million and $544 million, respectively, including reinstatement premiums, related to several natural catastrophes including the Japan and New Zealand earthquakes, the Australian storms, and other severe weather related events in the U.S. For further details, see “Consolidated Operating Results”.

Acquisitions

ACE acquired New York Life’s Korea operations on February 1, 2011 and New York Life’s Hong Kong operations on April 1, 2011. The results for the three and six months ended June 30, 2011 include five months of results for the acquired New York Life Korea operations and a quarter of results for the acquired New York Life Hong Kong operations. See Note 3 to the Consolidated Financial Statements for more information.

Market Conditions

The industry experienced significant catastrophe losses in the second quarter resulting in above average industry catastrophe losses for the first half of 2011. As a result, pricing is increasing on certain classes of property business, such as single-peril catastrophe, large account property requiring significant capacity, and other classes such as international marine and energy. We believe that casualty pricing is firming although we have not seen meaningful rate increases. We continue efforts to maintain strict underwriting discipline and will continue to decline business when we deem pricing and exposure are inadequate to generate an underwriting profit.

Net premiums written increased in the North American wholesale business primarily due to growth in agriculture driven by our acquisition of Rain and Hail. As a result of adherence to our strict underwriting standards, new business writings for North American retail commercial P&C decreased significantly in the three months ended June 30, 2011, compared with the prior year period. We are writing less new business and maintaining our renewals.

Net premiums written were up in our retail International P&C business for the three months ended June 30, 2011. We saw double digit growth in Asia, Latin America, U.K. and continental Europe. With respect to our International wholesale business, we continue to reduce our exposure due to inadequate pricing. Both our retail and wholesale International P&C businesses benefited from favorable foreign exchange impact.

Our Global Reinsurance segment reported a decline in net written premium in the quarter ended June 30, 2011, as conditions remain competitive.

A&H premiums continue to experience good growth driven primarily by our international A&H business. Our Asian and Latin American A&H businesses contributed double digit growth even after adjusting for favorable foreign exchange impact. Our U.S. A&H business also demonstrated meaningful growth for the quarter. We believe our A&H business will continue to grow through 2011. In contrast, the ability to grow our Combined Insurance premiums continues to be hampered by the economic recession in its target markets. Additionally, Combined’s business in the U.K. and Ireland has been impacted by changes in the regulatory environment as regulators in these two countries have adopted a new stance regarding sales practices and customer service. This has resulted in a need for us to re-evaluate our sales model and to re-engineer our processes. We have put these two operations on a sales moratorium while we re-evaluate our business model. We have decided to cease sales in the small Spanish subsidiary of Combined-Ireland permanently. We intend to seek regulatory approval to integrate all European operations of Combined into our AEGL subsidiary, incorporated in the UK. We expect to seek regulatory approval to re-commence sales in the UK and Ireland once the integration is completed.

Life revenues were up primarily due to the acquisitions of New York Life’s Korea operations and Hong Kong operations and good growth in our International Life business.

Consolidated Operating Results – Three and Six Months Ended June 30, 2011 and 2010


	Three Months Ended June 30					% Change			Six Months Ended June 30						% Change
	2011			2010		Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Net premiums written	$	3,953		$	3,420		16	%	$	7,399		$	6,991			6	%
Net premiums earned		3,757			3,233		16	%		7,066			6,510			9	%
Net investment income		569			518		10	%		1,113			1,022			9	%
Net realized gains (losses)		(73	)		9		NM			(118	)		177			NM

Total revenues		4,253			3,760		13	%		8,061			7,709			5	%

Losses and loss expenses		2,226			1,800		24	%		4,489			3,721			21	%
Policy benefits		108			87		24	%		199			174			14	%
Policy acquisition costs		604			536		13	%		1,159			1,090			6	%
Administrative expenses		515			463		11	%		1,009			923			9	%
Interest expense		62			52		19	%		125			104			20	%
Other (income) expense		9			3		NM			(5	)		(1	)		NM

Total expenses		3,524			2,941		20	%		6,976			6,011			16	%

Income before income tax		729			819		(11	)%		1,085			1,698			(36	)%
Income tax expense		122			142		(14	)%		219			266			(18	)%

Net income	$	607		$	677		(10	)%	$	866		$	1,432			(40	)%

NM—not meaningful

The following table summarizes by major product line the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned:


	Three Months Ended June 30, 2011
	P&C			A&H			Total
Net premiums written:
Increase (decrease) net premiums written in original currency		14.7	%		2.2	%		11.6	%
Foreign exchange effect		3.0	%		6.7	%		4.0	%

Increase (decrease) as reported in U.S. dollars		17.7	%		8.9	%		15.6	%

Net premiums earned:
Increase (decrease) net premiums earned in original currency		15.5	%		2.4	%		12.0	%
Foreign exchange effect		3.2	%		6.6	%		4.2	%

Increase (decrease) as reported in U.S. dollars		18.7	%		9.0	%		16.2	%

Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased in the three and six months ended June 30, 2011, compared with the prior year periods. The North American wholesale division benefited from the acquisition of Rain and Hail in December 2010, reporting premium growth in agricultural and personal lines. Our North American retail division reported less assumed loss portfolio business as well as lower new business and policy renewals across several lines of business. Our international retail business reported growth, partially offset by reinstatement premiums expensed in connection with first quarter catastrophe activity. The global reinsurance operations reported a decline in net premiums written compared with the prior year quarter, primarily due to competitive market conditions. The life segment reported an increase in net premiums written due primarily to the acquisition of New York Life’s Hong Kong operations.

Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire. Net premiums earned increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the Rain & Hail acquisition and growth in the international retail business and favorable foreign exchange, partially offset by reinstatement premiums expensed and less assumed loss portfolio transfers.

The following table provides a consolidated breakdown of net premiums earned by line of business:


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Property and all other	$	1,305		$	899			45	%	$	2,226		$	1,815			23	%
Casualty		1,352			1,380			(2	)%		2,732			2,807			(3	)%

Subtotal		2,657			2,279			17	%		4,958			4,622			7	%
Personal accident (A&H)		901			827			9	%		1,756			1,637			7	%
Life		199			127			57	%		352			251			40	%

Net premiums earned	$	3,757		$	3,233			16	%	$	7,066		$	6,510			9	%


	2011 % of total			2010 % of total						2011 % of total			2010 % of total
Property and all other		35	%		28	%					32	%		28	%
Casualty		36	%		43	%					38	%		43	%

Subtotal		71	%		71	%					70	%		71	%
Personal accident (A&H)		24	%		26	%					25	%		25	%
Life		5	%		3	%					5	%		4	%

Net premiums earned		100	%		100	%					100	%		100	%

Net investment income increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to positive operating cash flows, foreign exchange, and the impact of acquisitions which have resulted in a higher overall average invested asset base, partially offset by lower yields on new investments and short-term securities. 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 cost ratio, administrative expense ratio, and combined ratio:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Loss and loss expense ratio		62.9	%		58.8	%		67.8	%		60.3	%
Policy acquisition cost ratio		16.3	%		16.5	%		16.6	%		16.8	%
Administrative expense ratio		13.4	%		14.4	%		14.0	%		14.1	%

Combined ratio		92.6	%		89.7	%		98.4	%		91.2	%

The following table shows the impact of catastrophe losses and related reinstatement premiums and the impact of prior period development on our consolidated loss and loss expense ratio:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		62.9	%		58.8	%		67.8	%		60.3	%
Catastrophe losses and related reinstatement premiums		(4.1	)%		(2.8	)%		(9.6	)%		(4.2	)%
Prior period development		4.4	%		5.2	%		3.8	%		5.0	%

Loss and loss expense ratio, adjusted		63.2	%		61.2	%		62.0	%		61.1	%

The table below shows the impact of the catastrophe losses by segment:

Three Months Ended June 30, 2011


Catastrophe Loss Charges	Insurance - North American			Insurance - Overseas General			Global Reinsurance			Reinstatement Premiums Paid (Collected)			Pre-tax Total			After-tax Total
	(in millions of U.S. dollars)
Net loss:
True-up of Q1 Events	$	(6	)	$	(5	)	$	(20	)	$	(3	)	$	(34	)	$	(35	)
Q2 Events		116			15			42			(5	)		168			136

Total	$	110		$	10		$	22		$	(8	)	$	134		$	101

We experienced total net pre-tax catastrophe losses of $142 million and $557 million (before reinstatement premiums) in the three and six months ended June 30, 2011, compared with $76 million and $224 million of net pre-tax catastrophe losses (before reinstatement premiums) in the prior year periods. The catastrophe losses incurred during the three and six months ended June 30, 2011, were primarily related to earthquakes in Japan and New Zealand, and storms in Australia, and severe weather related events in the U.S. Reinsurance recoverables are due from highly rated reinsurers.

On March 11, 2011, the Tohoku earthquake struck the northeastern coast of Japan. Due to the size and complexity of the earthquake, total covered losses for the insurance industry remain difficult to predict. However, industry sources have estimated that the losses arising out of the earthquake will be substantial.

Our Japan Tohoku earthquake estimates were based on ground-up reviews of a substantial majority of our in-force direct policies and internal modeling of our in-force reinsurance policies we believe to be affected, together with information from our insureds, adjusters, brokers and cedents. Actual losses may vary materially from these amounts as a result of, among other things, the receipt of additional information from insureds or brokers, the attribution of losses to coverages that, for the purpose of our calculations, we assumed would not be exposed and inflation in repair costs due to the limited availability of labor and materials. In addition, our Japan earthquake losses are subject to a high level of uncertainty due to extremely complex and unique causation and coverage issues associated with the events, including the attribution of losses to other perils and potential legal and regulatory developments related to potential losses. Further, products such as contingent business interruption may represent a significant source of uncertainty for our loss estimate, especially given the post-event impact on certain industries (for example, auto and consumer). Some issues may become the subject of litigation and may not be resolved for a considerable period of time. As a result, although we believe our reserves for these events are adequate, both industry-wide insured losses and our losses from the Japan earthquake may ultimately be materially greater or lower than our initial reported losses and any additional losses could have a further material adverse impact on our financial results.

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 $146 million and $239 million of net favorable prior period development in the three and six months ended June 30, 2011. This compares with net favorable prior period development of $149 million and $245 million in the prior year periods, respectively. Refer to “Prior Period Development” for more information.

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, 2011, compared with the prior year periods. Insurance – North American reported a decline in its policy acquisition cost ratio primarily due to a shift in the mix of business toward lower acquisition cost lines of business, primarily agriculture. This favorable impact on the policy acquisition cost ratio was offset by changes in business mix and the impact of reinstatement premiums expensed, mainly within the Insurance – Overseas General segment.

Our administrative expense ratio decreased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the growth of low expense ratio business including agriculture business in our Insurance—North American segment, partially offset by the impact of reinstatement premiums expensed mainly within the Insurance – Overseas General segment.

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 income tax rate was 17 and 20 percent in the three and six months ended June 30, 2011, compared with 17 and 16 percent in the prior year period, respectively. The increase in our effective income tax rate in the six months ended June 30, 2011, was primarily due to a higher percentage of losses being generated in lower tax-paying jurisdictions.

Prior Period Development

The favorable prior period development of $146 million and $239 million during the three and six months ended June 30, 2011, respectively, was the net result of several underlying favorable and adverse movements. With respect to our crop business, prior to the acquisition of Rain and Hail, we regularly received reports relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments were typically more significant in the first quarter of the year, compared with other periods. Following the Rain and Hail acquisition which closed on December 28, 2010, we now have access to such information sooner. As a result, the more significant changes in estimate that previously occurred in the first quarter now occur one quarter earlier. Accordingly, there was minimal prior period development related to the crop business in the six months ended June 30, 2011 as compared to approximately $41 million of favorable prior period development in the corresponding prior year period. In the sections following the tables below, significant prior period movements within each reporting segment 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 (favorable) and adverse prior period development by segment:


Three months ended June 30	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2011
Insurance—North American	$	(46	)	$	(25	)	$	(71	)		0.4	%
Insurance—Overseas General		—			(40	)		(40	)		0.5	%
Global Reinsurance		(35	)		—			(35	)		1.4	%

Total	$	(81	)	$	(65	)	$	(146	)		0.6	%

2010
Insurance—North American	$	(52	)	$	(21	)	$	(73	)		0.5	%
Insurance—Overseas General		1			(46	)		(45	)		0.7	%
Global Reinsurance		(21	)		(10	)		(31	)		1.4	%

Total	$	(72	)	$	(77	)	$	(149	)		0.6	%

*	Calculated based on the segment/total beginning of period net unpaid loss and loss expenses reserves.


Six months ended June 30	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2011
Insurance—North American	$	(38	)	$	(68	)	$	(106	)		0.7	%
Insurance—Overseas General		(1	)		(83	)		(84	)		1.2	%
Global Reinsurance		(43	)		(6	)		(49	)		2.2	%

Total	$	(82	)	$	(157	)	$	(239	)		0.9	%

2010
Insurance—North American	$	(46	)	$	(72	)	$	(118	)		0.7	%
Insurance—Overseas General		3			(85	)		(82	)		1.2	%
Global Reinsurance		(24	)		(21	)		(45	)		2.0	%

Total	$	(67	)	$	(178	)	$	(245	)		1.0	%

*	Calculated based on the segment/total beginning of period net unpaid loss and loss expenses reserves.

Insurance – North American

Insurance – North American’s operations experienced net favorable prior period development of $71 million in the three months ended June 30, 2011 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:

•

Net favorable development of $46 million on long-tail business, including:

•

Favorable development of $56 million on our national accounts portfolios which consist of commercial auto liability, general liability, and workers’ compensation lines of business. The favorable development is the net impact of favorable and unfavorable movements, including:

•

Favorable development of $40 million on the 2010 accident year relating to our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses.

•

Favorable development of $41 million on the 2003 through 2006 accident years, primarily in workers’ compensation. Case activity in these portfolios, especially in our excess and high deductible products, has continued to be lower than expected. As these accident years matured, greater weight has been given to experience-based methods. The combination of this lower than expected activity and shift in weighting methodology have produced this favorable development.

•

Adverse development of $25 million on the 2002 and prior accident years, primarily in workers’ compensation. This adverse activity is due in part to data refinements and analysis relating to these accident periods.

•

The remaining adverse development of $10 million was on long-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.

•

Net favorable development of $25 million on short-tail business, including:

•

Favorable development of $16 million in our general aviation product lines (both hull and liability) primarily for the 2008 accident year. Actual paid and incurred loss activity continues to be lower than expected based on long term historical averages leading to a reduction in our estimate of ultimate losses.

•

The remaining favorable development of $9 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.

Insurance – North American’s operations experienced net favorable prior period development of $73 million in the three months ended June 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $52 million on long-tail business, including:

•

Favorable development of $36 million on our national accounts workers’ compensation portfolios, which was the net of adverse development of $43 million on the 2004 and prior accident years offset by favorable development of $79 million on the 2005 and subsequent accident years.

•

The favorable development was a function of two primary factors, $48 million of this development was related to the 2009 accident year and our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses. The remaining $31 million was concentrated in the 2005 accident year within our excess and high deductible workers’ compensation portfolios, where actual reported activity to date was less than our expectations and more weight has been given to experience-based actuarial methods in the current review.

•

The adverse development of $43 million was concentrated within two time periods. During the 2000 and prior accident years, we experienced higher than expected incurred loss activity, primarily on first dollar retrospectively rated business, leading to an increase in ultimate losses of $15 million. The remaining adverse development of $28 million primarily impacted the 2001-2004 accident years and was related to a combination of higher than expected incurred loss activity, particularly in connection to large claims movement, and our review of reinsurance cessions for these years.

•

Favorable development of $17 million in two of our national accounts casualty lines – general liability and commercial auto liability. This favorable development was concentrated in the 2006 accident year for business written above a self insured retention or high deductible and was largely due to increased weighting on experience-based actuarial methods in the current review.

•

Favorable development of $11 million in our wholesale financial and professional liability lines of business. This favorable movement was the net result of two partially offsetting items. The first was favorable development of $23 million in the 2006 and prior accident years where claim development/emergence was lower than expected. The second was adverse movement of $12 million in the 2008 and 2009 accident years on large claims related to higher than expected claims activity on two separate programs, both of which are now in runoff.

•

The remaining adverse development of $12 million was on long-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.

•

Net favorable development of $21 million on short-tail business, including:

•

Favorable development of $13 million in our general aviation product lines (both hull and liability) primarily for the 2007 accident year. Reported incurred losses were lower than expected and resulted in loss development well below historical averages, which led to a reduction in our estimate of ultimate losses.

•

Favorable development of $11 million in our wholesale property and inland marine portfolios, which was the net of adverse development of $17 million relating to higher than expected incurred loss activity on the 2009 accident year and favorable development of $28 million related to the 2009 and prior accident years. The favorable development included a reduction in our estimate for 2005 accident year catastrophe claims due to favorable settlements in the three months ended June 30, 2010, on a few large claims.

•

The remaining adverse development of $3 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.

Insurance – Overseas General

Insurance – Overseas General experienced net favorable prior period development of $40 million in the three months ended June 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

There was no prior period development on long-tail business in the quarter ended June 30, 2011.

•

Net favorable development of $40 million on short-tail business, including:

•

Favorable development of $61 million in accident years 2009 and prior for property, technical, and marine lines. Given the short-tail nature of these lines and the additional credibility and maturity provided by the experience in the quarter ended June 30, 2011, the observed favorable development led to lower experience-based indications that were recognized in the quarter.

•

Adverse development of $31 million in accident year 2010 for property and technical lines. This indication was driven predominantly by individual large case reserve increases and higher claim estimates for the December 2010 Australian floods.

•

The remaining favorable development of $10 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.

Insurance – Overseas General experienced net favorable prior period development of $45 million in the three months ended June 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net adverse development of $1 million on long-tail business based on reserve studies completed during the three months ended June 30, 2010, none of which was significant.

•

Net favorable development of $46 million on short-tail business including:

•

Favorable development of $39 million in property and energy lines across many geographical regions and within both the retail and wholesale operations. Specific case reserve reductions and lower than anticipated claims activity on other claims led to the reserve release, mainly in accident years 2008 and 2009, for retail business and accident years 2005-2009 for wholesale business.

•

Favorable development of $11 million within the A&H direct marketing line, where we experienced lower than anticipated case development, primarily in accident years 2008 and 2009.

•

The remaining adverse development of $4 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.

Global Reinsurance

Global Reinsurance experienced net favorable prior period development of $35 million in the three months ended June 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $35 million on long-tail business, including:

•

Favorable development of $27 million in the casualty line of business principally in treaty years 2002 to 2007. Following the reserve studies recently completed in the quarter ended June 30, 2011, we reflected a greater weighting towards experience-based methods. Since experience has tended to be generally favorable compared with assumptions, the changes resulted in the favorable development referenced above.

•

Favorable development of $13 million in the D&O line of business. $6 million relates to treaty years 2002 to 2004 where the loss experience has been generally more favorable than previously anticipated, while the remainder relates to treaty years 2006 to 2008, where the potential subprime exposure has not materialized into reported losses to the degree anticipated.

•

The remaining adverse development of $5 million on long-tail business was across a number of lines and accident years, none of which was significant, and related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.

•

There was no prior period development on short-tail business in the quarter ended June 30, 2011.

Global Reinsurance experienced net favorable prior period development of $31 million in the three months ended June 30, 2010, which was the net result of several underlying favorable movements across a number of lines and treaty years driven by the following principal changes:

•

Net favorable development of $21 million on long-tail business including:

•

Favorable development of $14 million in the casualty and automobile lines of business principally in treaty years 2003-2005 and favorable development of $7 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 three months ended June 30, 2010. Following the studies, we reflected 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 $10 million on short-tail business was across a number of lines and accident years, none of which was significant, and related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.

Segment Operating Results – Three and Six Months Ended June 30, 2011 and 2010

The discussions that follow include tables that show our segment operating results.

We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. For more information on each of our segments refer to “Segment Information” in our 2010 Form 10-K.

Insurance – North American

The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), Commercial Risk, Agriculture, ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations.


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Net premiums written	$	1,735		$	1,438			21	%	$	3,020		$	2,833			7	%
Net premiums earned		1,604			1,326			21	%		2,950			2,696			9	%
Losses and loss expenses		1,233			924			33	%		2,227			1,862			20	%
Policy acquisition costs		143			126			13	%		279			282			(1	)%
Administrative expenses		147			147			0	%		295			295			0	%

Underwriting income		81			129			(37	)%		149			257			(42	)%
Net investment income		300			287			5	%		595			565			5	%
Net realized gains		21			85			(75	)%		10			165			(94	)%
Interest expense		3			—			NM			7			—			NM
Other (income) expense		3			4			NM			(13	)		(1	)		NM
Income tax expense		95			110			(14	)%		184			214			(14	)%

Net income	$	301		$	387			(22	)%	$	576		$	774			(26	)%

Loss and loss expense ratio		76.9	%		69.7	%					75.5	%		69.1	%
Policy acquisition cost ratio		8.9	%		9.5	%					9.5	%		10.5	%
Administrative expense ratio		9.2	%		11.1	%					10.0	%		10.9	%

Combined ratio		95.0	%		90.3	%					95.0	%		90.5	%

Insurance – North American reported an increase in net premiums written for the three and six months ended June 30, 2011 and 2010, compared with the prior year periods. For the three and six months ended June 30, 2011 the wholesale division reported significantly higher premiums from the agriculture business due to the acquisition of Rain & Hail in December 2010. This increase was partially offset by lower wholesale casualty production in certain classes due to competitive market conditions and our adherence to underwriting standards. The retail division also reported less net written premiums for the three and six month periods ended June 30, 2011 primarily in the construction line of business due to a large contract written in the prior year. In addition, we experienced lower production in many of our retail property and casualty lines reflecting competitive market conditions and our adherence to underwriting discipline. The retail business also wrote less assumed loss portfolio transfer business for the six months ended June 30, 2011. These decreases were partially offset by

growth in targeted classes, including A&H business and certain professional lines. Our personal lines business reported growth in homeowners and auto insurance, as well as specialty offerings for the three and six months ended June 30, 2011 and 2010.

The following two tables provide a line of business breakdown of Insurance – North American’s net premiums earned:


	Three Months Ended June 30						%Change			Six Months Ended June 30						%Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Property and all other	$	657		$	355			85	%	$	1,035		$	713			45	%
Casualty		865			895			(3	)%		1,755			1,839			(5	)%
Personal accident (A&H)		82			76			8	%		160			144			11	%

Net premiums earned	$	1,604		$	1,326			21	%	$	2,950		$	2,696			9	%


	2011 % of Total			2010 % of Total						2011 % of Total			2010 % of Total
Property and all other		41	%		27	%					36	%		27	%
Casualty		54	%		67	%					59	%		68	%
Personal accident (A&H)		5	%		6	%					5	%		5	%

Net premiums earned		100	%		100	%					100	%		100	%

Insurance – North American reported an increase in net premiums earned in the three and six months ended June 30, 2011, compared with the prior year periods. This increase was attributable to higher wholesale premiums primarily from agriculture business due to the acquisition of Rain & Hail in December 2010, and to a lesser extent growth in program business for the wholesale unit. The retail businesses generated lower net earned premiums mainly in the property and casualty risk lines of business reflecting lower writings in these lines due to adherence to underwriting standards. In addition, the retail unit experienced a decline in earned premiums from less assumed loss portfolio transfers for the six months ended June 30, 2011. These decreases were partially offset by growth in certain professional risk and A&H businesses. Net premiums earned for the personal lines business increased due to continued geographic expansion of the ACE Private Risk Service product offerings.

The following table shows the impact of catastrophe losses and related reinstatement premiums, and prior period development on our loss and loss expense ratio:


	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		76.9	%		69.7	%		75.5	%		69.1	%
Catastrophe losses and related reinstatement premiums		(6.9	)%		(4.2	)%		(6.5	)%		(4.1	)%
Prior period development		4.4	%		5.5	%		3.6	%		6.1	%

Loss and loss expense ratio, adjusted		74.4	%		71.0	%		72.6	%		71.1	%

Insurance – North American’s net catastrophe losses, excluding reinstatement premiums, in the three and six months ended June 30, 2011 were $110 million and $186 million, compared with $53 million and $105 million in the prior year periods. Catastrophe losses for the three months ended and six months ended June 30, 2011 were related to severe weather-related events in the U.S., including flooding in the Midwest. For the six months ended June 30, 2011, catastrophe losses also include exposures from the Japan earthquake. The catastrophe losses in the prior year periods were primarily related to severe weather-related events in the U.S. and, to a lesser extent, earthquakes in Haiti and Chile. Insurance – North American experienced net favorable prior period development

of $71 million and $106 million in the three and six months ended June 30, 2011. This compares with net favorable prior period development of $73 million and $118 million in the prior year periods. Refer to “Prior Period Development” for more information. The adjusted loss and loss expense ratio increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the increase in agriculture business, which is written at higher loss ratios than other types of business, partially offset by lower assumed loss portfolio business for the six months ended June 30, 2011.

Insurance – North American’s policy acquisition cost ratio decreased in the three and six months ended June 30, 2011, compared with the prior year periods primarily reflecting a shift in the mix of business toward lower acquisition cost lines of business, primarily agriculture. Partially offsetting the growth in the low expense ratio agriculture business was targeted growth in several higher acquisition ratio lines of business, including personal and professional business, as well as commercial risk program business and less premiums from lower expense ratio business, including national account business. Insurance – North American’s administrative expense ratio decreased in the three and six months ended June 30, 2011 primarily due to the growth of low expense ratio business including agriculture business. These decreases were partially offset by lower net revenues for ESIS ($6 million and $13 million for the three and six months ended June 30, 2011 compared with $18 million and $26 million for the prior year periods). ESIS is our third party claims administration business, which we include in administrative expenses. During the quarter ended June 30, 2010, at the request of BP p.l.c., ESIS assumed an oversight and administration role for claims generated by the Deepwater Horizon oil leak catastrophe.

Insurance – Overseas General

The Insurance – Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international A&H and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment.


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Net premiums written	$	1,477		$	1,302			14	%	$	2,914		$	2,722			7	%
Net premiums earned		1,447			1,263			15	%		2,751			2,514			9	%
Losses and loss expenses		733			644			14	%		1,595			1,345			19	%
Policy benefits		—			1			NM			—			4			NM
Policy acquisition costs		348			296			18	%		660			579			14	%
Administrative expenses		242			207			17	%		466			409			14	%

Underwriting income		124			115			8	%		30			177			(83	)%
Net investment income		138			115			20	%		269			229			17	%
Net realized gains (losses)		(10	)		48			NM			(19	)		70			NM
Interest expense		1			—			NM			2			—			NM
Other (income) expense		(5	)		(3	)		(67	)%		(7	)		(1	)		NM
Income tax expense		40			59			(32	)%		59			73			(19	)%

Net income	$	216		$	222			(3	)%	$	226		$	404			(44	)%

Loss and loss expense ratio		50.7	%		51.0	%					58.0	%		53.7	%
Policy acquisition cost ratio		24.0	%		23.5	%					24.0	%		23.0	%
Administrative expense ratio		16.7	%		16.4	%					16.9	%		16.3	%

Combined ratio		91.4	%		90.9	%					98.9	%		93.0	%

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


	Three Months Ended June 30, 2011
	P&C			A&H			Total
Net premiums written:
Growth in original currency		5.3	%		3.6	%		5.0	%
Foreign exchange effect		7.4	%		10.3	%		8.5	%

Growth as reported in U.S. dollars		12.7	%		13.9	%		13.5	%

Net premiums earned:
Growth in original currency		5.8	%		5.0	%		5.5	%
Foreign exchange effect		8.1	%		10.5	%		9.0	%

Growth as reported in U.S. dollars		13.9	%		15.5	%		14.5	%

Insurance – Overseas General’s net premiums written increased in the three and six months ended June 30, 2011, compared with prior year periods, primarily due to growth in our international retail operations and the acquisition of Jerneh Insurance Berhad in December 2010, partially offset by reinstatement premiums expensed in connection with the first quarter 2011 catastrophe activity. Refer to the table above for the impact of foreign exchange on net premiums written and earned. In the three and six months ended June 30, 2011, our international retail businesses reported growth of 9%. The growth was reported in all regions, primarily in Asia Pacific and Latin America. P&C, A&H and personal lines each reported double-digit growth. Our London wholesale business unit reported a decline in net premiums written of 4%, driven by lost business due to inadequate pricing in many of the lines underwritten in that market.

Insurance – Overseas General’s net premiums earned increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the growth in the international retail operations and favorable foreign exchange impact, partially offset by lower wholesale writings and increased reinstatement premiums expensed in connection with first quarter catastrophe activity. On a constant dollar basis, net premiums earned increased due to growth in P&C and A&H production in our international retail operations. Our London wholesale operations reported a decline in net premiums earned due to lower production over the last year.

The following two tables provide a line of business and regional breakdown of Insurance – Overseas General’s net premiums earned:


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Line of Business
Property and all other	$	533		$	424			26	%	$	964		$	844			14	%
Casualty		348			349			0	%		690			694			(1	)%
Personal accident (A&H)		566			490			16	%		1,097			976			12	%

Net premiums earned	$	1,447		$	1,263			15	%	$	2,751		$	2,514			9	%

Region
Europe	$	604		$	561			8	%	$	1,109		$	1,098			1	%
Asia Pacific		275			192			43	%		537			406			32	%
Far East		124			106			17	%		249			218			14	%
Latin America		266			223			19	%		515			434			19	%

		1,269			1,082			17	%		2,410			2,156			12	%
ACE Global Markets		178			181			(2	)%		341			358			(5	)%

Net premiums earned	$	1,447		$	1,263			15	%	$	2,751		$	2,514			9	%


	Three Months Ended June 30									Six Months Ended June 30
	2011			2010						2011			2010
	% of Total			% of Total						% of Total			% of Total
Line of Business
Property and all other		37	%		33	%					35	%		33	%
Casualty		24	%		28	%					25	%		28	%
Personal accident (A&H)		39	%		39	%					40	%		39	%

Net premiums earned		100	%		100	%					100	%		100	%

Region
Europe		42	%		45	%					40	%		44	%
Asia Pacific		19	%		15	%					20	%		16	%
Far East		9	%		8	%					9	%		9	%
Latin America		18	%		18	%					19	%		17	%

		88	%		86	%					88	%		86	%
ACE Global Markets		12	%		14	%					12	%		14	%

Net premiums earned		100	%		100	%					100	%		100	%

The following table shows the impact of catastrophe losses and related reinstatement premiums and prior period development on our loss and loss expense ratio:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		50.7	%		51.0	%		58.0	%		53.7	%
Catastrophe losses and related reinstatement premiums		(0.6	)%		(1.5	)%		(8.3	)%		(3.8	)%
Prior period development		2.8	%		3.5	%		3.0	%		3.2	%

Loss and loss expense ratio, adjusted		52.9	%		53.0	%		52.7	%		53.1	%

Net catastrophe losses, excluding reinstatement premiums, in the three and six months ended June 30, 2011 were $10 million, and $197 million, compared with $18 million and $82 million in the prior year periods. The catastrophe losses in the three and six months ended June 30, 2011 included earthquakes in New Zealand and Japan and storms in Australia. The catastrophe losses for the three and six months ended June 30, 2010 were primarily related to earthquakes in Chile and Mexico, and storms in Australia and Europe. Insurance – Overseas General experienced net favorable prior period development of $40 million and $84 million in the three and six months ended June 30, 2011 compared with $45 million and $82 in the prior year periods, respectively. Refer to “Prior Period Development” for more information.

Insurance – Overseas General’s policy acquisition cost ratio increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the impact of catastrophe-related reinstatement premiums expensed and changes in mix of business. Insurance – Overseas General’s administrative expense ratio increased in the three and six months ended June 30, 2011, primarily due to the impact of reinstatement premiums expensed, and reduced wholesale earned premiums.

Global Reinsurance

The Global Reinsurance segment represents our reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, 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 coverage to a diverse array of primary P&C companies.


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Net premiums written	$	282		$	289			(2	)%	$	597		$	660			(10	)%
Net premiums earned		254			256			(1	)%		514			532			(3	)%
Losses and loss expenses		112			103			9	%		391			254			54	%
Policy acquisition costs		47			48			(2	)%		93			102			(9	)%
Administrative expenses		14			15			(7	)%		26			27			(4	)%

Underwriting income		81			90			(10	)%		4			149			(97	)%
Net investment income		71			73			(3	)%		143			142			1	%
Net realized gains (losses)		(14	)		28			NM			(27	)		59			NM
Interest expense		1			—			NM			1			—			NM
Other (income) expense		1			(2	)		NM			(5	)		(6	)		17	%
Income tax expense		8			9			(11	)%		18			19			(5	)%

Net income	$	128		$	184			(30	)%	$	106		$	337			(69	)%

Loss and loss expense ratio		44.1	%		40.4	%					76.1	%		47.8	%
Policy acquisition cost ratio		18.5	%		18.5	%					18.1	%		19.1	%
Administrative expense ratio		5.3	%		5.8	%					4.9	%		5.1	%

Combined ratio		67.9	%		64.7	%					99.1	%		72.0	%

Global Reinsurance reported a decrease in net premiums written in the three and six months ended June 30, 2011, compared with prior year periods, primarily due to competitive market conditions and lower exposures, partially offset by reductions in retrocessions.

The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned:


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Property and all other	$	40		$	51			(22	)%	$	85		$	117			(27	)%
Casualty		139			136			2	%		287			274			5	%
Property catastrophe		75			69			9	%		142			141			1	%

Net premiums earned	$	254		$	256			(1	)%	$	514		$	532			(3	)%


	2011 % of Total			2010 % of Total						2011 % of Total			2010 % of Total
Property and all other		16	%		20	%					17	%		22	%
Casualty		54	%		53	%					55	%		51	%
Property catastrophe		30	%		27	%					28	%		27	%
Net premiums earned		100	%		100	%					100	%		100	%

Global Reinsurance’s net premiums earned decreased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to 2011 decreases in production.

The following table shows the impact of catastrophe losses and related reinstatement premiums and prior period development on this segment’s loss and loss expense ratio:


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		44.1	%		40.4	%		76.1	%		47.8	%
Catastrophe losses and related reinstatement premiums		(7.9	)%		(2.0	)%		(33.5	)%		(6.8	)%
Prior period development		14.1	%		12.5	%		9.6	%		8.6	%

Loss and loss expense ratio, adjusted		50.3	%		50.9	%		52.2	%		49.6	%

Global Reinsurance recorded net catastrophe losses, excluding reinstatement premiums, of $22 million and $174 million in the three and six months ended June 30, 2011, respectively, compared with net catastrophe losses of $5 million and $37 million in the prior year periods, respectively. The catastrophe losses in the three and six months ended June 30, 2011, were primarily related to earthquakes in Japan and New Zealand, natural catastrophes in Australia and severe weather related events in the U.S. The catastrophe losses for the prior year periods were primarily related to storms in Australia and New Zealand. Global Reinsurance experienced net favorable prior period development of $35 million and $49 million in the three and six months ended June 30, 2011, respectively. This compares with net favorable prior period development of $31 million and $45 million in the three and six months ended June 30, 2010, respectively. Refer to “Prior Period Development” for more information. The decrease in the adjusted loss and loss expense ratio for the three months ended June 30, 2011 is due to the change in mix of business earned. The increase in the adjusted loss and loss expense ratio for the six months ended June 30, 2011 was due to a new workers’ compensation treaty and a medical malpractice LPT (“Loss Portfolio Transfer”), both with high loss ratios.

Global Reinsurance’s policy acquisition costs ratio was flat for the three months ended June 30, 2011, compared with the prior year period. The policy acquisition costs ratio decreased for the six months ended June 30, 2011, compared with the prior year period as a result of lower commission in our U.S. operations, primarily due to a

new workers’ compensation treaty which did not generate acquisition costs as well as the medical malpractice LPT which had no ceding commission. The administrative expense ratio decreased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily as a result of less headcount and compensation related costs.

Life

The Life segment includes our international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), the acquired business of New York Life’s Korea operations and Hong Kong operations, and the North American supplemental A&H and life business of Combined Insurance. We assess the performance of our life business based on life underwriting income which includes net investment income.


	Three Months Ended June 30						% Change			Six Months Ended June 30						% Change
	Three Months Ended June 30						Q-11 vs. Q-10			Six Months Ended June 30						YTD-11 vs. YTD-10
	2011			2010			Q-11 vs. Q-10			2011			2010			YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Net premiums written	$	459		$	391			17	%	$	868		$	776			12	%
Net premiums earned		452			388			16	%		851			768			11	%
Losses and loss expenses		147			129			14	%		275			260			6	%
Policy benefits		108			86			26	%		199			170			17	%
Policy acquisition costs		66			66			0	%		127			127			0	%
Administrative expenses		72			54			33	%		140			112			25	%
Net investment income		59			43			37	%		105			86			22	%

Life underwriting income		118			96			23	%		215			185			16	%
Net realized gains (losses)		(68	)		(155	)		56	%		(81	)		(112	)		28	%
Interest expense		3			—			NM			6			—			NM
Other (income) expense		8			3			NM			13			6			NM
Income tax expense		14			16			(13	)%		27			30			(10	)%

Net income	$	25		$	(78	)		NM		$	88		$	37			138	%

The following table provides a line of business breakdown of life net premiums written:


	Three Months Ended June 30				% Change			Six Months Ended June 30				% Change
	Three Months Ended June 30				Q-11 vs. Q-10			Six Months Ended June 30				YTD-11 vs. YTD-10
	2011		2010		Q-11 vs. Q-10			2011		2010		YTD-11 vs. YTD-10
	(in millions of U.S. dollars, except for percentages)
Life reinsurance	$	85	$	91		(7	)%	$	174	$	185		(6	)%
Life insurance		125		44		184	%		197		78		153	%
A&H		249		256		(3	)%		497		513		(3	)%

Life net premiums written	$	459	$	391		17	%	$	868	$	776		12	%

Life insurance net premium increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the acquisition of New York Life’s Korea operations and Hong Kong operations. Life reinsurance net premium decreased compared to prior year because there is no new life reinsurance business currently being written. A&H net premiums written declined slightly due to the effects of the economy resulting in lower new business.

Life underwriting income increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the acquisition of New York Life’s Korea operations and Hong Kong operations. In addition, for the three and six months ended June 30, 2011, life reinsurance results improved modestly relative to prior year, primarily due to favorable mortality experience. A&H underwriting income increased modestly relative to prior year, primarily due to lower acquisition expenses.

Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported guaranteed living benefits (GLB) reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. During the three months ended June 30, 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates and equity levels slightly offset by an increase in the value of the derivative instruments, which increase in value when the S&P 500 Index decreases. During the six months ended June 30, 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates and a reduction in the value of the derivative instruments, partially offset by rising equity levels.

Other Income and Expense Items


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Equity in net (income) loss of partially-owned entities	$	(8	)	$	(5	)	$	(40	)	$	(23	)
Noncontrolling interest expense		1			2			2			9
Federal excise and capital taxes		4			3			10			6
Amortization of intangible assets		7			1			14			4
Other		5			2			9			3

Other (income) expense	$	9		$	3		$	(5	)	$	(1	)

Other (income) expense primarily comprises our equity in net income of investment funds, limited partnerships, partially-owned investment companies, Huatai Insurance Company of China, Limited, and Huatai Life Insurance Company of China, Limited, which are included in equity in net income of partially-owned entities. Other (income) expense also includes certain federal excise and capital 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
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Fixed maturities	$	557		$	517		$	1,091		$	1,031
Short-term investments		13			7			26			14
Equity securities		10			5			18			11
Other		13			12			29			16

Gross investment income		593			541			1,164			1,072
Investment expenses		(24	)		(23	)		(51	)		(50	)

Net investment income	$	569		$	518		$	1,113		$	1,022

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, and changes in overall asset allocation. Net investment income increased ten percent and nine percent in the three and six months ended June 30, 2011, compared with the prior year periods, respectively. Net investment income resulted from positive operating cash flows, foreign exchange, private equity fund distributions, and a higher overall average invested asset base from acquisitions, partially offset by lower yields on new investments and short-term securities. The investment portfolio’s average market yield on fixed maturities was 3.4 percent and 3.7 percent at June 30, 2011 and 2010, respectively. Average market yield on fixed maturities represents the weighted average yield to maturity of our fixed income portfolio based on the market prices of the holdings at that date.

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.

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. For a discussion related to how we assess OTTI for all of our investments, including credit-related OTTI, and the related impact on net income, refer to Note 4 c) to the Consolidated Financial Statements. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GLB 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.

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


	Three Months Ended June 30, 2011								Three Months Ended June 30, 2010
	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 and short-term investments	$	74		$	202	$	276		$	77		$	408		$	485
Equity securities		4			6		10			32			(31	)		1
Other		(4	)		17		13			(12	)		13			1

Subtotal		74			225		299			97			390			487

Derivatives
Equity and fixed income derivatives		(48	)		—		(48	)		5			—			5
Fair value adjustment on insurance derivatives		(70	)		—		(70	)		(301	)		—			(301	)
S&P put option and futures		3			—		3			143			—			143
Fair value adjustment on other derivatives		(2	)		—		(2	)		4			—			4

Subtotal derivatives		(117	)		—		(117	)		(149	)		—			(149	)

Foreign exchange gains (losses)		(30	)		—		(30	)		61			—			61

Total gains (losses)	$	(73	)	$	225	$	152		$	9		$	390		$	399


	Six Months Ended June 30, 2011								Six Months Ended June 30, 2010
	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 and short-term investments	$	123		$	163	$	286		$	158		$	831		$	989
Equity securities		11			8		19			77			(55	)		22
Other		(5	)		64		59			(8	)		68			60

Subtotal		129			235		364			227			844			1,071

Derivatives
Equity and fixed income derivatives		(68	)		—		(68	)		24			—			24
Fair value adjustment on insurance derivatives		1			—		1			(205	)		—			(205	)
S&P put option and futures		(68	)		—		(68	)		84			—			84
Fair value adjustment on other derivatives		(3	)		—		(3	)		(5	)		—			(5	)

Subtotal derivatives		(138	)		—		(138	)		(102	)		—			(102	)

Foreign exchange gains (losses)		(109	)		—		(109	)		52			—			52

Total gains (losses)	$	(118	)	$	235	$	117		$	177		$	844		$	1,021

The following tables present a breakdown of our OTTI and other net realized gains (losses) on investments for the periods indicated:


	Three Months Ended June 30, 2011									Three Months Ended June 30, 2010
	OTTI			Other Net Realized Gains (Losses)			Net Realized Gains (Losses)			OTTI			Other Net Realized Gains (Losses)		Net Realized Gains (Losses)
	(in millions of U.S. dollars)
Fixed maturities and short-term investments	$	(5	)	$	79		$	74		$	(5	)	$	82	$	77
Equity securities		—			4			4			—			32		32
Other		(3	)		(1	)		(4	)		(13	)		1		(12	)

Total investment portfolio gains (losses)	$	(8	)	$	82		$	74		$	(18	)	$	115	$	97


	Six Months Ended June 30, 2011									Six Months Ended June 30, 2010
	OTTI			Other Net Realized Gains (Losses)			Net Realized Gains (Losses)			OTTI			Other Net Realized Gains (Losses)		Net Realized Gains (Losses)
	(in millions of U.S. dollars)
Fixed maturities and short-term investments	$	(9	)	$	132		$	123		$	(23	)	$	181	$	158
Equity securities		—			11			11			—			77		77
Other		(3	)		(2	)		(5	)		(13	)		5		(8	)

Total investment portfolio gains (losses)	$	(12	)	$	141		$	129		$	(36	)	$	263	$	227

Our net realized gains (losses) for the three and six months ended June 30, 2011, included write-downs of $8 million and $12 million, respectively, as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $18 million and $36 million for the three and six months ended June 30, 2010, respectively.

At June 30, 2011, our investment portfolios held by U.S. legal entities included approximately $115 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 these fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $40 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.

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 securities of high credit quality and liquidity, with the objective of maintaining a stable principal balance. Certain investments purchased with the securities lending collateral declined in value resulting in an unrealized loss of $17 million at June 30, 2011. 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. It is our view that the decline in value is temporary.

Investments

Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with approximately one half invested in AAA securities), as rated by the independent investment rating service Standard and Poor’s (S&P). The portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. Our Other investments principally comprise direct investments, investment funds, and limited partnerships. 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 average duration of our fixed income securities, including the effect of options and swaps, was 3.8 years at June 30, 2011 and 3.7 years at December 31, 2010. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $2.0 billion at June 30, 2011.

The following table shows the fair value and cost/amortized cost of our invested assets:


	June 30, 2011				December 31, 2010
	Fair Value		Cost/ Amortized Cost		Fair Value		Cost/ Amortized Cost
	(in millions of U.S. dollars)
Fixed maturities available for sale	$	41,038	$	39,862	$	37,539	$	36,542
Fixed maturities held to maturity		9,078		9,033		9,461		9,501
Short-term investments		2,380		2,380		1,983		1,983

		52,496		51,275		48,983		48,026
Equity securities		582		549		692		666
Other investments		2,156		1,916		1,692		1,511

Total investments	$	55,234	$	53,740	$	51,367	$	50,203

The fair value of our total investments increased $3.9 billion during the six months ended June 30, 2011, primarily due to the investing of operating cash flows and the acquisition of New York Life’s Korea operations and Hong Kong operations.

The following tables show the market value of our fixed maturities and short-term investments at June 30, 2011 and December 31, 2010. The first table lists investments according to type and the second according to S&P credit rating.


	June 30, 2011					December 31, 2010
	Market Value		Percentage of Total			Market Value		Percentage of Total
	(in millions of U.S. dollars, except for percentages)
Treasury	$	1,832		3	%	$	2,075		4	%
Agency		1,755		3	%		2,015		4	%
Corporate and asset-backed securities		16,805		32	%		15,900		33	%
Mortgage-backed securities		13,483		26	%		12,362		25	%
Municipal		2,534		5	%		2,449		5	%
Non-U.S.		13,707		26	%		12,199		25	%
Short-term investments		2,380		5	%		1,983		4	%

Total	$	52,496		100	%	$	48,983		100	%

AAA	$	25,331		48	%	$	23,718		48	%
AA		4,783		9	%		4,714		10	%
A		9,944		19	%		8,482		17	%
BBB		5,691		11	%		5,487		11	%
BB		3,667		7	%		3,357		7	%
B		2,389		5	%		2,393		5	%
Other		691		1	%		832		2	%

Total	$	52,496		100	%	$	48,983		100	%

As part of our overall investment strategy, we may invest in states, municipalities, and other political subdivisions fixed maturity securities (Municipal). We apply the same investment selection process described previously to our Municipal investments. As of June 30, 2011, one state, including political subdivisions and other municipal issuers within the state, represented approximately 20 percent of our Municipal investments. A majority of the single state exposure represents special revenue bonds. Over 71 percent of our Municipal investments carry an S&P rating of AA- or better and none carry fair values that reflect a significantly different risk compared to those ratings. These Municipal investments are split 39 percent and 61 percent between general obligation and special revenue bonds, respectively.

The table below summarizes the market value of our non-U.S. fixed income portfolio by country/sovereign for non-U.S. government securities at June 30, 2011:


	Market Value
	(in millions of U.S. dollars)
United Kingdom	$	1,028
Canada		893
Republic of Korea		422
Japan		390
Germany		356
Federative Republic of Brazil		220
Province of Ontario		210
France		175
Swiss Confederation		162
Province of Quebec		137
State of Queensland		120
Kingdom of Thailand		117
People’s Republic of China		82
Commonwealth of Australia		79
United Mexican States		75
State of New South Wales		69
Federation of Malaysia		61
Dominion of New Zealand		60
Taiwan		59
State of Victoria		55
Republic of Austria		44
Arab Republic of Egypt		41
State of Qatar		37
Province of Manitoba		34
Province of Alberta		31
Other Non-U.S. Government		444

Non-U.S. Government Securities		5,401
European Country Non-U.S. Corporate
(excluding United Kingdom)		2,822
Other Non-U.S. Corporate		5,484

Total	$	13,707

Our non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. We have 81 percent of our non-U.S. fixed income portfolio denominated in G7 currencies. The average credit quality of our non-U.S. fixed income securities is AA and 53 percent of our holdings are rated AAA or guaranteed by governments or quasi-government agencies. Our corporate bond holdings are highly diversified across industries and geographies. Issuer limits are based on credit rating (AA—two percent, A—one percent, BBB—0.5 percent of the total portfolio) and are monitored on a daily basis by ACE via an internal compliance system.

The table below summarizes the market value of our European Country fixed income portfolio (excluding United Kingdom) by industry at June 30, 2011:


	Market Value
	(in millions of U.S. dollars)
	Bank		Financial		Industrial		Utility		Total
Netherlands	$	204	$	171	$	233	$	135	$	743
France		170		97		115		132		514
Germany		270		37		73		5		385
Luxembourg		41		3		216		98		358
Switzerland		228		—		—		—		228
Euro Supranational		204		—		—		—		204
Ireland		—		22		104		20		146
Spain		63		4		61		6		134
Italy		40		1		17		9		67
Finland		11		—		3		3		17
Belgium		—		1		11		2		14
Austria		7		1		2		—		10
Portugal		—		—		2		—		2

Total	$	1,238	$	337	$	837	$	410	$	2,822

Note: ACE has no investments in Greece

The table below summarizes the market value and credit rating of the top 10 European bank exposures within our European Country fixed income portfolio (excluding United Kingdom) at June 30, 2011:


	Market Value
	(in millions of U.S. dollars)
European Investment Bank	$	193
KFW		187
UBS AG		117
Credit Suisse Group AG		96
Rabobank Nederland NV		95
BNP Paribas SA		64
Deutsche Bank AG		49
Groupe BPCE		39
Banco Santander SA		32
Intesa Sanpaolo SpA		31

The table below summarizes the market value and credit rating of the top 10 European corporate exposures within our European Country fixed income portfolio (excluding United Kingdom) at June 30, 2011:


	Market Value
	(in millions of U.S. dollars)
ING Groep NV	$	90
Deutsche Telekom AG		81
EDF SA		70
Royal Dutch Shell PLC		67
Telecom Italia SpA		59
Telefonica SA		49
Credit Agricole Groupe		47
General Electric Co		40
Gazprom OAO		39
ArcelorMittal		39

The table below summarizes our largest exposures to corporate bonds by market value at June 30, 2011:


	Market Value
	(in millions of U.S. dollars)
General Electric Co	$	523
Bank of America Corp		436
JP Morgan Chase & Co		429
Citigroup Inc		372
Morgan Stanley		356
Goldman Sachs Group Inc/The		325
Verizon Communications Inc		310
Wells Fargo & Co		257
AT&T INC		247
HSBC Holdings Plc		239
Lloyds Banking Group Plc		216
Royal Bank of Scotland Group P		170
Comcast Corp		168
Kraft Foods Inc		165
Barclays PLC		158
Credit Suisse Group		156
ConocoPhillips		128
Time Warner Cable Inc		125
American Express Co		121
UBS AG		120
BP PLC		115
Pfizer Inc		114
Dominion Resources Inc/VA		109
Banco Santander SA		108
Anheuser-Busch InBev NV		107

Mortgage-backed securities

Additional details on the mortgage-backed component of our investment portfolio at June 30, 2011, are provided below:

Mortgage-backed securities

Market Value

(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)
Agency RMBS	$	10,940	$	—	$	—	$	—	$	—	$	10,940
Non-agency RMBS		346		15		19		35		650		1,065

Total RMBS		11,286		15		19		35		650		12,005
Commercial mortgage-backed		1,437		24		14		3		—		1,478

Total mortgage-backed securities	$	12,723	$	39	$	33	$	38	$	650	$	13,483


Mortgage-backed securities Amortized Cost (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)
Agency RMBS	$	10,713	$	—	$	—	$	—	$	—	$	10,713
Non-agency RMBS		359		17		20		42		781		1,219

Total RMBS		11,072		17		20		42		781		11,932
Commercial mortgage-backed		1,377		21		13		3		—		1,414

Total mortgage-backed securities	$	12,449	$	38	$	33	$	45	$	781	$	13,346

Our mortgage-backed securities are rated predominantly AAA and comprise approximately 26 percent of our fixed income portfolio. This compares with a 36 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of the second quarter of 2011. The minimum rating for our initial purchases of mortgage-backed securities is AAA.

Agency RMBS represent securities which have been issued by Federal agencies (Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation) with implied or explicit government guarantees. These represent 91 percent of our total RMBS portfolio. With respect to our non-agency RMBS, these are backed primarily by prime collateral and are broadly diversified in over 160,000 loans. This portfolio’s loan-to-value ratio is approximately 69 percent with an average Fair Isaac Corporation (FICO) score of 730. With this conservative loan-to-value ratio and subordinated collateral of nine percent, the cumulative 5-year foreclosure rate would have to rise to 14 percent and real estate values would have to fall 12 percent from their current levels, before principal is impaired. The current foreclosure rate of our non-agency RMBS portfolio is nine percent.

Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA, broadly diversified with over 16,000 loans, and 67 percent of the portfolio was issued before 2006 and 19 percent of the portfolio issued after 2009. The average loan-to-value ratio is approximately 67 percent with a debt service coverage ratio in excess of 1.7 and weighted-average subordinated collateral of 32 percent. The cumulative foreclosure rate would have to rise to 41 percent before principal is impaired. The foreclosure rate for our CMBS portfolio at the end of the second quarter of 2011 was approximately 2.7 percent.

Below-investment grade corporate fixed income portfolio

Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. At June 30, 2011, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 10 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes over 700 issuers, with the greatest single exposure being $77 million.

We manage high yield bonds as a distinct and separate asset class from investment grade bonds. The allocation to high yield bonds is explicitly set by internal management and is targeted to securities in the upper tier of credit quality (BB/B). Our minimum rating for initial purchase is BB/B. Six external investment managers are responsible for high yield security selection and portfolio construction. Our high yield managers have a conservative approach to credit selection and very low historical default experience. Holdings are highly diversified across industries and subject to a 1.5 percent issuer limit as a percentage of high yield allocation. We monitor position limits daily through an internal compliance system. Derivative and structured securities (e.g. credit default swaps and collateralized mortgage obligations) are not permitted in the high-yield portfolio.

Reinsurance recoverable on ceded reinsurance

The composition of our reinsurance recoverable is as follows:


	June 30 2011		December 31 2010
	(in millions of U.S. dollars)
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	$	12,667	$	12,149
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance		708		722

Net reinsurance recoverable on losses and loss expenses	$	13,375	$	12,871

Reinsurance recoverable on policy benefits	$	250	$	281

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. The increase in net reinsurance recoverable on losses and loss expenses was primarily due to the increase in natural catastrophe losses in 2011.

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 are unpaid at the balance sheet date (case reserves) and for obligations on 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). Loss reserves also include an estimate of expenses associated with processing and settling unpaid claims (loss expenses). At June 30, 2011, our gross unpaid loss and loss expense reserves were $39.0 billion and our net unpaid loss and loss expense reserves were $26.3 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. In connection with such structured settlements, we carry net discounted reserves of $67 million.

The table below presents a roll-forward of our unpaid losses and loss expenses for the six months ended June 30, 2011.


	Gross Losses			Reinsurance Recoverable ⁽¹⁾			Net Losses
	(in millions of U.S. dollars)
Balance at December 31, 2010	$	37,391		$	12,149		$	25,242
Losses and loss expenses incurred		6,572			2,083			4,489
Losses and loss expenses paid		(5,577	)		(1,756	)		(3,821	)
Other (including foreign exchange translation)		565			191			374

Balance at June 30, 2011	$	38,951		$	12,667		$	26,284

(1)	Net of provision for uncollectible reinsurance

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 (including loss expense reserves) segregated between case reserves and IBNR reserves:


	June 30, 2011						December 31, 2010
	Gross		Ceded		Net		Gross		Ceded		Net
	(in millions of U.S. dollars)
Case reserves	$	18,966	$	7,393	$	11,573	$	16,899	$	5,951	$	10,948
IBNR reserves		19,985		5,274		14,711		20,492		6,198		14,294

Total	$	38,951	$	12,667	$	26,284	$	37,391	$	12,149	$	25,242

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

There was no unexpected A&E reserve activity during the six months ended June 30, 2011. For more information on our A&E exposure, refer to our 2010 Form 10-K.

Fair value measurements

The accounting guidance on fair value measurements 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. Refer to Note 5 to the Consolidated Financial Statements for additional information.

within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.

While we obtain values for the majority of the investment securities we hold 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 the GAAP definition of fair value as an exit price. Based on our understanding of the methodologies used by our pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. We do not typically adjust prices obtained from pricing services.

At June 30, 2011, our Level 3 assets represented four percent of our assets that are measured at fair value and two percent of our total assets. Our Level 3 liabilities represented 100 percent of our liabilities that are measured at fair value and one percent of our total liabilities at June 30, 2011. During the three and six months ended June 30, 2011, we transferred $41 million and $46 million, respectively, out of our Level 3 assets. Refer to Note 5 to the Consolidated Financial Statements for a description of the valuation techniques and inputs used to determine fair values for our financial instruments carried or disclosed at fair value by valuation hierarchy (Levels 1, 2, and 3) as well as a roll-forward of Level 3 financial instruments for the three and six months ended June 30, 2011 and 2010.

Guaranteed living benefits (GLB) derivatives

Under life reinsurance programs covering living benefit guarantees, we assumed the risk of GLBs associated with variable annuity (VA) contracts. We ceased writing this business in 2007. Our GLB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value. 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 the accounting guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. The incremental difference between fair value and benefit reserves is reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated 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 liabilities through lapse, annuitization, death, or expiration of the reinsurance contract). At maturity, the cumulative gains and losses will net to zero (excluding cumulative hedge gains or losses) 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 GLBs, 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 2010 Form 10-K, for further description of this product and related accounting treatment.

The fair value of GLB 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 that would assume these liabilities. 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 the guaranteed minimum income benefit (GMIB) annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. Key factors affecting the lapse rate assumption include investment performance and policy duration. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the variable annuity contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable (more “in the money”) guarantees by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.

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 GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period, since these factors determine the value of the guarantee to the policyholder. In general, we assume that GMIB annuitization rates will be higher for policies with more valuable (more “in the money”) guarantees. In addition, we also assume that GMIB annuitization rates are higher in the first year immediately following the waiting period (the first year the policies are eligible to annuitize utilizing the GMIB) in comparison to all subsequent years. We do not yet have a robust set of annuitization experience because most of our clients’ policyholders are not yet eligible to annuitize utilizing the GMIB. However, for certain clients there are several years of annuitization experience – for those clients the annuitization function reflects the actual experience and has a maximum annuitization rate per annum of 8 percent (a higher maximum applies in the first year a policy is eligible to annuitize utilizing the GMIB – it is over 13 percent). For most clients there is no currently observable relevant annuitization behavior data and so we use a weighted average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize utilizing the GMIB). As noted elsewhere, our GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.

Based on our first or second quarter 2011 review, no changes were made to actuarial or behavior assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $6 million, in 2011. In 2010, changes were made to the VA valuation model that individually both increased and decreased our fair value liability. The aggregate result of these changes decreased our realized loss by $207 million, down to a loss of $158 million, inclusive of the benefits realized on derivative hedge instruments held.

During the three and six months ended June 30, 2011, we recorded realized losses of $75 million and $17 million, respectively, due to increasing net fair value of reported GLB reinsurance liabilities resulting substantially from falling interest rates. This excludes a realized gain of $3 million during the three months ended June 30, 2011 and a realized loss of $68 million during the six months ended June 30, 2011 on derivative hedge instruments held to partially offset the risk in the VA guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment. Refer to “Net Realized Gains (Losses)” for a breakdown of the realized gains on GLB reinsurance and the realized losses on the derivatives for the three and six months ended June 30, 2011 and 2010.

ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of VA guarantees. Risk management begins with underwriting a prospective client

and guarantee design, with particular focus on protecting our 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 VA 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;

•

annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs; and

•

per policy claim limits, as a percentage of guaranteed value, for GMABs.

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 $4 million and $21 million at June 30, 2011, and December 31, 2010, 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. The aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.

Note that GLB 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 payment eligibility	Percent of living benefit account values
2011 and prior		1	%
2012		7	%
2013		24	%
2014		19	%
2015		5	%
2016		5	%
2017		18	%
2018 and after		21	%

Total		100	%

The following table provides the historical cash flows under these policies for the periods indicated. The amounts represent accrued past premium received and claims paid, split by benefit type.


	Three Months Ended June 30					Six Months Ended June 30
	2011		2010			2011		2010
	(in millions of U.S. dollars)
Death Benefits (GMDB)
Premium	$	25	$	27		$	51	$	55
Less paid claims		23		28			49		61

Net	$	2	$	(1	)	$	2	$	(6	)

Living Benefits (Includes GMIB and GMAB)
Premium	$	41	$	40		$	82	$	80
Less paid claims		1		1			2		2

Net	$	40	$	39		$	80	$	78

Total VA Guaranteed Benefits
Premium	$	66	$	67		$	133	$	135
Less paid claims		24		29			51		63

Net	$	42	$	38		$	82	$	72

Death Benefits (GMDB)

For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $108 million of claims and $93 million of premium on death benefits over the next 12 months.

GLB (includes GMIB and GMAB)

Our GLB’s predominantly include premiums and claims from VA contracts reinsuring GMIB and Guaranteed Minimum Accumulation Benefits (GMAB). Substantially all of our living benefit reinsurance clients’ policyholders are currently ineligible to trigger a claim payment. The vast majority of these policyholders become eligible in years 2013 and beyond. At current market levels, we expect approximately $1 million of claims and $154 million of premium on living benefits over the next 12 months.

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, in an amount sufficient for them to obtain statutory reserve credit. The timing of the calculation and amount 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.

Catastrophe management

We continue to closely monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects our in-force portfolio and reinsurance program at April 1, 2011.

The table below shows our modeled annual aggregate pre-tax probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes at June 30, 2011, and 2010. The table also shows corresponding pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes at June 30, 2011. For example, according to the model, for the 1-in-100

return period scenario, there is a one percent chance that our losses incurred in any year from U.S. hurricanes could be in excess of $1.3 billion (or five percent of our total shareholders’ equity at June 30, 2011). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $136.6 billion.


	U.S. Hurricanes									California Earthquakes
	June 30, 2011							June 30, 2010		June 30, 2011							June 30, 2010
Modeled Annual Aggregate Net PML			% of Total Shareholders’ Equity			Industry		ACE				% of Total Shareholders’ Equity			Industry		ACE
Modeled Annual Aggregate Net PML	ACE					Industry		ACE		ACE					Industry		ACE
	(in millions of U.S. dollars, except for percentages)
1-in-100	$	1,254		5	%	$	136,621	$	1,089	$	803		3	%	$	36,665	$	771
1-in-250	$	1,722		7	%	$	198,607	$	1,398	$	948		4	%	$	58,285	$	880

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 our 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 our potential maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates.

Natural catastrophe property reinsurance program

ACE’s core property catastrophe reinsurance program provides protection against natural catastrophes impacting its primary property operations (i.e., excluding assumed reinsurance) and consists of two separate towers.

We regularly review our reinsurance protection and corresponding property catastrophe exposures. This may or may not lead to the purchase of additional reinsurance prior to a program’s renewal date. In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.

There were no significant changes to ACE’s coverage under its Property Catastrophe Program for North America during the second quarter. With respect to our International Property Catastrophe Program, we renewed our core program for the period from July 1, 2011 through June 30, 2012 with limits similar to the expiring core program, except that we retained, in large part, the $75-$150 million loss layer.

Crop insurance

We are, and have been since the 1980s, one of the leading writers of crop insurance in the U.S. and have conducted that business through an MGA subsidiary of Rain and Hail. On December 28, 2010, we acquired all of the outstanding common stock of Rain and Hail not previously owned by us. Prior to this transaction, ACE owned approximately 20 percent of the outstanding common stock of Rain and Hail. Accordingly, the three and six months ended June 30, 2011 includes the results of Rain and Hail.

We provide protection throughout the U.S. and are therefore geographically diversified, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region. Our crop insurance business comprises two components – multi-peril crop insurance (MPCI) and hail insurance.

The MPCI program is a partnership with the U.S. Department of Agriculture (USDA). The policies cover revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. Generally, policies have deductibles ranging from 10 percent to 50 percent of the insured’s risk. The USDA’s Risk Management Agency (RMA) sets the policy terms and conditions, rates and forms, and is also responsible for setting compliance standards. As a participating company, we report all details of policies underwritten to the RMA and are party to a Standard Reinsurance Agreement (SRA), which sets out the relationship between private insurance companies and the federal government concerning the terms and conditions regarding the risks each will bear. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we cede business on a quota-share basis to third-party reinsurers and further protect our net retained position through the purchase of stop-loss reinsurance in the private market place. In July 2010, the RMA released a final version of a new SRA (the 2011 SRA), replacing the prior agreement which expired on June 30, 2010. The 2011 SRA applies to the 2011 Crop year. Similar to the recently expired SRA, the 2011 SRA contains the pro rata and state stop-loss provisions which continue to allow companies to limit the exposure of any one state or group of states on their underwriting results. Generally, it also continues to allow companies to selectively retain the more attractive risks while ceding the historically less profitable risks to the federal government. While the 2011 SRA does reduce the potential underwriting profit, it also decreases the maximum underwriting loss, compared with the prior version. Despite the potential underwriting profitability reduction, we believe the 2011 SRA allows for an acceptable rate of return in 2011.

Our hail program is a private offering. We use industry data to develop our own rates and forms for the coverage offered. The policy primarily protects farmers against yield reduction caused by hail and/or fire, and related costs such as transit to storage. We offer various deductibles to allow the grower to partially self-insure for a reduced premium cost. We limit our hail exposures through the use of township liability limits, quota-share reinsurance cessions, and stop-loss reinsurance on our net retained hail business.

On the MPCI business, we recognize net premiums written as we receive acreage reports from the policyholders on the various crops throughout the U.S. The program has specific timeframes as to when producers must report acreage to us. These reports allow us to determine the actual premium associated with the liability that is being planted. Once the net premium written has been booked, the premium is then earned over the growing season for the crops. Given the major crops that are covered in the program, we typically see a substantial written premium impact in the second and third quarters and the earned premium is also more concentrated in the second and third quarters. Premium is earned on the hail program over the coverage period of the policy. Given the very short nature of the growing season, most hail business is typically written in the second and third quarters with the earned premium also more heavily occurring during this time frame. Prior to the acquisition of Rain and Hail, we regularly received reports relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments were typically more significant in the first quarter of the year compared with other periods. Following the Rain and Hail acquisition on December 28, 2010, we have access to such information sooner. Accordingly, the more significant changes in estimate that previously occurred in the first quarter now occur one quarter earlier.

Liquidity

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 2011. Should the need arise, we generally have access to the capital markets and available credit facilities. At June 30, 2011, our available credit lines totaled $2.4 billion and usage to support issued letters of credit was $1.5 billion. This compares with available credit lines of $2.4 billion and usage of $1.8 billion at December 31, 2010. 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. Our existing credit facilities have remaining terms expiring between 2012 and 2015 and require that we maintain certain financial covenants, all of which we met at June 30, 2011. Should any of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. 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, on a timely basis 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 . Refer to “Credit Facilities” in our 2010 Form 10-K.

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. During the first half of 2011, we were able to meet all of our obligations, including the payments of dividends declared on our Common Shares, with our net cash flows.

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. During the six months ended June 30, 2011, ACE Limited received dividends from its Bermuda subsidiaries of $500 million. ACE Limited did not receive any dividends from its Bermuda subsidiaries during the six months ended June 30, 2010.

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. During the six months ended June 30, 2011, ACE Limited received dividends from ACE Global Markets of $180 million. ACE Limited did not receive any dividends from ACE Global Markets during the six months ended June 30, 2010.

The U.S. insurance subsidiaries of ACE INA 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 INA during the six months ended June 30, 2011 and 2010. 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.

Cash Flows

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, 2011 and 2010.

Our consolidated net cash flows from operating activities were $2.1 billion in the six months ended June 30, 2011, compared with $1.7 billion in the prior year period. Net loss and loss expenses paid were $3.8 billion in the six months ended June 30, 2011, compared with $3.6 billion in the prior year period. Operating cash flow increased in the first half of 2011, in part due to net collections of insurance and reinsurance balances. In addition, cash flow from operations this quarter includes $312 million of cash collateral related to a large insurance transaction. Some or all of the cash collateral may change to non-cash collateral which would ultimately result in a reduction in future operating cash flows.

Multi-peril crop insurance products are seasonal and produce the strongest written premium volume during the second and third quarters. Premium monies are retained in a fund held by the Federal government as the policies are written and are reported as Insurance and Reinsurance Balances Receivable. This asset is reduced for claim

payments, typically made during the third and fourth quarters, and the residual underwriting profit when collected by ACE ten months after the end of the fiscal year. This trend results in higher receivables from the Federal government until they are settled.

Our consolidated net cash flows used for investing activities were $1.9 billion in the six months ended June 30, 2011, compared with $1.5 billion in the prior year period. Net investing activities for the indicated periods were related primarily to net purchases of fixed maturities and for 2011, included the acquisition of New York Life’s Korea operations and Hong Kong operations.

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.

From time to time, we utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. We use these instruments to address short-term cash timing differences without disrupting our investment portfolio holdings, and we settle the transactions with future operating cash flows. At June 30, 2011, there were $1.4 billion in reverse repurchase agreements outstanding.

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:


	June 30 2011			December 31 2010
	(in millions of U.S. dollars, except for percentages)
Short-term debt	$	1,400		$	1,300
Long-term debt		3,360			3,358

Total debt		4,760			4,658
Trust preferred securities		309			309
Total shareholders’ equity		24,113			22,974

Total capitalization	$	29,182		$	27,941

Ratio of debt to total capitalization		16.3	%		16.7	%
Ratio of debt plus trust preferred securities to total capitalization		17.4	%		17.8	%

The following table reports the significant movements in our shareholders’ equity for the six months ended June 30, 2011.


	June 30, 2011
	(in millions of U.S. dollars)
Balance at December 31, 2010	$	22,974
Net income		866
Dividends declared on Common Shares		(232	)
Change in net unrealized appreciation on investments, net of tax		175
Change in net cumulative translation, net of tax		224
Other movements, net of tax		106

Balance at June 30, 2011	$	24,113

As part of our capital management program, in November 2010, our Board of Directors authorized the repurchase of up to $600 million of ACE’s Common Shares through December 31, 2012. At June 30, 2011, $297 million of this authorization had not been used. There were no share repurchases during the six months ended June 30, 2011.

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. We expect to file a new unlimited shelf registration to replace the one that expires in December 2011.

Dividends

We have paid dividends each quarter since we became a public company in 1993. From the fourth quarter of 2008 through the second quarter of 2011, we paid dividends by way of a par value distribution. Beginning in the third quarter of 2011, dividends were paid out of capital contributions reserves (additional paid in capital) by the transfer of dividends from additional paid in capital to retained earnings. The following table represents dividends paid per Common Share to shareholders of record on each of the following dates:


Shareholders of record as of:	Dividends paid as of:
December 16, 2010	January 11, 2011	$0.33 (CHF 0.32)
April 1, 2011	April 22, 2011	$0.33 (CHF 0.30)
June 30, 2011	July 21, 2011	$0.35 (CHF 0.29)

At the Annual General Meeting held in May 2010, our shareholders approved a par value reduction in an aggregate Swiss franc amount, pursuant to a formula, equal to $1.32 per share, which we refer to as the Base Annual Dividend. The Base Annual Dividend was payable in four installments, provided that each of the Swiss franc installments would be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment equaled $0.33, subject to an aggregate upward adjustment, which we refer to as the Dividend Cap, for the four installments of 50 percent of the Base Annual Dividend.

Application of the formula meant that the Swiss franc amount of each installment was determined in connection with each distribution while the U.S. dollar value of the installment remained $0.33. Par value reduction that would otherwise exceed the Dividend Cap would be reduced to equal the Swiss franc amount remaining available under the Dividend Cap and the U.S. dollar amount distributed would be the then-applicable U.S. dollar equivalent of that Swiss franc amount.

Beginning January 1, 2011, Swiss tax law allows the payment of dividends out of capital contributions reserves, a subaccount of legal reserves, without such dividends being subject to Swiss withholding taxes. Thus, distributions to shareholders from capital contributions reserves have obtained the same tax-privileged status as distributions to shareholders by way of par value distribution on our common shares. At our May 2011 Annual General Meeting, the shareholders approved a dividend for the coming year from our capital contributions reserves. This dividend is of an aggregate CHF amount equal to $1.40 per share, payable in four installments, provided that each CHF installment will be adjusted pursuant to a dividend cap formula similar to the one previously used for par value distributions as described earlier in this section.

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 2010 Form 10-K.

Reinsurance of GMDB and GLB guarantees

Our net income is directly impacted by changes in the benefit reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GLB. The benefit reserves are calculated in accordance with the guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit 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 GLB liability (FVL), which is classified as a derivative for accounting purposes. The FVL established for a GLB reinsurance contract represents the difference between the fair value of the contract and the benefit reserves. Changes in the FVL, net of associated changes in the calculated benefit reserves, 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 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.

At June 30, 2011, management established benefit reserves 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 exercises judgment in determining the extent to which short-term market movements impact the benefit reserves. The benefit reserves are 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’s best estimate reflected a judgment that the equity markets will exhibit sub-par growth over the next several years. Management regularly examines both quantitative and qualitative analysis and for the six months ended June 30, 2011, determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at June 30, 2011, has averaged less than 1/3 standard deviation from the calculated benefit ratios, averaging the periodic results from a 2-year rolling period ending June 30, 2011.

The guidance requires ACE to “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 benefit 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 guarantee 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 subsequent dates.

The benefit reserves 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 tables below show the sensitivity, at June 30, 2011, of the benefit 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) to partially offset the risk in the variable annuity guarantee reinsurance portfolio.


		Worldwide Equity Shock
Interest Rate Shock		+10%			Flat			-10%			-20%			-30%			-40%
		(in millions of U.S. dollars)
+100 bps	(Increase)/decrease in benefit reserves	$	61		$	16		$	(53	)	$	(166	)	$	(325	)	$	(541	)
	(Increase)/decrease in FVL		200			107			(13	)		(174	)		(388	)		(613	)
	Increase/(decrease) in hedge value		(158	)		(5	)		149			306			465			626

	Increase/(decrease) in net income	$	103		$	118		$	83		$	(34	)	$	(248	)	$	(528	)

Flat	(Increase)/decrease in benefit reserves	$	46		$	—		$	(73	)	$	(190	)	$	(357	)	$	(585	)
	(Increase)/decrease in FVL		138			—			(182	)		(431	)		(703	)		(977	)
	Increase/(decrease) in hedge value		(153	)		(5	)		155			313			472			635

	Increase/(decrease) in net income	$	31		$	(5	)	$	(100	)	$	(308	)	$	(588	)	$	(927	)

-100 bps	(Increase)/decrease in benefit reserves	$	30		$	(17	)	$	(95	)	$	(218	)	$	(396	)	$	(638	)
	(Increase)/decrease in FVL		(2	)		(207	)		(484	)		(798	)		(1,127	)		(1,447	)
	Increase/(decrease) in hedge value		(148	)		6			162			320			481			644

	Increase/(decrease) in net income	$	(120	)	$	(218	)	$	(417	)	$	(696	)	$	(1,042	)	$	(1,441	)


Sensitivities to Other Economic Variables	AA-rated Credit Spreads					Interest Rate Volatility					Equity Volatility
Sensitivities to Other Economic Variables	AA-rated Credit Spreads					Interest Rate Volatility					Equity Volatility
	+100		-100			+2%			-2%		+2%			-2%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	—	$	—		$	—		$	—	$	—		$	—
(Increase)/decrease in FVL		46		(60	)		(1	)		2		(15	)		13
Increase/(decrease) in hedge value		—		—			—			—		4			(4	)
Increase/(decrease) in net income	$	46	$	(60	)	$	(1	)	$	2	$	(11	)	$	9

Sensitivities to Actuarial Assumptions


	Mortality
	+20%			+10%			-10%			-20%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	(38	)	$	(19	)	$	20		$	42
(Increase)/decrease in FVL		17			8			(9	)		(17	)
Increase/(decrease) in hedge value		—			—			—			—

Increase/(decrease) in net income	$	(21	)	$	(11	)	$	11		$	25


	Lapses
	+50%			+25%			-25%			-50%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	60		$	33		$	(41	)	$	(92	)
(Increase)/decrease in FVL		130			75			(102	)		(231	)
Increase/(decrease) in hedge value		—			—			—			—

Increase/(decrease) in net income	$	190		$	108		$	(143	)	$	(323	)


	Annuitization
	+50%			+25%			-25%			-50%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	(29	)	$	(16	)	$	19		$	42
(Increase)/decrease in FVL		(111	)		(59	)		49			95
Increase/(decrease) in hedge value		—			—			—			—

Increase/(decrease) in net income	$	(140	)	$	(75	)	$	68		$	137

The above tables assume benefit reserves and FVL using the benefit ratio calculated at June 30, 2011. 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 AA-rated credit spreads (AA-rated credit spreads are a proxy for both our own credit spreads and the credit spreads of the ceding insurers), impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from June 30, 2011 market levels and includes the impact of an adjustment to the hedge portfolio made subsequent to that date.

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 benefit reserves 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 benefit reserves and the FVL as well as the sensitivities to changes in market factors shown above. Additionally, actual sensitivity of our benefit reserves, FVL, and net income may differ from those disclosed in the tables above due to differences between short-term market movements and management judgment regarding the long-term assumptions implicit in our benefit ratio. Furthermore, the sensitivities above could vary by multiples of the sensitivities in the tables above.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our 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 our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the six months ended June 30, 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ACE LIMITED

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Our 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 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.

Further information is set forth in Note 7 d) to our Consolidated Financial Statements.

Item 1 A. Risk Factors

Refer to “Risk Factors” under Item 1A. of Part I of our 2010 Form 10-K. There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2010 Form 10K.

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

The following table provides information with respect to purchases by ACE of its Common Shares during the three months ended June 30, 2011.

Issuer’s Purchases of Equity Securities


Period	Total Number of Shares Purchased*		Average Price Paid per Share		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan**
April 1 through April 30		7,195	$	66.00	$	297 million
May 1 through May 31		67,626		69.13		297 million
June 1 through June 30		2,632		68.08		297 million

Total		77,453

*	This column represents activity related to the surrender to ACE of Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

**	In November 2010, the Company’s Board of Directors authorized the repurchase of up to $600 million of ACE’s Common Shares through 2012.

Item 6. Exhibits

Refer to the Exhibit Index.

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 4, 2011				/ S / E VAN G. G REENBERG
				Evan G. Greenberg
				Chairman and Chief Executive Officer

August 4, 2011				/ S / P HILIP V. B ANCROFT
				Philip V. Bancroft
				Chief Financial Officer

Incorporated by Reference

Filed
Herewith

Exhibit
Number

Exhibit Description

Form

Original
Number

Date Filed

SEC File
Reference
Number

3.1

Articles of Association of the Company, as amended and restated

8-K

April 1, 2011

001-11778

4.1

Articles of Association of the Company, as amended and restated

8-K

April 1, 2011

001-11778

10.1*

Form of Incentive Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.

10.2*

Form of Non-Qualified Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.

10.3*

Form of Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.

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, 2011 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2011 and 2010; (iii) Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to Consolidated Financial Statements.

*	Management Contract or Compensation Plan

Exhibit 10.1

For Awards for Messrs. Greenberg and Cusumano

Incentive Stock Option Terms

under the

ACE Limited 2004 Long-Term Incentive Plan

The Participant has been granted an Option by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Option shall be subject to the following Incentive Stock Option Terms (sometimes referred to as the “Option Terms”):

1. Terms of Award . The following words and phrases used in these Option Terms shall have the meanings set forth in this paragraph 1:

(a)	The “Participant” is the individual recipient of the Incentive Stock Option Award on the specified Grant Date.

(b)	The “Grant Date” is [Insert Date] .

(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.

(d)	The “Exercise Price” is $ [Insert Price] per share.

Other words and phrases used in these Option Terms are defined pursuant to paragraph 8 or elsewhere in these Option Terms.

2. Incentive Stock Option . The Option is intended to constitute an “incentive stock option” as that term is used in Code section 422. To the extent that the aggregate fair market value (determined at the time of grant) of Shares with respect to which incentive stock options are exercisable for the first time by the Participant during any calendar year under all plans of the Company and its Subsidiaries exceeds $100,000, the options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as nonstatutory stock options. It should be understood that there is no assurance that the Option will, in fact, be treated as an incentive stock option.

3. Date of Exercise . Subject to the limitations of these Option Terms, each Installment of Covered Shares of the Option shall be exercisable on and after the Vesting Date for such Installment as described in the following schedule (but only if the Date of Termination has not occurred before the Vesting Date):


INSTALLMENT		VESTING DATE APPLICABLE TO INSTALLMENT
¹ / 3 of Covered Shares		One year anniversary of the Grant Date
¹ / 3 of Covered Shares		Two year anniversary of the Grant Date
¹ / 3 of Covered Shares		Three year anniversary of the Grant Date

Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become fully vested and exercisable as follows, with the exception of paragraph (c):

(a)	The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death or Disability.

(b)

If the Participant’s Date of Termination is a Change in Control Date of Termination (as defined below), then, for Installments, if any, as to which the Restricted Period has not ended prior to the Participant’s Date of Termination, the Restricted Period will end and such Installments will become exercisable on the Change in Control Date of Termination; provided that if the Participant’s Change in Control Date of Termination occurs within the 180-day period immediately preceding the date of a Change in Control, then all unvested Installments held by the Participant on the Date of Termination will become exercisable on the date of the Change in Control, subject to the following:

(i) All Installments (including those that become exercisable under this paragraph (b)) shall remain exercisable until the earlier of (A) the three year anniversary of the Date of Termination or (B) the Option’s originally scheduled expiration date. If the originally scheduled expiration date for the Option occurs before the date of the Change in Control, then the Option will not become exercisable under this paragraph (b).

(ii) “Change in Control Date of Termination” means (A) the Participant’s Date of Termination that occurs for any reason (including, without limitation, voluntary resignation of the Participant with or without Good Reason) during the first calendar month that begins on or after the six-month anniversary of the date of a Change in Control or (B) the Participant’s Date of Termination occurs because the Company and/or any of the Related Companies terminates the Participant’s employment with the Company and/or the Related Companies without Cause (other than due to death, a Disability or a Retirement) or because the Participant terminates his or her employment for Good Reason, provided that such termination in accordance with this clause (B) occurs during the period commencing on the 180th day immediately preceding a Change in Control date and ending on the two year anniversary of such Change in Control date.

(iii) To the extent that the terms of the ACE Limited Executive Severance Plan would otherwise apply to this Stock Option Award, vesting shall be subject to Section 10.4(b) of that plan rather than Section 10.4(a) of that plan.

(iv) For purposes of this paragraph (b), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.

(v) To the extent that the Option or portion thereof is exercised more than three months after the Participant’s Date of Termination as an employee, the Option may, for U.S. tax purposes, be treated as a nonstatutory stock option.

[The following paragraph (vi) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]

(vi) Notwithstanding the foregoing provisions of this paragraph (b), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then the Option shall become fully exercisable upon a Change in Control.

(c)

For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Date of Termination occurs by reason of the Participant’s Retirement, vesting shall continue pursuant to the foregoing schedule following the Date of Termination. Following the Date of Termination the Restricted Period shall end in accordance with the above schedule.

Except as specified in paragraphs (b) and (c), the Option may be exercised on or after the Date of Termination only as to that portion of the Covered Shares for which it was exercisable (or became exercisable) immediately prior to the Date of Termination.

4. Expiration . The Option shall not be exercisable after the Company’s close of business on the last business day that occurs prior to the Expiration Date. The “Expiration Date” shall be the earliest to occur of:

(a)	the ten-year anniversary of the Grant Date;

(b)	if the Participant’s Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination;

(c)	if the Participant’s Date of Termination occurs by reason of Retirement, the date on which the Expiration Date would occur if the Participant’s Date of Termination occurred on the ten-year anniversary of the Grant Date, or if earlier, the date of the Participant’s death; or

(d)	if the Participant’s Date of Termination occurs for any reason other than those listed in subparagraph (b) or (c) of this paragraph 4, then subject to paragraph 3(b), the three-month anniversary of such Date of Termination.

shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.

6. Withholding . All deliveries and distributions under these Option 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; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

7. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participant’s life, may be exercised only by the Participant.

8. Definitions . For purposes of these Option 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 . A Participant’s “Date of Termination” means, with respect to an employee, the date on which the Participant’s employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participant’s termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and

further provided that a Participant’s employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participant’s employer.

(c)	Director . The term “Director” means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.

(d)

Disability . The Participant shall be considered to have a “Disability” during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.

(e)

Retirement . The term “Retirement” means an employee who’s Date of Termination occurs after satisfying all of the following: (i) the employee has provided at least ten years of service with the Company or a Related Company; (ii) the employee has attained at least age 62; and (iii) the employee terminates employment in good standing with the Company or a Related Company, and (iv) the employee executes an agreement and release as required by the Company which will include, without limitation, a general release, and non-competition and non-solicitation provisions. However, with respect to exercising vested options pursuant to 4(c), above, “Retirement” shall mean the occurrence of a Participant’s Date of Termination with the consent of the Participant’s employer after the Participant is eligible for early retirement or normal retirement under a retirement plan maintained by the Company or the Subsidiaries.

(f)	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 Option Terms.

9. Heirs and Successors . The Option 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 rights exercisable by the Participant or benefits deliverable to the Participant under these Option Terms have not been exercised or delivered, respectively, at the time of the Participant’s death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Option 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 exercised by or 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 Designated Beneficiary’s exercise of all rights under these Option Terms or before the complete distribution of benefits to the Designated Beneficiary under these Option Terms, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.

10. Administration . The authority to manage and control the operation and administration of these Option Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Option Terms as it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.

11. Plan and Corporate Records Govern . Notwithstanding anything in these Option Terms to the contrary, these Option 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 Option 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 Option 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.

12. Not An Employment Contract . The Option will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participant’s employment or other service at any time.

13. Notices . Any written notices provided for in these Option 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.

14. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option 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.

15. No Rights As Shareholder . The Participant shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.

16. Amendment . The Option 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.

IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.


ACE LIMITED

By:
Its:

Exhibit 10.2

For Awards for Messrs. Greenberg and Cusumano

Non-Qualified Stock Option Terms

under the

ACE Limited 2004 Long-Term Incentive Plan

The Participant has been granted an Option by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Option shall be subject to the following Non-Qualified Stock Option Terms (sometimes referred to as the “Option Terms”):

1. Terms of Award . The following words and phrases used in these Option Terms shall have the meanings set forth in this paragraph 1:

(a)	The “Participant” is the individual recipient of the Non-Qualified Stock Option Award on the specified Grant Date.

(b)	The “Grant Date” is [Insert Date] .

(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.

(d)	The “Exercise Price” is $ [Insert Price] per share.

Other words and phrases used in these Option Terms are defined pursuant to paragraph 8 or elsewhere in these Option Terms.

2. Non-Qualified Stock Option . The Option is not intended to constitute an “incentive stock option” as that term is used in Code section 422.


INSTALLMENT		VESTING DATE APPLICABLE TO INSTALLMENT
1/3 of Covered Shares		One year anniversary of the Grant Date
1/3 of Covered Shares		Two year anniversary of the Grant Date
1/3 of Covered Shares		Three year anniversary of the Grant Date

Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become fully vested and exercisable as follows, with the exception of paragraph (c):

(a)	The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death or Disability.

(b)

(iv) For purposes of this paragraph (b), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.

[The following paragraph (v) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]

(v) Notwithstanding the foregoing provisions of this paragraph (b), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then the Option shall become fully exercisable upon a Change in Control.

(c)

(a)	the ten-year anniversary of the Grant Date;

(b)	if the Participant’s Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination;

(c)	if the Participant’s Date of Termination occurs by reason of Retirement, the date on which the Expiration Date would occur if the Participant’s Date of Termination occurred on the ten-year anniversary of the Grant Date, or if earlier, the date of the Participant’s death; or

(d)	if the Participant’s Date of Termination occurs for any reason other than those listed in subparagraph (b) or (c) of this paragraph 4, then subject to paragraph 3(b), the three-month anniversary of such Date of Termination.

5. Method of Option Exercise . Subject to these Option Terms and the Plan, the Option may be exercised in whole or in part by filing a written notice (or by such other method as may be provided by the Committee, including but not limited to processes provided in electronic record-keeping systems utilized for management of the Plan) with the Secretary of the Company at its corporate headquarters prior to the Company’s close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Stock indicated by the Participant’s election. Payment shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would

violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.

8. Definitions . For purposes of these Option 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)

(c)	Director . The term “Director” means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.

(d)

(e)

(f)	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 Option Terms.

11. Plan Governs . Notwithstanding anything in these Option Terms to the contrary, these Option 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 Option 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 Option 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.

IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.


ACE LIMITED

By:
Its:

Exhibit 10.3

For Awards for Messrs. Greenberg and Cusumano

Restricted Stock Award Terms

under the

ACE Limited 2004 Long-Term Incentive Plan

The Participant has been granted a Restricted Stock Award by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Restricted Stock Award shall be subject to the following Restricted Stock Award Terms:

1. Terms of Award . The following words and phrases used in these Restricted Stock Award Terms shall have the meanings set forth in this paragraph 1:

(a)	The “Participant” is the individual recipient of the Restricted Stock Award on the specified Grant Date.

(b)	The “Grant Date” is ( Insert Date )

(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.

Other words and phrases used in these Restricted Stock Award Terms are defined pursuant to paragraph 9 or elsewhere in these Restricted Stock Award Terms.

2. Restricted Period . Subject to the limitations of these Restricted Stock Award Terms, the “Restricted Period” for each Installment of Covered Shares of the Restricted Stock Award shall begin on the Grant Date and end as described in the following schedule (but only if the Date of Termination has not occurred before the end of the Restricted Period):


INSTALLMENT		RESTRICTED PERIOD WILL END ON:
1/4 of Covered Shares		One year anniversary of the Grant Date
1/4 of Covered Shares		Two year anniversary of the Grant Date
1/4 of Covered Shares		Three year anniversary of the Grant Date
1/4 of Covered Shares		Four year anniversary of the Grant Date

The Restricted Period shall end prior to the date specified in the foregoing schedule to the extent set forth below:

(a)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participant’s Date of Termination, if the Date of Termination occurs by reason of the Participant’s death.

(b)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participant’s Date of Termination, if the Date of Termination occurs by reason of the Participant’s Long-Term Disability.

(c)

If the Participant’s Date of Termination is a Change in Control Date of Termination (as defined below), then, for Installments, if any, as to which the Restricted Period has not ended prior to the Participant’s Date of Termination, the Restricted Period will end on the Change in Control Date of Termination; provided that if the Participant’s Change in Control Date of Termination occurs within the 180-day period immediately preceding the date of a Change in Control, then the Restricted Period for all unvested Installments held by the Participant on the Date of Termination will end, and those Installments will vest on the date of a Change in Control, subject to the following:

(i) “Change in Control Date of Termination” means (A) the Participant’s Date of Termination that occurs for any reason (including, without limitation, voluntary resignation of the Participant with or without Good Reason) during the first calendar month that begins on or after the six month anniversary of the date of a Change in Control or (B) the Participant’s Date of Termination that occurs because the Company and/or any of the Related Companies terminates the Participant’s employment with the Company and/or the Related Companies without Cause (other than due to death, a Disability or a Retirement) or because the Participant terminates his or her employment for Good Reason, provided that such termination in accordance with this clause (B) occurs during the period commencing on the 180th day immediately preceding a Change in Control date and ending on the two year anniversary of such Change in Control date.

(ii) To the extent that the terms of the ACE Limited Executive Severance Plan would otherwise apply to this Restricted Stock Award, vesting shall be subject to Section 10.4(b) of that plan rather than Section 10.4(a) of that plan.

(iii) For purposes of this paragraph (c), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.

[The following paragraph (iv) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]

(iv) Notwithstanding the foregoing provisions of this paragraph (c), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then Restricted Period for such Installments shall end upon a Change in Control.

3. Transfer and Forfeiture of Shares . Except as otherwise determined by the Committee in its sole discretion, the Participant shall forfeit the Installments of the Covered Shares as of the Participant’s Date of Termination, if such Date of Termination occurs prior to the end of the Restricted Period which applies to those Installments. If the Participant’s Date of Termination has not occurred prior to the last day of the Restricted Period with respect to any Installment of the Covered Shares, then, at the end of such Restricted Period, that Installment of Covered Shares shall be transferred to the Participant free of all restrictions.

4. Withholding . All deliveries and distributions under These Restricted Stock 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; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

5. Transferability . Except as otherwise provided by the Committee, the Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period.

6. Dividends . The Participant shall not be prevented from receiving dividends and distributions paid on the Covered Shares of Restricted Stock merely because those shares are subject to the restrictions imposed by these Restricted Stock Award Terms 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 for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.

7. Voting . The Participant shall not be prevented from voting the Restricted Stock Award merely because those shares are subject to the restrictions imposed by these Restricted Stock Award Terms and the Plan; provided, however, that the Participant shall not be entitled to vote Covered Shares with respect to record dates for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.

8. Deposit of Restricted Stock Award . Each certificate issued in respect of the Covered Shares awarded under these Restricted Stock Award Terms shall be registered in the name of the Participant and shall be deposited in a bank designated by the Committee.

9. Definitions . For purposes of these Restricted Stock 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 . A Participant’s “Date of Termination” means, with respect to an employee, the date on which the Participant’s employment with the Company and Related Companies terminates for any reason, and with respect to a Director, the date

immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s transfer of employment between the Company and a Related Company or between two Related Companies; further provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Related Company, nor by reason of a Participant’s termination of employment with the Company or a Related Company if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participant’s employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Related Company approved by the Participant’s employer.

(c)	Director . The term “Director” means a member of the Board, who may or may not be 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 Participant is determined to be eligible for long-term disability benefits under the long-term disability plan in which the Participant participates and which is sponsored by the Company or a Related Company; or if the Participant does not participate in a long-term disability plan sponsored by the Company or a Related Company, then the Participant shall be considered to have a “Long-Term Disability” if the Committee determines, under standards comparable to those of the Company’s long-term disability plan, that the Participant would be eligible for long-term disability benefits if he or she participated in such plan.

(e)	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 Award Terms.

10. Heirs and Successors . These Restricted Stock 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 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 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 Award Terms, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.

11. Administration . The authority to manage and control the operation and administration of these Restricted Stock Award Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Restricted Stock Award Terms as it has with respect to the Plan. Any interpretation of these Restricted Stock Award Terms by the Committee and any decision made by it with respect to these Restricted Stock Award Terms are final and binding on all persons.

12. Plan and Corporate Records Govern . Notwithstanding anything in these Restricted Stock Award Terms to the contrary, these Restricted Stock 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 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 Award 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.

13. Not An Employment Contract . The Restricted Stock 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.

14. Notices . Any written notices provided for in these Restricted Stock 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.

15. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock 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.

16. Amendment . These Restricted Stock 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.

IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.


ACE LIMITED

By:
Its

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 4, 2011

/s/ Evan G. Greenberg

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;

(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 4, 2011

/s/ Philip V. Bancroft

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, 2011, 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 4, 2011				/s/ Evan G. Greenberg 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 4, 2011				/s/ Philip V. Bancroft
				Philip V. Bancroft
				Chief Financial Officer