ACE Ltd (Form: 10-Q, Received: 11/03/2011 15:44:47)

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 September 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 October 27, 2011 was 336,823,967.

ACE LIMITED

INDEX TO FORM 10-Q


			Page No.
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

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

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

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

	Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 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		9
	Note 4.	Investments		10
	Note 5.	Fair value measurements		16
	Note 6.	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts		26
	Note 7.	Commitments, contingencies, and guarantees		27
	Note 8.	Shareholders’ equity		34
	Note 9.	Share-based compensation		35
	Note 10.	Segment information		35
	Note 11.	Earnings per share		39
	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			46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			85

Item 4.	Controls and Procedures			88

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings			89

Item 1A.	Risk Factors			89

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities			89

Item 6.	Exhibits			90

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 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 – $40,334 and $36,542) (includes hybrid financial instruments of $334 and $416)	$	41,577		$	37,539
Fixed maturities held to maturity, at amortized cost (fair value – $8,873 and $9,461)		8,731			9,501
Equity securities, at fair value (cost – $647 and $666)		621			692
Short-term investments, at fair value and amortized cost		2,376			1,983
Other investments (cost – $1,970 and $1,511)		2,194			1,692

Total investments		55,499			51,407
Cash		766			772
Securities lending collateral		1,269			1,495
Accrued investment income		563			521
Insurance and reinsurance balances receivable		5,403			4,233
Reinsurance recoverable on losses and loss expenses		12,837			12,871
Reinsurance recoverable on policy benefits		248			281
Deferred policy acquisition costs		1,792			1,641
Value of business acquired		757			634
Goodwill and other intangible assets		4,817			4,664
Prepaid reinsurance premiums		1,582			1,511
Deferred tax assets		623			769
Investments in partially-owned insurance companies (cost – $366 and $357)		371			360
Other assets		2,193			2,196

Total assets	$	88,720		$	83,355

Liabilities
Unpaid losses and loss expenses	$	38,476		$	37,391
Unearned premiums		6,594			6,330
Future policy benefits		4,376			3,106
Insurance and reinsurance balances payable		3,492			3,282
Deposit liabilities		653			421
Securities lending payable		1,290			1,518
Payable for securities purchased		362			292
Accounts payable, accrued expenses, and other liabilities		4,617			2,958
Income taxes payable		191			116
Short-term debt		1,250			1,300
Long-term debt		3,360			3,358
Trust preferred securities		309			309

Total liabilities		64,970			60,381

Commitments and contingencies
Shareholders’ equity
Common Shares (CHF 30.27 and CHF 30.57 par value, 342,832,412 and 341,094,559 shares issued, 336,390,293 and 334,942,852 shares outstanding)		10,095			10,161
Common Shares in treasury (6,442,119 and 6,151,707 shares)		(350	)		(330	)
Additional paid-in capital		5,405			5,623
Retained earnings		6,761			5,926
Deferred compensation obligation		2			2
Accumulated other comprehensive income (AOCI)		1,839			1,594
Common Shares issued to employee trust		(2	)		(2	)

Total shareholders’ equity		23,750			22,974

Total liabilities and shareholders’ equity	$	88,720		$	83,355

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in millions of U.S. dollars, except per share data)
Revenues
Net premiums written	$	4,343		$	3,295		$	11,742		$	10,286
Change in unearned premiums		147			127			(186	)		(354	)

Net premiums earned		4,490			3,422			11,556			9,932
Net investment income		564			516			1,677			1,538
Net realized gains (losses):
Other-than-temporary impairment (OTTI) losses gross		(31	)		(39	)		(45	)		(120	)
Portion of OTTI losses recognized in other comprehensive income (OCI)		11			20			13			65

Net OTTI losses recognized in income		(20	)		(19	)		(32	)		(55	)
Net realized gains (losses) excluding OTTI losses		(740	)		(31	)		(846	)		182

Total net realized gains (losses)		(760	)		(50	)		(878	)		127

Total revenues		4,294			3,888			12,355			11,597

Expenses
Losses and loss expenses		2,745			1,887			7,234			5,608
Policy benefits		83			93			282			267
Policy acquisition costs		666			607			1,825			1,697
Administrative expenses		517			433			1,526			1,356
Interest expense		62			58			187			162
Other (income) expense		87			(25	)		82			(26	)

Total expenses		4,160			3,053			11,136			9,064

Income before income tax		134			835			1,219			2,533
Income tax expense		165			160			384			426

Net income (loss)	$	(31	)	$	675		$	835		$	2,107

Other comprehensive income (loss)
Unrealized appreciation	$	22		$	953		$	391		$	2,023
Reclassification adjustment for net realized gains included in net income		(18	)		(120	)		(152	)		(346	)

		4			833			239			1,677
Change in:
Cumulative translation adjustment		(152	)		186			149			(73	)
Pension liability		3			(6	)		(2	)		2

Other comprehensive income, before income tax		(145	)		1,013			386			1,606
Income tax expense related to OCI items		(5	)		(197	)		(141	)		(319	)

Other comprehensive income (loss)		(150	)		816			245			1,287

Comprehensive income (loss)	$	(181	)	$	1,491		$	1,080		$	3,394


Earnings per share
Basic earnings per share	$	(0.09	)	$	1.98		$	2.47		$	6.21

Diluted earnings per share	$	(0.09	)	$	1.97		$	2.45		$	6.18

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Nine Months Ended September 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		47			20
Dividends declared on Common Shares-par value reduction		(113	)		(330	)

Balance – end of period		10,095			10,264

Common Shares in treasury
Balance – beginning of period		(330	)		(3	)
Common Shares repurchased		(100	)		—
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans		80			(30	)

Balance – end of period		(350	)		(33	)

Additional paid-in capital
Balance – beginning of period		5,623			5,526
Net shares redeemed under employee share-based compensation plans		(111	)		(59	)
Exercise of stock options		26			11
Share-based compensation expense and other		103			101
Funding of dividends declared to Retained earnings		(236	)		—

Balance – end of period		5,405			5,579

Retained earnings
Balance – beginning of period		5,926			2,818
Net income		835			2,107
Funding of dividends declared from Additional paid-in capital		236			—
Dividends declared on Common Shares		(236	)		—

Balance – end of period		6,761			4,925

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)


	Nine Months Ended September 30
	2011			2010
	(in millions of U.S. dollars)
Accumulated other comprehensive income (loss)
Net unrealized appreciation on investments
Balance – beginning of period	$	1,399		$	657
Change in period, net of income tax expense of $(112) and $(366)		127			1,311

Balance – end of period		1,526			1,968

Cumulative translation adjustment
Balance – beginning of period		262			240
Change in period, net of income tax (expense) benefit of $(30) and $48		119			(25	)

Balance – end of period		381			215

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

Balance – end of period		(68	)		(73	)

Accumulated other comprehensive income		1,839			2,110

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

Total shareholders’ equity	$	23,750		$	22,845

See accompanying notes to consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30
	2011			2010
	(in millions of U.S. dollars)
Cash flows from operating activities
Net income (loss)	$	835		$	2,107
Adjustments to reconcile net income to net cash flows from operating activities
Net realized losses (gains)		878			(127	)
Amortization of premiums/discounts on fixed maturities		105			103
Deferred income taxes		5			(16	)
Unpaid losses and loss expenses		826			58
Unearned premiums		232			517
Future policy benefits		51			94
Insurance and reinsurance balances payable		158			(290	)
Accounts payable, accrued expenses, and other liabilities		508			116
Income taxes payable		74			146
Insurance and reinsurance balances receivable		(1,103	)		12
Reinsurance recoverable on losses and loss expenses		133			65
Reinsurance recoverable on policy benefits		26			12
Deferred policy acquisition costs		(154	)		(172	)
Prepaid reinsurance premiums		(52	)		(167	)
Other		476			317

Net cash flows from operating activities		2,998			2,775

Cash flows from investing activities
Purchases of fixed maturities available for sale		(18,783	)		(22,762	)
Purchases of to be announced mortgage-backed securities		(785	)		(1,128	)
Purchases of fixed maturities held to maturity		(285	)		(514	)
Purchases of equity securities		(289	)		(336	)
Sales of fixed maturities available for sale		13,567			17,233
Sales of to be announced mortgage-backed securities		756			1,063
Sales of equity securities		364			432
Maturities and redemptions of fixed maturities available for sale		2,603			2,666
Maturities and redemptions of fixed maturities held to maturity		966			931
Net derivative instruments settlements		67			11
Acquisition of subsidiaries (net of cash acquired of $81 in 2011)		(394	)		(67	)
Other		(317	)		(197	)

Net cash flows used for investing activities		(2,530	)		(2,668	)

Cash flows from financing activities
Dividends paid on Common Shares		(342	)		(323	)
Common Shares repurchased		(168	)		—
Proceeds from issuance of short-term debt		3,985			175
Repayment of short-term debt		(4,035	)		(175	)
Proceeds from share-based compensation plans		82			41

Net cash flows used for financing activities		(478	)		(282	)

Effect of foreign currency rate changes on cash and cash equivalents		4			(7	)

Net decrease in cash		(6	)		(182	)
Cash – beginning of period		772			669

Cash – end of period	$	766		$	487

Supplemental cash flow information
Taxes paid	$	306		$	296
Interest paid	$	151		$	130

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. We intend to adopt this guidance retrospectively on January 1, 2012. The amount of acquisition costs we will defer under the new guidance will be less than the amount deferred under our current accounting practice. The adoption of this guidance is not expected to have a material impact on our financial condition.

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.

Testing goodwill for impairment

In September 2011, the FASB issued new guidance that eliminates the requirement to calculate the fair value of reporting units at least annually and replaces it with an optional qualitative assessment. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this guidance on October 1, 2011. The application of the new guidance will not impact our financial condition or results of operations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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:


	September 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	$	2,390	$	175	$	(1	)	$	2,564	$	—
Foreign		12,018		465		(123	)		12,360		(2	)
Corporate securities		14,109		646		(234	)		14,521		(21	)
Mortgage-backed securities		10,308		407		(166	)		10,549		(171	)
States, municipalities, and political subdivisions		1,509		76		(2	)		1,583		—

	$	40,334	$	1,769	$	(526	)	$	41,577	$	(194	)

Held to maturity
U.S. Treasury and agency	$	1,088	$	48	$	—		$	1,136	$	—
Foreign		1,038		14		(27	)		1,025		—
Corporate securities		2,289		35		(42	)		2,282		—
Mortgage-backed securities		3,181		94		(3	)		3,272		—
States, municipalities, and political subdivisions		1,135		25		(2	)		1,158		—

	$	8,731	$	216	$	(74	)	$	8,873	$	—


	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	$	—

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 nine months ended September 30, 2011, $30 million and $38 million, respectively, of net unrealized depreciation related to such securities is included in OCI. For the three and nine months ended September 30, 2010, $65 million and $161 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At September 30, 2011 and December 31, 2010, AOCI includes net unrealized depreciation of $144 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 84 percent and 79 percent of the total mortgage-backed securities at September 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.

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.


	September 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	$	2,048	$	2,077	$	1,846	$	1,985
Due after 1 year through 5 years		12,610		12,997		13,094		13,444
Due after 5 years through 10 years		11,885		12,267		10,276		10,782
Due after 10 years		3,483		3,687		2,818		2,812

		30,026		31,028		28,034		29,023
Mortgage-backed securities		10,308		10,549		8,508		8,516

	$	40,334	$	41,577	$	36,542	$	37,539

Held to maturity; maturity period
Due in 1 year or less	$	351	$	354	$	400	$	404
Due after 1 year through 5 years		2,055		2,084		1,983		2,010
Due after 5 years through 10 years		2,481		2,483		2,613		2,524
Due after 10 years		663		680		694		677

		5,550		5,601		5,690		5,615
Mortgage-backed securities		3,181		3,272		3,811		3,846

	$	8,731	$	8,873	$	9,501	$	9,461

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

b) Equity securities

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


	September 30 2011			December 31 2010
	(in millions of U.S. dollars)
Cost	$	647		$	666
Gross unrealized appreciation		20			28
Gross unrealized depreciation		(46	)		(2	)

Fair value	$	621		$	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 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 OTTI.

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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

For the three and nine months ended September 30, 2011, credit losses recognized in net income for corporate securities were $4 million. For the three and nine months ended September 30, 2010, credit losses recognized in net income for corporate securities were $11 million and $12 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.

Credit losses recognized in net income for mortgage-backed securities for the three and nine months ended September 30, 2011 were $5 million and $8 million, respectively. Credit losses recognized in net income for mortgage-backed securities for the three and nine months ended September 30, 2010 were $8 million and $30 million, respectively.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Fixed maturities:
OTTI on fixed maturities, gross	$	(30	)	$	(39	)	$	(41	)	$	(107	)
OTTI on fixed maturities recognized in OCI (pre-tax)		11			20			13			65

OTTI on fixed maturities, net		(19	)		(19	)		(28	)		(42	)
Gross realized gains excluding OTTI		92			138			309			434
Gross realized losses excluding OTTI		(53	)		(6	)		(138	)		(121	)

Total fixed maturities		20			113			143			271

Equity securities:
OTTI on equity securities		(1	)		—			(1	)		—
Gross realized gains excluding OTTI		—			8			12			85
Gross realized losses excluding OTTI		(1	)		(1	)		(2	)		(1	)

Total equity securities		(2	)		7			9			84

OTTI on other investments		—			—			(3	)		(13	)
Foreign exchange gains (losses)		20			(62	)		(89	)		(10	)
Investment and embedded derivative instruments		(89	)		(1	)		(157	)		23
Fair value adjustments on insurance derivative		(926	)		25			(925	)		(180	)
S&P put options and futures		220			(110	)		152			(26	)
Other derivative instruments		2			(14	)		(1	)		(19	)
Other		(5	)		(8	)		(7	)		(3	)

Net realized gains (losses)	$	(760	)	$	(50	)	$	(878	)	$	127

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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Balance of credit losses related to securities still held - beginning of period	$	94		$	137		$	137		$	174
Additions where no OTTI was previously recorded		6			8			8			32
Additions where an OTTI was previously recorded		3			11			4			10
Reductions for securities sold during the period		(24	)		(9	)		(70	)		(69	)

Balance of credit losses related to securities still held - end of period	$	79		$	147		$	79		$	147

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

d) Gross unrealized loss

At September 30, 2011, there were 5,101 fixed maturities out of a total of 21,676 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $8 million. There were approximately 110 equity securities out of a total of 178 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $31 million. Fixed maturities in an unrealized loss position at September 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. Equity securities in an unrealized loss position include foreign fixed income securities held in a commingled fund structure 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)
September 30, 2011
U.S. Treasury and agency	$	142	$	(0.8	)	$	—	$	—		$	142	$	(0.8	)
Foreign		2,342		(132.4	)		194		(17.1	)		2,536		(149.5	)
Corporate securities		5,052		(252.1	)		99		(24.1	)		5,151		(276.2	)
Mortgage-backed securities		426		(6.5	)		664		(162.8	)		1,090		(169.3	)
States, municipalities, and political subdivisions		203		(3.3	)		47		(1.1	)		250		(4.4	)

Total fixed maturities		8,165		(395.1	)		1,004		(205.1	)		9,169		(600.2	)
Equity securities		503		(46.2	)		1		(0.2	)		504		(46.4	)
Other investments		54		(2.7	)		—		—			54		(2.7	)

Total	$	8,722	$	(444.0	)	$	1,005	$	(205.3	)	$	9,727	$	(649.3	)


	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 September 30, 2011 and December 31, 2010, are fixed maturities and short-term investments totaling $13.1 billion and $12.0 billion, respectively, and cash of $90 million and $104 million, respectively.

The following table presents the components of restricted assets:


	September 30 2011		December 31 2010
	(in millions of U.S. dollars)
Trust funds	$	9,482	$	8,200
Deposits with U.S. regulatory authorities		1,249		1,384
Deposits with non-U.S. regulatory authorities		2,223		2,289
Other pledged assets		280		190

	$	13,234	$	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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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

We use 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

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.

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. In general ACE assumes that GMIB annuitization rates will be higher for policies with more valuable guarantees (policies with guaranteed values far in excess of

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

their account values). 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 using 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 using the GMIB. However, for certain clients there are several years of annuitization experience. For these 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 using 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 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, second and third quarter 2011 review, no changes were made to actuarial or behavioral assumptions. We made minor technical refinements to the model with a net income (loss) impact of approximately $(0.1) million and $6.2 million for the three and nine months ended September 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)
September 30, 2011
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,391	$	1,173	$	—	$	2,564
Foreign		223		12,121		16		12,360
Corporate securities		21		14,375		125		14,521
Mortgage-backed securities		—		10,531		18		10,549
States, municipalities, and political subdivisions		—		1,582		1		1,583

		1,635		39,782		160		41,577

Equity securities		606		5		10		621
Short-term investments		1,367		1,009		—		2,376
Other investments		197		232		1,765		2,194
Securities lending collateral		—		1,269		—		1,269
Investment derivative instruments		1		—		—		1
Other derivative instruments		47		64		8		119

Total assets measured at fair value	$	3,853	$	42,361	$	1,943	$	48,157

Liabilities:
GLB ⁽¹⁾	$	—	$	—	$	1,476	$	1,476

⁽¹⁾


	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⁾

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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

Fair value of alternative investments

Included in Other investments in the fair value hierarchy at September 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 September 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.

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 September 30, 2011.


	Expected Liquidation Period		September 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	$	204	$	146	$	192	$	151
Real estate		3 to 9 Years		234		105		168		92
Distressed		6 to 9 Years		189		40		243		43
Mezzanine		6 to 9 Years		162		318		135		173
Traditional		3 to 8 Years		507		258		376		291
Vintage		1 to 3 Years		23		2		27		3
Investment funds		Not Applicable		388		—		329		—

			$	1,707	$	869	$	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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 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	$	27		$	142		$	34		$	1	$	10	$	1,680		$	4		$	524
Transfers into Level 3		—			—			—			—		—		—			—			—
Transfers out of Level 3		(11	)		—			(13	)		—		—		—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		—			(6	)		—			—		—		59			—			—
Net Realized Gains/Losses		(1	)		—			—			—		—		(1	)		5			952
Purchases		1			1			—			—		—		85			—			—
Issuances		—			—			—			—		—		—			—			—
Sales		—			(3	)		(2	)		—		—		—			—			—
Settlements		—			(9	)		(1	)		—		—		(58	)		(1	)		—

Balance-End of Period	$	16		$	125		$	18		$	1	$	10	$	1,765		$	8		$	1,476

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—	$	—	$	(1	)	$	4		$	952

⁽¹⁾


	Three Months Ended September 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	$	28		$	121	$	12	$	3		$	16		$	1,227	$	14		$	648
Transfers into (Out of) Level 3		1			—		—		—			—			—		—			—
Change in Net Unrealized Gains (Losses) included in OCI		(1	)		3		—		—			3			14		—			—
Net Realized Gains/Losses		1			1		—		—			—			6		(8	)		(25	)
Purchases, Sales, Issuances, and Settlements, Net		2			34		—		(1	)		(4	)		133		—			—

Balance-End of Period	$	31		$	159	$	12	$	2		$	15		$	1,380	$	6		$	623

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—	$	—	$	—		$	(1	)	$	—	$	(8	)	$	(25	)

⁽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 $758 million at September 30, 2010, and $776 million at June 30, 2010, which includes a fair value derivative adjustment of $623 million and $648 million, respectively.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Nine Months Ended September 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		(18	)		(4	)		(48	)		—			—			—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		(1	)		(5	)		—			—			(1	)		110			—			—
Net Realized Gains/Losses		—			(2	)		—			—			4			(4	)		6			969
Purchases		6			23			46			—			2			418			—			—
Sales		(3	)		(23	)		(17	)		—			(8	)		(55	)		—			—
Settlements		(3	)		(13	)		(6	)		(1	)		—			(136	)		(2	)		—

Balance-End of Period	$	16		$	125		$	18		$	1		$	10		$	1,765		$	8		$	1,476

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	(4	)	$	4		$	969

⁽¹⁾


	Nine Months Ended September 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		(30	)		(35	)		—			—			—			—			—			—
Change in Net Unrealized Gains (Losses) included in OCI		—			9			—			—			3			47			—			—
Net Realized Gains/Losses		—			—			—			—			1			(7	)		4			180
Purchases, Sales, Issuances, and Settlements, Net		2			17			(9	)		(1	)		(1	)		191			(12	)		—

Balance-End of Period	$	31		$	159		$	12		$	2		$	15		$	1,380		$	6		$	623

Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	—		$	4		$	180

⁽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 $758 million at September 30, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $623 million and $443 million, respectively.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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.

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


	September 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	$	1,088	$	1,136	$	1,105	$	1,127
Foreign		1,038		1,025		1,049		1,013
Corporate securities		2,289		2,282		2,361		2,313
Mortgage-backed securities		3,181		3,272		3,811		3,846
States, municipalities, and political subdivisions		1,135		1,158		1,175		1,162

Total assets		8,731		8,873		9,501		9,461

Liabilities:
Short-term debt		1,250		1,250		1,300		1,300
Long-term debt		3,360		3,781		3,358		3,846
Trust preferred securities		309		398		309		376

Total liabilities	$	4,919	$	5,429	$	4,967	$	5,522

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 30					Nine Months Ended September 30
	2011			2010		2011			2010
	(in millions of U.S. dollars)
GMDB
Net premiums earned	$	24		$	26	$	75		$	82
Policy benefits and other reserve adjustments	$	20		$	26	$	63		$	72
GLB
Net premiums earned	$	40		$	41	$	122		$	122
Policy benefits and other reserve adjustments		7			8		19			21
Net realized gains (losses)		(952	)		25		(969	)		(180	)

Gain (loss) recognized in income	$	(919	)	$	58	$	(866	)	$	(79	)
Net cash received	$	40		$	40	$	121		$	120
Net (increase) decrease in liability	$	(959	)	$	18	$	(987	)	$	(199	)

For GMDB reinsurance the reported liability was $179 million and $185 million at September 30, 2011 and December 31, 2010, respectively. For GLB reinsurance, the reported liability of $1,635 million at September 30, 2011, and $648 million at December 31, 2010, includes a fair value derivative adjustment of $1,476 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 equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitants’ 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 September 30, 2011 and December 31, 2010, the net amount at risk from GMDB reinsurance programs was $4.0 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 (September 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 1.5 and 2.5 percent.

At September 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 30, 2011 and December 31, 2010, the net amount at risk from GLB reinsurance programs was $1,681 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 (September 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 1.5 and 2.5 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.

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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 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.

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		September 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	$	9		$	737	$	3		$	729
Futures contracts on money market instruments		AP		6			12,345		3			4,297
Futures contracts on notes and bonds		AP		(14	)		1,071		5			676
Options on money market instruments		AP		—			820		—			1
Options on notes and bonds futures		AP		—			56		—			—
Convertible bonds		FM AFS		334			338		416			382
TBAs		FM AFS		129			125		101			98

			$	464		$	15,492	$	528		$	6,183

Other derivative instruments
Futures contracts on equities ⁽¹⁾		AP	$	47		$	1,290	$	(25	)	$	1,069
Options on equity market indices ⁽¹⁾		AP		64			250		46			250
Credit default swaps		AP		8			350		4			350
Other		AP		—			56		—			17

			$	119		$	1,946	$	25		$	1,686

GLB ⁽²⁾		AP/FPB	$	(1,635	)	$	1,681	$	(648	)	$	719

⁽¹⁾	Related to GMDB and GLB blocks of business.

⁽²⁾	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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Investment and embedded derivative instruments
Foreign currency forward contracts	$	15		$	(14	)	$	(3	)	$	22
All other futures contracts and options		(64	)		(9	)		(91	)		1
Convertible bonds		(41	)		22			(63	)		—
TBAs		1			—			—			—

	$	(89	)	$	(1	)	$	(157	)	$	23

GLB and other derivative instruments
GLB	$	(952	)	$	25		$	(969	)	$	(180	)
Futures contracts on equities ⁽¹⁾		197			(101	)		134			(35	)
Options on equity market indices ⁽¹⁾		23			(9	)		18			9
Interest rate swaps		—			(7	)		—			(24	)
Credit default swaps		2			(7	)		(1	)		4
Other		—			—			—			1

	$	(730	)	$	(99	)	$	(818	)	$	(225	)

	$	(819	)	$	(100	)	$	(975	)	$	(202	)

⁽¹⁾	Related to GMDB and GLB blocks of business.

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 futures contracts on money market instruments, notes and bonds are used in fixed maturity portfolios to more efficiently manage duration, as substitutes for ownership of the money market instruments, 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

(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.

(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 $1,319 million. In connection with these investments, we have commitments that may require funding of up to $869 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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.

(ii) Business practices litigation

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 and stayed the case. On October 17, 2011 the Court lifted the stay and indicated that it will issue a new scheduling order in the coming months. The Court has not yet finally approved the proposed class settlement, and has not yet indicated when it will finally resolve all issues such that ACE may re-file its motions to dismiss.

As of November 2, 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 were stayed until recently. On October 17, 2011 the Court lifted the stay and indicated that it will issue a new scheduling order in the coming months.

•

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

•

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

•

Henley Management Co., Inc. et al. v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, Inc., 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 November 2, 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 November 2, 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

•

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 January 2012.

In October 2011, plaintiff submitted an amended expert report in which it downwardly adjusted its damage claim against ACE from $11.3 million to $5.7 million in overcharges to Ohio public entities; plaintiffs may claim that this amount should be trebled pursuant to Ohio antitrust law. Plaintiff also downwardly adjusted the penalty it seeks to impose on ACE related to ACE’s sales of private insurance in Ohio from $10.3 million to $3.3 million. 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 following 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 and third quarters of 2011 of CHF 0.29 ($0.35) and 0.31 ($0.35) per Common Share, respectively, were funded from capital contributions reserves (additional paid in capital) and paid from free reserves (retained earnings).

For the three and nine months ended September 30, 2010, dividends declared per Common Share amounted to CHF 0.32 ($0.33), and CHF 0.99 ($0.97), 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 September 30, 2011, 6,442,119 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

ACE Limited securities repurchase authorization

In August 2011, the Board of Directors authorized the repurchase of up to $303 million of ACE’s Common Shares through December 31, 2012. The amount authorized in August 2011 was in addition to the $197 million balance remaining under a $600 million share repurchase program approved in November 2010. These authorizations were granted to allow ACE to repurchase Common Shares to partially offset potential dilution from the exercise of stock options and the granting of restricted stock under share-based compensation plans. Such repurchases may be made in the open market, in privately negotiated transactions, block trades, accelerated repurchases and/or through option or other forward transactions.

Under the November 2010 authorization, ACE had repurchased 4.9 million of its outstanding Common Shares as of December 31, 2010 in a series of open market transactions for a cost of $303 million. During the three and nine months ended September 30, 2011, ACE repurchased an additional 1.6 million of its outstanding Common Shares in a series of open market transactions for a cost of $100 million. At September 30, 2011, $500 million in share repurchase authorization remained through December 31, 2012 pursuant to the November 2010 and August 2011 Board authorizations.

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 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 ACE’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

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

investment income and gains (losses) from separate account assets that do not qualify for separate account reporting under GAAP as components of underwriting income. The following tables present the operations by segment:

Statement of Operations by Segment

For the Three Months Ended September 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	$	2,207		$	1,432	$	250		$	454		$	—		$	4,343
Net premiums earned		2,299			1,503		240			448			—			4,490
Losses and loss expenses		1,838			683		94			130			—			2,745
Policy benefits		—			—		—			83			—			83
Policy acquisition costs		176			370		50			70			—			666
Administrative expenses		153			237		12			77			38			517

Underwriting income (loss)		132			213		84			88			(38	)		479

Net investment income		291			138		70			60			5			564
Net realized gains (losses) including OTTI		(2	)		1		(29	)		(732	)		2			(760	)
Interest expense		4			2		—			3			53			62
Other (income) expense:
Losses from separate account assets		—			—		—			39			—			39
Other		21			10		7			8			2			48
Income tax expense (benefit)		120			56		7			13			(31	)		165

Net income (loss)	$	276		$	284	$	111		$	(647	)	$	(55	)	$	(31	)

Statement of Operations by Segment

For the Three Months Ended September 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	$	1,445		$	1,205		$	272		$	373		$	—		$	3,295
Net premiums earned		1,444			1,321			271			386			—			3,422
Losses and loss expenses		1,026			605			137			119			—			1,887
Policy benefits		—			—			—			93			—			93
Policy acquisition costs		165			326			51			65			—			607
Administrative expenses		112			204			14			59			44			433

Underwriting income (loss)		141			186			69			50			(44	)		402

Net investment income		287			118			71			43			(3	)		516
Net realized gains (losses) including OTTI		(2	)		32			10			(85	)		(5	)		(50	)
Interest expense		6			—			—			—			52			58
Other (income) expense		(20	)		(4	)		(10	)		5			4			(25	)
Income tax expense (benefit)		108			63			12			16			(39	)		160

Net income (loss)	$	332		$	277		$	148		$	(13	)	$	(69	)	$	675

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Statement of Operations by Segment

For the Nine Months Ended September 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	$	5,227	$	4,346		$	847		$	1,322		$	—		$	11,742
Net premiums earned		5,249		4,254			754			1,299			—			11,556
Losses and loss expenses		4,065		2,278			485			405			1			7,234
Policy benefits		—		—			—			282			—			282
Policy acquisition costs		455		1,030			143			197			—			1,825
Administrative expenses		448		703			38			217			120			1,526

Underwriting income (loss)		281		243			88			198			(121	)		689

Net investment income		886		407			213			165			6			1,677
Net realized gains (losses) including OTTI		8		(18	)		(56	)		(813	)		1			(878	)
Interest expense		11		4			1			9			162			187
Other (income) expense:
Losses from separate account assets		—		—			—			39			—			39
Other		8		3			2			21			9			43
Income tax expense (benefit)		304		115			25			40			(100	)		384

Net income (loss)	$	852	$	510		$	217		$	(559	)	$	(185	)	$	835

Statement of Operations by Segment

For the Nine Months Ended September 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	$	4,278		$	3,927		$	932		$	1,149		$	—		$	10,286
Net premiums earned		4,140			3,835			803			1,154			—			9,932
Losses and loss expenses		2,888			1,950			391			379			—			5,608
Policy benefits		—			4			—			263			—			267
Policy acquisition costs		447			905			153			192			—			1,697
Administrative expenses		407			613			41			171			124			1,356

Underwriting income (loss)		398			363			218			149			(124	)		1,004

Net investment income		852			347			213			129			(3	)		1,538
Net realized gains (losses) including OTTI		163			102			69			(197	)		(10	)		127
Interest expense		6			—			—			—			156			162
Other (income) expense		(21	)		(5	)		(16	)		11			5			(26	)
Income tax expense (benefit)		322			136			31			46			(109	)		426

Net income (loss)	$	1,106		$	681		$	485		$	24		$	(189	)	$	2,107

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 September 30, 2011
Insurance – North American	$	1,404	$	816	$	79	$	2,299
Insurance – Overseas General		553		366		584		1,503
Global Reinsurance		118		122		—		240
Life		—		—		448		448

	$	2,075	$	1,304	$	1,111	$	4,490

For the Three Months Ended September 30, 2010
Insurance – North American	$	466	$	903	$	75	$	1,444
Insurance – Overseas General		457		358		506		1,321
Global Reinsurance		133		138		—		271
Life		—		—		386		386

	$	1,056	$	1,399	$	967	$	3,422


	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
	(in millions of U.S. dollars)
For the Nine Months Ended September 30, 2011
Insurance – North American	$	2,439	$	2,571	$	239	$	5,249
Insurance – Overseas General		1,517		1,056		1,681		4,254
Global Reinsurance		345		409		—		754
Life		—		—		1,299		1,299

	$	4,301	$	4,036	$	3,219	$	11,556

For the Nine Months Ended September 30, 2010
Insurance – North American	$	1,179	$	2,742	$	219	$	4,140
Insurance – Overseas General		1,301		1,052		1,482		3,835
Global Reinsurance		391		412		—		803
Life		—		—		1,154		1,154

	$	2,871	$	4,206	$	2,855	$	9,932

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

11. Earnings per share

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


	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011		2010
	(in millions of U.S. dollars, except share and per share data)
Numerator:
Net income (loss)	$	(31	)	$	675	$	835	$	2,107

Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding		338,385,734			340,218,717		338,139,477		339,527,671
Denominator for diluted earnings per share:
Share-based compensation plans		—			1,636,802		2,733,434		1,314,662

Adjusted weighted-average shares outstanding and assumed conversions		338,385,734			341,855,519		340,872,911		340,842,333

Basic earnings per share	$	(0.09	)	$	1.98	$	2.47	$	6.21

Diluted earnings per share	$	(0.09	)	$	1.97	$	2.45	$	6.18

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 September 30, 2011 and 2010, the potential anti-dilutive share conversions were 2,295,260 shares and 204,251 shares, respectively. The potential anti-dilutive share conversions for the nine months ended September 30, 2011 and 2010, were 223,987 shares and 264,312 shares, respectively.

12. Information provided in connection with outstanding debt of subsidiaries

The following tables present condensed consolidating financial information at September 30, 2011 and December 31, 2010, and for the three and nine months ended September 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.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Balance Sheet at September 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	$	38		$	29,160	$	26,301		$	—		$	55,499
Cash ⁽³⁾		(70	)		640		196			—			766
Insurance and reinsurance balances receivable		—			4,883		520			—			5,403
Reinsurance recoverable on losses and loss expenses		—			17,530		(4,693	)		—			12,837
Reinsurance recoverable on policy benefits		—			952		(704	)		—			248
Value of business acquired		—			757		—			—			757
Goodwill and other intangible assets		—			4,264		553			—			4,817
Investments in subsidiaries		23,302			—		—			(23,302	)		—
Due from (to) subsidiaries and affiliates, net		664			—		—			(664	)		—
Other assets		6			7,023		1,364			—			8,393

Total assets	$	23,940		$	65,209	$	23,537		$	(23,966	)	$	88,720

Liabilities
Unpaid losses and loss expenses	$	—		$	31,696	$	6,780		$	—		$	38,476
Unearned premiums		—			5,560		1,034			—			6,594
Future policy benefits		—			3,759		617			—			4,376
Due to subsidiaries and affiliates, net		—			581		83			(664	)		—
Short-term debt		—			850		400			—			1,250
Long-term debt		—			3,360		—			—			3,360
Trust preferred securities		—			309		—			—			309
Other liabilities		190			8,429		1,986			—			10,605

Total liabilities		190			54,544		10,900			(664	)		64,970

Total shareholders’ equity		23,750			10,665		12,637			(23,302	)		23,750

Total liabilities and shareholders’ equity	$	23,940		$	65,209	$	23,537		$	(23,966	)	$	88,720

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

⁽²⁾	Includes ACE Limited parent company eliminations.

⁽³⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2011, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

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 ⁽³⁾		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		—		—			(564	)		—
Other assets		14		7,045		1,434			—			8,493

Total assets	$	23,462	$	60,629	$	22,357		$	(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
Due from subsidiaries and affiliates, net		—		555		9			(564	)		—
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		50,920		9,537			(564	)		60,381

Total shareholders’ equity		22,974		9,709		12,820			(22,529	)		22,974

Total liabilities and shareholders’ equity	$	23,462	$	60,629	$	22,357		$	(23,093	)	$	83,355

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

⁽²⁾	Includes ACE Limited parent company eliminations.

⁽³⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At December 31, 2010, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Operations

For the Three Months Ended September 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	$	—		$	2,581	$	1,762		$	—		$	4,343
Net premiums earned		—			2,700		1,790			—			4,490
Net investment income		—			281		283			—			564
Equity in earnings of subsidiaries		(55	)		—		—			55			—
Net realized gains (losses) including OTTI		2			28		(790	)		—			(760	)
Losses and loss expenses		—			1,782		963			—			2,745
Policy benefits		—			22		61			—			83
Policy acquisition costs and administrative expenses		14			625		556			(12	)		1,183
Interest expense		(9	)		66		(5	)		10			62
Other (income) expense		(30	)		83		34			—			87
Income tax expense		3			146		16			—			165

Net income (loss)	$	(31	)	$	285	$	(342	)	$	57		$	(31	)

Condensed Consolidating Statement of Operations

For the Three Months Ended September 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	$	—		$	1,965		$	1,330		$	—		$	3,295
Net premiums earned		—			2,031			1,391			—			3,422
Net investment income		—			253			263			—			516
Equity in earnings of subsidiaries		653			—			—			(653	)		—
Net realized gains (losses) including OTTI		(8	)		(13	)		(29	)		—			(50	)
Losses and loss expenses		—			1,202			685			—			1,887
Policy benefits		—			46			47			—			93
Policy acquisition costs and administrative expenses		16			586			448			(10	)		1,040
Interest expense		(9	)		63			(5	)		9			58
Other (income) expense		(40	)		14			1			—			(25	)
Income tax expense		3			126			31			—			160

Net income (loss)	$	675		$	234		$	418		$	(652	)	$	675

⁽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 Nine Months Ended September 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	$	—		$	6,910	$	4,832		$	—		$	11,742
Net premiums earned		—			6,863		4,693			—			11,556
Net investment income		1			825		851			—			1,677
Equity in earnings of subsidiaries		772			—		—			(772	)		—
Net realized gains (losses) including OTTI		—			32		(910	)		—			(878	)
Losses and loss expenses		—			4,521		2,713			—			7,234
Policy benefits		—			121		161			—			282
Policy acquisition costs and administrative expenses		50			1,813		1,521			(33	)		3,351
Interest expense		(27	)		199		(13	)		28			187
Other (income) expense		(92	)		115		59			—			82
Income tax expense		7			325		52			—			384

Net income (loss)	$	835		$	626	$	141		$	(767	)	$	835

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 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	$	—		$	6,185	$	4,101		$	—		$	10,286
Net premiums earned		—			5,881		4,051			—			9,932
Net investment income		—			760		778			—			1,538
Equity in earnings of subsidiaries		2,036			—		—			(2,036	)		—
Net realized gains (losses) including OTTI		3			60		64			—			127
Losses and loss expenses		—			3,665		1,943			—			5,608
Policy benefits		—			112		155			—			267
Policy acquisition costs and administrative expenses		48			1,730		1,302			(27	)		3,053
Interest expense		(28	)		184		(22	)		28			162
Other (income) expense		(94	)		52		16			—			(26	)
Income tax expense		6			329		91			—			426

Net income (loss)	$	2,107		$	629	$	1,408		$	(2,037	)	$	2,107

⁽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 Nine Months Ended September 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	$	652		$	1,219		$	1,807		$	(680	)	$	2,998

Cash flows from (used for) investing activities
Purchases of fixed maturities available for sale		—			(9,434	)		(10,134	)		—			(19,568	)
Purchases of fixed maturities held to maturity		—			(282	)		(3	)		—			(285	)
Purchases of equity securities		—			(149	)		(140	)		—			(289	)
Sales of fixed maturities available for sale		7			7,366			6,950			—			14,323
Sales of equity securities		—			347			17			—			364
Maturities and redemptions of fixed maturities available for sale		—			1,234			1,369			—			2,603
Maturities and redemptions of fixed maturities held to maturity		—			724			242			—			966
Net derivative instruments settlements		(2	)		(19	)		88			—			67
Capital contribution to subsidiary		(385	)		—			—			385			—
Advances (to) from affiliates		(90	)		—			—			90			—
Acquisition of subsidiaries (net of cash acquired of $81)		—			(357	)		(37	)		—			(394	)
Other		—			(469	)		152			—			(317	)

Net cash flows from (used for) investing activities		(470	)		(1,039	)		(1,496	)		475			(2,530	)

Cash flows from (used for) financing activities
Dividends paid on Common Shares		(342	)		—			—			—			(342	)
Common Shares repurchased		—			—			(168	)		—			(168	)
Net proceeds from issuance (repayment) of short-term debt		(300	)		(150	)		400			—			(50	)
Proceeds from share based compensation plans		82			—			—			—			82
Advances (to) from affiliates		—			35			55			(90	)		—
Dividends to parent company		—			—			(680	)		680			—
Capital contribution from parent		—			—			385			(385	)		—

Net cash flows from (used for) financing activities		(560	)		(115	)		(8	)		205			(478	)

Effect of foreign currency rate changes on cash and cash equivalents		—			2			2			—			4

Net increase (decrease) in cash		(378	)		67			305			—			(6	)
Cash – beginning of period ⁽³⁾		308			573			(109	)		—			772

Cash – end of period ⁽³⁾	$	(70	)	$	640		$	196		$	—		$	766

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

⁽²⁾	Includes ACE Limited parent company eliminations.

⁽³⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2011 and December 31, 2010, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

ACE LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 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 cash flows from operating activities	$	90		$	1,432		$	1,253		$	—		$	2,775

Cash flows from (used for) investing activities
Purchases of fixed maturities available for sale		—			(10,785	)		(13,105	)		—			(23,890	)
Purchases of fixed maturities held to maturity		—			(513	)		(1	)		—			(514	)
Purchases of equity securities		—			(98	)		(238	)		—			(336	)
Sales of fixed maturities available for sale		7			7,877			10,412			—			18,296
Sales of equity securities		—			8			424			—			432
Maturities and redemptions of fixed maturities available for sale		—			1,393			1,273			—			2,666
Maturities and redemptions of fixed maturities held to maturity		—			781			150			—			931
Net derivative instruments settlements		(2	)		(18	)		31			—			11
Advances (to) from affiliates		162			—			—			(162	)		—
Other		—			(198	)		(66	)		—			(264	)

Net cash flows from (used for) investing activities		167			(1,553	)		(1,120	)		(162	)		(2,668	)

Cash flows from (used for) financing activities
Dividends paid on Common Shares		(323	)		—			—			—			(323	)
Proceeds from share based compensation plans		41			—			—			—			41
Advances (to) from affiliates		—			4			(166	)		162			—

Net cash flows from (used for) financing activities		(282	)		4			(166	)		162			(282	)

Effect of foreign currency rate changes on cash and cash equivalents		—			1			(8	)		—			(7	)

Net decrease in cash		(25	)		(116	)		(41	)		—			(182	)
Cash – beginning of period ⁽³⁾		(1	)		400			270			—			669

Cash – end of period ⁽³⁾	$	(26	)	$	284		$	229		$	—		$	487

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

⁽²⁾	Includes ACE Limited parent company eliminations.

⁽³⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2010 and December 31, 2009, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

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 nine months ended September 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 September 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, Agriculture and ACE Bermuda; and our retail divisions ACE USA (including ACE Canada), Commercial Risk, 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 Hong Kong (Hong Kong Life) and Korea (Korea Life) 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.

Executive Summary

The industry continued to experience significant catastrophe losses in the third quarter resulting in above average insured losses from natural catastrophes and man-made disasters through September 30, 2011. We experienced a higher number of natural catastrophes in the first nine months of 2011 compared to the first nine months of 2010.

Results for the three and nine months ended September 30, 2011 were adversely impacted by net after-tax losses of $86 million and $630 million, respectively, including reinstatement premiums, related to several natural catastrophes including the Japan and New Zealand earthquakes, storms in Australia and other severe weather related events in the U.S. including Hurricane Irene. For further details, see “Consolidated Operating Results”.

The industry continues to be pressured by difficult global factors including uncertain political and economic climates. The current economic environment is experiencing financial market volatility, including falling interest rates, unstable foreign exchange markets reacting to the European debt crisis and unpredictable movements in the equity markets. At ACE, 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. We also take a deliberate approach to risk management incorporating a spread of business globally and lack of over-concentration in any one business.

To complement our agriculture business strategy, on September 8, 2011, we announced that we signed a definitive agreement to acquire Penn Millers Holding Corporation (“PMHC”). This transaction, which is subject to regulatory approvals, PMHC shareholder approval and other customary conditions, is expected to be completed by the end of the first quarter of 2012.

In our North American wholesale division, net premiums written increased primarily due to growth in agriculture driven by our acquisition of Rain and Hail. Year to date, we have written substantially more premium volume in agriculture than we originally projected due to higher crop commodity prices. In addition to agriculture, wholesale property net premiums written increased due to improved business retention and price increases. Offsetting this, wholesale casualty net premiums written decreased due to competitive market conditions and adherence to our underwriting standards. In our North American retail division, net premiums written increased in targeted classes including A&H and high net worth personal lines and net premiums written decreased in our commercial property and casualty lines due to competitive market conditions and adherence to our underwriting standards. The North American retail division benefited from positive renewal rates and increases in renewal exposure basis. Renewal rates in terms of policy counts remain stable and our new business writings are relatively low reflecting adherence to underwriting standards.

Net premiums written were up in our retail International P&C business for the three months ended September 30, 2011. We saw double digit growth in Asia, and Latin America, primarily driven by our international A&H business and global personal lines business. 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 foreign exchange impact.

Our Global Reinsurance segment reported a decline in net written premium for the three months ended September 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. In addition, we are in discussions with regulators in the UK and Ireland about enforcement proceedings and potential penalties with regard to these matters, which we do not expect to have a material impact on ACE’s statement of operations.

We 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 nine months ended September 30, 2011 include eight months of results for the acquired New York Life Korea operations and six months of results for the acquired New York Life Hong Kong operations. See Note 3 to the Consolidated Financial Statements for more information. Life revenues were up primarily due to these acquisitions as well as growth in our International Life business for the three months ended September 30, 2011 compared to the prior year period.

Consolidated Operating Results – Three and Nine Months Ended September 30, 2011 and 2010


	Three Months Ended September 30						% Change			Nine Months Ended September 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	$	4,343		$	3,295			32	%	$	11,742		$	10,286			14	%
Net premiums earned		4,490			3,422			31	%		11,556			9,932			16	%
Net investment income		564			516			9	%		1,677			1,538			9	%
Net realized gains (losses)		(760	)		(50	)		NM			(878	)		127			NM

Total revenues		4,294			3,888			10	%		12,355			11,597			7	%

Losses and loss expenses		2,745			1,887			45	%		7,234			5,608			29	%
Policy benefits		83			93			(11	)%		282			267			6	%
Policy acquisition costs		666			607			10	%		1,825			1,697			8	%
Administrative expenses		517			433			19	%		1,526			1,356			13	%
Interest expense		62			58			7	%		187			162			15	%
Other (income) expense		87			(25	)		NM			82			(26	)		NM

Total expenses		4,160			3,053			36	%		11,136			9,064			23	%

Income before income tax		134			835			(84	)%		1,219			2,533			(52	)%
Income tax expense		165			160			3	%		384			426			(10	)%

Net income (loss)	$	(31	)	$	675			NM		$	835		$	2,107			(60	)%

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 September 30, 2011
	P&C			A&H			Total
Net premiums written:
Growth in original currency		34.4	%		4.1	%		26.8	%
Foreign exchange effect		3.9	%		7.3	%		5.0	%

Growth as reported in U.S. dollars		38.3	%		11.4	%		31.8	%

Net premiums earned:
Growth in original currency		34.2	%		2.3	%		26.2	%
Foreign exchange effect		4.0	%		7.4	%		5.0	%

Growth as reported in U.S. dollars		38.2	%		9.7	%		31.2	%

Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased in the three and nine months ended September 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 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 nine months ended September 30, 2011, compared with the prior year periods, primarily due to the Rain and 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 September 30						% Change			Nine Months Ended September 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)
Property and all other	$	2,075		$	1,056			96	%	$	4,301		$	2,871			50	%
Casualty		1,304			1,399			(7	)%		4,036			4,206			(4	)%

Subtotal		3,379			2,455			38	%		8,337			7,077			18	%
Personal accident (A&H)		913			833			10	%		2,669			2,470			8	%
Life		198			134			48	%		550			385			43	%

Net premiums earned	$	4,490		$	3,422			31	%	$	11,556		$	9,932			16	%


	2011 % of total			2010 % of total						2011 % of total			2010 % of total
Property and all other		46	%		31	%					37	%		29	%
Casualty		29	%		41	%					35	%		42	%

Subtotal		75	%		72	%					72	%		71	%
Personal accident (A&H)		21	%		24	%					23	%		25	%
Life		4	%		4	%					5	%		4	%

Net premiums earned		100	%		100	%					100	%		100	%

Net investment income increased for the three and nine months ended September 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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Loss and loss expense ratio		64.7	%		58.2	%		66.6	%		59.6	%
Policy acquisition cost ratio		14.8	%		17.9	%		15.9	%		17.1	%
Administrative expense ratio		10.8	%		12.3	%		12.7	%		13.5	%

Combined ratio		90.3	%		88.4	%		95.2	%		90.2	%

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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		64.7	%		58.2	%		66.6	%		59.6	%
Catastrophe losses and related reinstatement premiums		(3.3	)%		(3.1	)%		(7.1	)%		(3.8	)%
Prior period development		5.1	%		6.6	%		4.3	%		5.6	%

Loss and loss expense ratio, adjusted		66.5	%		61.7	%		63.8	%		61.4	%

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

Three Months Ended September 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 & Q2 Events	$	21	$	8	$	2		$	(22	)	$	9		$	4
Hurricane Irene		76		19		14			(2	)		107			82
Global Catastrophe Recovery		—		—		(25	)		—			(25	)		(25	)
Other Q3 Events		22		7		3			(2	)		30			25

Total	$	119	$	34	$	(6	)	$	(26	)	$	121		$	86

We experienced total net pre-tax catastrophe losses of $147 million and $704 million (before reinstatement premiums) in the three and nine months ended September 30, 2011, respectively, compared with $91 million and $315 million of net pre-tax catastrophe losses (before reinstatement premiums) in the prior year periods, respectively. The catastrophe losses incurred during the nine months ended September 30, 2011, were primarily related to earthquakes in Japan and New Zealand, storms in Australia, and severe weather related events in the U.S. including Hurricane Irene. The global catastrophe recovery in the Global Reinsurance segment is related to an industry loss warranty payment received.

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 $194 million and $433 million of net favorable prior period development in the three and nine months ended September 30, 2011, respectively. This compares with net favorable prior period development of $201 million and $446 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 nine months ended September 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 nine months ended September 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 123 and 32 percent in the three and nine months ended September 30, 2011, compared with 19 and 17 percent in the prior year periods, respectively. The increase in our effective income tax rate in the three and nine months ended September 30, 2011, was primarily due to realized losses on derivatives generated in lower tax-paying jurisdictions.

Prior Period Development

The favorable prior period development of $194 million and $433 million during the three and nine months ended September 30, 2011, respectively, was the net result of several underlying favorable and adverse movements. 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 September 30	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2011
Insurance—North American	$	(51	)	$	(7	)	$	(58	)		0.4	%
Insurance—Overseas General		(125	)		(1	)		(126	)		1.7	%
Global Reinsurance		(15	)		5			(10	)		0.4	%

Total	$	(191	)	$	(3	)	$	(194	)		0.7	%

2010
Insurance—North American	$	(19	)	$	(16	)	$	(35	)		0.2	%
Insurance—Overseas General		(132	)		15			(117	)		1.8	%
Global Reinsurance		(47	)		(2	)		(49	)		2.2	%

Total	$	(198	)	$	(3	)	$	(201	)		0.9	%

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


Nine months ended September 30	Long-tail			Short-tail			Total			% of net unpaid reserves*
	(in millions of U.S. dollars, except for percentages)
2011
Insurance—North American	$	(89	)	$	(75	)	$	(164	)		1.1	%
Insurance—Overseas General		(125	)		(85	)		(210	)		3.1	%
Global Reinsurance		(59	)		—			(59	)		2.6	%

Total	$	(273	)	$	(160	)	$	(433	)		1.7	%

2010
Insurance—North American	$	(65	)	$	(88	)	$	(153	)		1.0	%
Insurance—Overseas General		(129	)		(70	)		(199	)		2.9	%
Global Reinsurance		(71	)		(23	)		(94	)		4.2	%

Total	$	(265	)	$	(181	)	$	(446	)		1.8	%

*	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 $58 million in the three months ended September 30, 2011, which was the net result of several underlying favorable and adverse movements driven by the following principal changes:

•

Net favorable development of $51 million on long-tail business, including:

•

Favorable development of $43 million in our medical risk operations, primarily impacting the 2006 and prior accident years. This portfolio composed largely of excess hospital professional liability insurance, experienced continued low levels of reported and paid loss activity leading to reduced estimates of ultimate loss versus our prior review.

•

Favorable development of $26 million in our foreign casualty Controlled Master Program product affecting the 2007 and prior accident years. The paid and reported loss activity on the general liability and employers liability lines for this product were lower than expected based on our prior review, resulting in reductions in ultimate losses for these coverage lines.

•

Adverse development of $14 million in our environmental liability business unit impacting the 2005 accident year. The adverse activity was associated with a single remediation cost cap policy where we increased our estimate of ultimate losses based on remediation cost information provided by the insured in the three months ended September 30, 2011.

•

The remaining adverse development of $4 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 three months ended September 30, 2011.

•

Net favorable development of $7 million on short-tail businesses across a number of lines and accident years, none of which was significant, related principally to updated studies that reflected the loss experience in the three months ended September 30, 2011.

Insurance – North American experienced net favorable prior period development of $35 million in the three months ended September 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $19 million on long-tail business, including:

•

Favorable development of $15 million in our medical professional liability portfolios. This favorable development is concentrated in the 2005 and prior report years in our hospital

professional liability excess business and mainly in the 2007 report year for a group of portfolios of primary medical professional business including physicians. These portfolios provide coverage on a claims made basis. The favorable development was a function of low levels of case incurred loss activity for these coverage periods since our last review, leading to lower indications of ultimate losses versus the prior valuation.

•

The remaining favorable development of $4 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 three months ended September 30, 2010.

•

Net favorable development of $16 million on short-tail businesses across a number of lines and accident years, none of which was significant, related principally to updated studies that reflected the loss experience in the three months ended September 30, 2010.

Insurance – Overseas General

Insurance – Overseas General experienced net favorable prior period development of $126 million in the three months ended September 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $125 million on long-tail business, including:

•

Favorable development of $245 million in casualty (primary and excess) and financial lines for accident years 2007 and prior. The findings of the detailed actuarial reviews completed in the three months ended September 30, 2011, recognized the impact of favorable loss emergence and the increased weight given to experience-based methods on maturing accident years.

•

Adverse development of $62 million in financial lines for accident years 2008-2010. A claims review completed in the three months ended September 30, 2011, of the exposure to financial fraud and subprime claims led to an increase of $20 million. The remaining development was a result of higher than expected large claim activity in accident years 2008 and 2010.

•

Adverse development of $58 million in casualty lines for accident years 2008-2010. Previously observed increasing frequency and severity trends in 2008 and 2009 within certain European countries continued into accident year 2010 and have led to $17 million of strengthening of reserves for that year. The rest of the development was primarily from large loss development across the primary and excess book.

•

Net favorable development of $1 million on short-tail business based on reserve studies completed during the three months ended September 30, 2011, none of which were significant.

Insurance – Overseas General experienced net favorable prior period development of $117 million in the three months ended September 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $132 million on long-tail business including:

•

Favorable development of $239 million in casualty (primary and excess) and financial lines for accident years 2006 and prior. The changes were mainly in accident years 2004-2006. The findings of the detailed actuarial reviews completed in the three months ended September 30, 2010, recognized the impact of favorable loss emergence and the increased weight given to experience-based methods on maturing accident years.

•

Adverse development of $67 million in the financial lines book for accident years 2007-2009, across multiple geographies. A claims review completed in the three months ended September 30, 2010 of the exposure to financial fraud and subprime claims concluded with increases to case estimates of $57 million following specific developments on notified claims. The remaining development arose from case strengthening on several large claims of $27 million and $17 million favorable development in attritional losses on the 2007 and 2008 accident years.

•

Adverse development of $40 million in the casualty lines for accident years 2007-2009, primarily driven by adverse frequency and severity trends within European countries ($24 million increase) and specific case development across the primary and excess books ($12 million increase).

•

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

•

Adverse development of $10 million in the political risk line. This change is based on a claims department review in the three months ended September 30, 2010, of a number of notices and outstanding claims. The claims were predominantly in the 2008 and 2009 accident years.

•

The remaining adverse development of $5 million on short-tail business was across a number of lines and accident years, none of which was significant.

Global Reinsurance

Global Reinsurance experienced net favorable prior period development of $10 million in the three months ended September 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

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

•

Favorable development of $14 million on medical malpractice business principally in treaty years 2004 to 2007. Following the reserve studies recently completed in the three months ended September 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 favorable development.

•

The remaining favorable development of $1 million on long-tail business was across a number of lines and accident years, none of which was significant.

•

Net adverse development of $5 million on short-tail business based on reserve studies completed during the three months ended September 30, 2011, none of which were significant.

Global Reinsurance experienced net favorable prior period development of $49 million in the three months ended September 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

•

Net favorable development of $47 million on long-tail business including:

•

Favorable development of $27 million in the medical malpractice lines of business principally in treaty years 2002-2006, favorable development of $15 million in the professional liability/D&O line of business primarily in treaty years 2003-2007, and favorable development of $5 million in the workers’ compensation line of business primarily in treaty years 2004-2005. These developments were the result of reserve studies on these lines of business completed during the three months ended September 30, 2010, which revealed that experience has been relatively favorable compared with assumptions.

•

Net favorable development of $2 million on short-tail business based on reserve studies completed during the three months ended September 30, 2010, none of which were significant.

Segment Operating Results – Three and Nine Months Ended September 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 September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						% Change			Nine Months Ended September 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	$	2,207		$	1,445			53	%	$	5,227		$	4,278			22	%
Net premiums earned		2,299			1,444			59	%		5,249			4,140			27	%
Losses and loss expenses		1,838			1,026			79	%		4,065			2,888			41	%
Policy acquisition costs		176			165			7	%		455			447			2	%
Administrative expenses		153			112			37	%		448			407			10	%

Underwriting income		132			141			(6	)%		281			398			(29	)%
Net investment income		291			287			1	%		886			852			4	%
Net realized gains (losses)		(2	)		(2	)		0	%		8			163			(95	)%
Interest expense		4			6			(33	)%		11			6			83	%
Other (income) expense		21			(20	)		NM			8			(21	)		NM
Income tax expense		120			108			11	%		304			322			(6	)%

Net income	$	276		$	332			(17	)%	$	852		$	1,106			(23	)%

Loss and loss expense ratio		80.0	%		71.0	%					77.4	%		69.8	%
Policy acquisition cost ratio		7.7	%		11.4	%					8.7	%		10.8	%
Administrative expense ratio		6.6	%		7.8	%					8.6	%		9.8	%

Combined ratio		94.3	%		90.2	%					94.7	%		90.4	%

Insurance – North American reported an increase in net premiums written for the three and nine months ended September 30, 2011 and 2010, compared with the prior year periods. For the three and nine months ended September 30, 2011, the wholesale division reported significantly higher premiums from the agriculture business due to the acquisition of Rain and Hail in December 2010. This increase was partially offset by lower wholesale casualty production due to competitive market conditions and our adherence to underwriting standards. The retail division also reported less net premiums written for the three and nine month periods ended September 30, 2011 due to lower production in many of our retail property and casualty lines reflecting competitive market conditions and our adherence to underwriting standards. These decreases were partially offset by growth in targeted classes, including A&H and certain property and professional lines. For the nine months ended September 30, 2011, written premiums for the retail division were lower than the prior year due to less assumed loss portfolio transfer business and lower construction premiums due to a large contract written last year. Our personal lines business reported higher written premiums for the three and nine months ended September 30, 2011 and 2010 reflecting growth in homeowners and automobile business, as well as other specialty offerings.

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


	Three Months Ended September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	323		$	293			10	%	$	924		$	873			6	%
Agriculture		1,081			173			NM			1,515			306			NM
Casualty		816			903			(10	)%		2,571			2,742			(6	)%
Personal accident (A&H)		79			75			5	%		239			219			9	%

Net premiums earned	$	2,299		$	1,444			59	%	$	5,249		$	4,140			27	%


	2011 % of Total			2010 % of Total						2011 % of Total			2010 % of Total
Property and all other		14	%		20	%					18	%		21	%
Agriculture		47	%		12	%					29	%		8	%
Casualty		36	%		63	%					49	%		66	%
Personal accident (A&H)		3	%		5	%					4	%		5	%

Net premiums earned		100	%		100	%					100	%		100	%

Insurance – North American reported an increase in net premiums earned in the three and nine months ended September 30, 2011, compared with the prior year periods. This increase was primarily attributable to higher wholesale premiums from agriculture business due to the acquisition of Rain and 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 and from less assumed loss portfolio transfer premiums for the three and nine months ended September 30, 2011. These decreases were partially offset by growth in certain professional risk and A&H lines of business. Net premiums earned for the personal lines business increased for the three and nine months ended September 30, 2011 due to continued 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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		80.0	%		71.0	%		77.4	%		69.8	%
Catastrophe losses and related reinstatement premiums		(5.0	)%		(1.0	)%		(5.9	)%		(3.0	)%
Prior period development		2.6	%		2.4	%		3.2	%		4.7	%

Loss and loss expense ratio, adjusted		77.6	%		72.4	%		74.7	%		71.5	%

Insurance – North American’s net catastrophe losses, excluding reinstatement premiums, in the three and nine months ended September 30, 2011 were $119 million and $305 million, compared with $17 million and $122 million in the prior year periods. Catastrophe losses for the three and nine months ended September 30, 2011 were from severe weather-related events in the U.S. including Hurricane Irene. In addition, for the nine months ended September 30, 2011, catastrophe losses included flooding in the Midwest and 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 $58 million and $164 million in the three and nine months

ended September 30, 2011. This compares with net favorable prior period development of $35 million and $153 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 nine months ended September 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 nine months ended September 30, 2011.

Insurance – North American’s policy acquisition cost ratio decreased in the three and nine months ended September 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 fewer premiums from lower expense ratio business, including national account business. Insurance – North American’s administrative expense ratio decreased in the three and nine months ended September 30, 2011 primarily due to the growth of low expense ratio business including agriculture business. These decreases were partially offset by lower net results for ESIS ($8 million and $21 million for the three and nine months ended September 30, 2011 compared with $52 million and $78 million for the prior year periods). ESIS is our third-party claims administration business, which we include in administrative expenses. In the three and nine months ended September 30, 2010, ESIS was engaged in the 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 September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	1,432		$	1,205			19	%	$	4,346		$	3,927			11	%
Net premiums earned		1,503			1,321			14	%		4,254			3,835			11	%
Losses and loss expenses		683			605			13	%		2,278			1,950			17	%
Policy benefits		—			—			NM			—			4			NM
Policy acquisition costs		370			326			13	%		1,030			905			14	%
Administrative expenses		237			204			16	%		703			613			15	%

Underwriting income		213			186			15	%		243			363			(33	)%
Net investment income		138			118			17	%		407			347			17	%
Net realized gains (losses)		1			32			(97	)%		(18	)		102			NM
Interest expense		2			—			NM			4			—			NM
Other (income) expense		10			(4	)		NM			3			(5	)		NM
Income tax expense		56			63			(11	)%		115			136			(15	)%

Net income	$	284		$	277			3	%	$	510		$	681			(25	)%

Loss and loss expense ratio		45.4	%		45.8	%					53.6	%		50.9	%
Policy acquisition cost ratio		24.7	%		24.7	%					24.2	%		23.6	%
Administrative expense ratio		15.8	%		15.5	%					16.5	%		16.0	%

Combined ratio		85.9	%		86.0	%					94.3	%		90.5	%

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 September 30, 2011
	P&C			A&H			Total
Net premiums written:
Growth in original currency		10.0	%		6.3	%		8.4	%
Foreign exchange effect		9.5	%		11.3	%		10.3	%

Growth as reported in U.S. dollars		19.5	%		17.6	%		18.7	%

Net premiums earned:
Growth in original currency		4.2	%		4.3	%		4.2	%
Foreign exchange effect		8.5	%		11.3	%		9.6	%

Growth as reported in U.S. dollars		12.7	%		15.6	%		13.8	%

Insurance – Overseas General’s net premiums written increased in the three and nine months ended September 30, 2011, compared with the prior year periods, primarily due to growth in our international retail operations and the acquisition of Jerneh Insurance Berhad in December 2010. In addition, the increase in net premiums written in the nine months ended September 30, 2011 were partially offset by reinstatement premiums expensed in connection with the first quarter 2011 catastrophe activity. In the three and nine months ended September 30, 2011 our international retail businesses reported growth of 12 percent and 10 percent, respectively, with growth reported in all regions, primarily in Asia Pacific and Latin America. In the three months ended September 30, 2011, P&C, A&H and personal lines each reported double-digit growth. In the nine months ended September 30, 2011, A&H and personal lines each reported double-digit growth. Our London wholesale business unit reported growth in net premiums written in the three and nine months ended September 30, 2011, compared with the prior year periods, of four percent and two percent, respectively. Refer to the table above for the impact of foreign exchange on net premiums written and earned.

Insurance – Overseas General’s net premiums earned increased in the three and nine months ended September 30, 2011, compared with the prior year periods, primarily due to the growth in the international retail operations and favorable foreign exchange impact. In addition, the increase in net premiums earned in the nine months ended September 30, 2011 were partially offset by lower wholesale writings and increased reinstatement premiums expensed in connection with first quarter 2011 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.

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


	Three Months Ended September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	553		$	457			21	%	$	1,517		$	1,301			17	%
Casualty		366			358			2	%		1,056			1,052			0	%
Personal accident (A&H)		584			506			15	%		1,681			1,482			13	%

Net premiums earned	$	1,503		$	1,321			14	%	$	4,254		$	3,835			11	%

Region
Europe	$	614		$	582			5	%	$	1,723		$	1,680			3	%
Asia Pacific		290			202			44	%		827			608			36	%
Far East		135			119			13	%		384			337			14	%
Latin America		287			232			24	%		802			666			20	%

		1,326			1,135			17	%		3,736			3,291			14	%
ACE Global Markets		177			186			(5	)%		518			544			(5	)%

Net premiums earned	$	1,503		$	1,321			14	%	$	4,254		$	3,835			11	%


	Three Months Ended September 30									Nine Months Ended September 30
	2011 % of Total			2010 % of Total						2011 % of Total			2010 % of Total
Line of Business
Property and all other		37	%		35	%					36	%		34	%
Casualty		24	%		27	%					25	%		27	%
Personal accident (A&H)		39	%		38	%					39	%		39	%

Net premiums earned		100	%		100	%					100	%		100	%

Region
Europe		41	%		44	%					41	%		44	%
Asia Pacific		19	%		15	%					19	%		16	%
Far East		9	%		9	%					9	%		9	%
Latin America		19	%		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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		45.4	%		45.8	%		53.6	%		50.9	%
Catastrophe losses and related reinstatement premiums		(1.8	)%		(2.1	)%		(6.0	)%		(3.1	)%
Prior period development		8.5	%		8.8	%		4.9	%		5.1	%

Loss and loss expense ratio, adjusted		52.1	%		52.5	%		52.5	%		52.9	%

Net catastrophe losses, excluding reinstatement premiums, in the three and nine months ended September 30, 2011 were $34 million and $231 million, compared with $25 million and $107 million in the prior year periods. The catastrophe losses in the three and nine months ended September 30, 2011 included earthquakes in New Zealand and Japan and storms in the U.S. and Australia. The catastrophe losses for the three and nine months ended September 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 $126 million and $210 million in the three and nine months ended September 30, 2011 compared with $117 million and $199 million in the prior year periods, respectively. Refer to “Prior Period Development” for more information.

Insurance – Overseas General’s policy acquisition cost ratio was flat in the three months ended September 30, 2011, compared with the prior year period, and increased slightly in the nine months ended September 30, 2011, compared with the prior year period, 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 nine months ended September 30, 2011, compared to prior year periods, primarily due to the impact of reinstatement premiums expensed and reduced wholesale net 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 September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	250		$	272			(8	)%	$	847		$	932			(9	)%
Net premiums earned		240			271			(11	)%		754			803			(6	)%
Losses and loss expenses		94			137			(31	)%		485			391			24	%
Policy acquisition costs		50			51			(2	)%		143			153			(7	)%
Administrative expenses		12			14			(14	)%		38			41			(7	)%

Underwriting income		84			69			22	%		88			218			(60	)%
Net investment income		70			71			(1	)%		213			213			—
Net realized gains (losses)		(29	)		10			NM			(56	)		69			NM
Interest expense		—			—			NM			1			—			NM
Other (income) expense		7			(10	)		NM			2			(16	)		NM
Income tax expense		7			12			(42	)%		25			31			(19	)%

Net income	$	111		$	148			(25	)%	$	217		$	485			(55	)%

Loss and loss expense ratio		39.2	%		50.4	%					64.3	%		48.7	%
Policy acquisition cost ratio		20.6	%		19.0	%					18.9	%		19.0	%
Administrative expense ratio		5.6	%		4.9	%					5.2	%		5.1	%

Combined ratio		65.4	%		74.3	%					88.4	%		72.8	%

Global Reinsurance reported a decrease in net premiums written in the three and nine months ended September 30, 2011, compared with prior year periods, primarily due to competitive market conditions as well as a reversal of premium on loss sensitive treaties resulting from favorable prior period loss development.

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


	Three Months Ended September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	47		$	62			(24	)%	$	132		$	179			(26	)%
Casualty		122			138			(12	)%		409			412			(1	)%
Property catastrophe		71			71			—			213			212			—

Net premiums earned	$	240		$	271			(11	)%	$	754		$	803			(6	)%


	2011 % of Total			2010 % of Total						2011 % of Total			2010 % of Total
Property and all other		20	%		23	%					18	%		22	%
Casualty		50	%		51	%					54	%		51	%
Property catastrophe		30	%		26	%					28	%		27	%

Net premiums earned		100	%		100	%					100	%		100	%

Global Reinsurance’s net premiums earned decreased in the three and nine months ended September 30, 2011, compared with the prior year periods, primarily due to consecutive annual net 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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Loss and loss expense ratio, as reported		39.2	%		50.4	%		64.3	%		48.7	%
Catastrophe losses and related reinstatement premiums		2.7	%		(18.3	)%		(21.9	)%		(10.6	)%
Prior period development		7.2	%		18.1	%		8.8	%		11.8	%

Loss and loss expense ratio, adjusted		49.1	%		50.2	%		51.2	%		49.9	%

Global Reinsurance recorded net catastrophe (gains)/losses, excluding reinstatement premiums, of $(6) million and $168 million in the three and nine months ended September 30, 2011, respectively, compared with net catastrophe losses of $49 million and $86 million in the prior year periods, respectively. The catastrophe gains in the three months ended September 30, 2011, were primarily related to an industry loss warranty recovery payment received partially offset by losses related to Hurricane Irene and the storms in Australia and the Netherlands. The catastrophe losses in the nine months ended September 30, 2011 were primarily related to earthquakes in Japan and New Zealand, natural catastrophes in Australia and other 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 $10 million and $59 million in the three and nine months ended September 30, 2011, respectively (both of which are net of $13 million of unfavorable premium adjustments to loss sensitive treaties). This compares with net favorable prior period development of $49 million and $94 million in the three and nine months ended September 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 September 30, 2011 is due to the favorable impact of the mix of business earned partially offset by unexpected large losses. The increase in the adjusted loss and loss expense ratio for the nine months ended September 30, 2011 was due to additional earnings in 2011 on a worker’s compensation treaty and a medical malpractice LPT (“Loss Portfolio Transfer”), both with high loss ratios partially offset by the favorable impact of the mix of business earned.

Global Reinsurance’s policy acquisition cost ratio increased for the three months ended September 30, 2011, compared with the prior year period due to the impact of adverse premium adjustments related to favorable prior period development and the mix of business earned. The policy acquisition cost ratio was flat for the nine months ended September 30, 2011, compared with the prior year period as the impact of the lower commission in our U.S. operations, primarily due to a new workers’ compensation treaty and medical malpractice LPT which did not generate acquisition costs and the favorable impact of the change in the mix of earnings were completely offset by unfavorable commission accruals, reductions in catastrophe retrocession profit commissions and the impact of unfavorable premium adjustments on loss sensitive treaties without the related benefit to acquisition costs. The administrative expense ratio increased for the three months ended September 30, 2011, compared with the prior year period, primarily as a result of the strengthening of the Euro, the British pound and the Canadian dollar against the U.S. dollar. The administrative expense ratio was flat for the nine months ended September 30, 2011, compared with the prior year period.

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 and gains (losses) from separate account assets that do not qualify for separate account reporting under generally accepted accounting principles (GAAP).


	Three Months Ended September 30						% Change			Nine Months Ended September 30						% Change
	Three Months Ended September 30						Q-11 vs. Q-10			Nine Months Ended September 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	$	454		$	373			22	%	$	1,322		$	1,149			15	%
Net premiums earned		448			386			16	%		1,299			1,154			13	%
Losses and loss expenses		130			119			9	%		405			379			7	%
Policy benefits		83			93			(11	)%		282			263			7	%
Losses from separate account assets ⁽¹⁾		39			—			NM			39			—			NM
Policy acquisition costs		70			65			8	%		197			192			3	%
Administrative expenses		77			59			31	%		217			171			27	%
Net investment income		60			43			40	%		165			129			28	%

Life underwriting income		109			93			17	%		324			278			17	%
Net realized gains (losses)		(732	)		(85	)		NM			(813	)		(197	)		NM
Interest expense		3			—			NM			9			—			NM
Other (income) expense ⁽¹⁾		8			5			60	%		21			11			91	%
Income tax expense		13			16			(19	)%		40			46			(13	)%

Net income (loss)	$	(647	)	$	(13	)		NM		$	(559	)	$	24			NM

⁽¹⁾	Losses from separate account assets that do not qualify for separate account reporting under GAAP are reclassified from Other (income) expense for purposes of presenting Life underwriting income. Refer to Note 10 to the Consolidated Financial Statements for more information.

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


	Three Months Ended September 30				% Change			Nine Months Ended September 30				% Change
	Three Months Ended September 30				Q-11 vs. Q-10			Nine Months Ended September 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	$	86	$	83		4	%	$	260	$	268		(3	)%
Life insurance		123		47		162	%		320		125		156	%
A&H		245		243		1	%		742		756		(2	)%

Life net premiums written	$	454	$	373		22	%	$	1,322	$	1,149		15	%

Life insurance net premiums written increased for the three and nine months ended September 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 premiums written increased for the three months ended September 30, 2011, compared to prior year period, due to a one time true up in the third quarter 2010 and decreased for the nine months ended September 30, 2011, compared to the prior year period, because there is no new life reinsurance business currently being written. A&H net premiums written were flat for the three months ended September 30, 2011, compared to the prior year period, and decreased for the nine months ended September 30, 2011, compared to the prior year period, due to the effects of the economy resulting in lower new business.

Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported 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 and nine month periods ended September 30, 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates and equity levels partially offset by an increase in the value of the derivative instruments, which increase in value when the S&P 500 Index decreases.

Other Income and Expense Items


	Three Months Ended September 30					Nine Months Ended September 30
	2011		2010			2011			2010
	(in millions of U.S. dollars)
Losses from separate account assets	$	39	$	—		$	39		$	—
Equity in net (income) loss of partially-owned entities		23		(40	)		(17	)		(63	)
Federal excise and capital taxes		6		4			16			10
Amortization of intangible assets		7		2			20			9
Noncontrolling interest expense		—		4			2			13
Other		12		5			22			5

Other (income) expense	$	87	$	(25	)	$	82		$	(26	)

Other (income) expense includes losses for separate account assets that do not qualify for separate account reporting under GAAP. The offsetting movement in the separate account liabilities is included in policy benefits. Additionally, other (income) expense includes 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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(in millions of U.S. dollars)
Fixed maturities	$	555		$	519		$	1,646		$	1,550
Short-term investments		10			9			36			23
Equity securities		10			5			28			16
Other		10			11			39			27

Gross investment income		585			544			1,749			1,616
Investment expenses		(21	)		(28	)		(72	)		(78	)

Net investment income	$	564		$	516		$	1,677		$	1,538

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 nine percent in both the three and nine months ended September 30, 2011, compared with the prior year periods. 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 3.2 percent both at September 30, 2011 and 2010. 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. The yield on short-term investments reflects the global nature of our insurance operations (1.5 percent - 2.0 percent yield). For example, yields on short-term investments in Malaysia, China, Korea, and Mexico range from 3.0 percent to 4.25 percent. The yield on our equity securities portfolio is high relative to the yield on the S&P 500 Index because we classify our strategic emerging debt portfolio, which is a mutual fund, as equity (5.5 percent - 6.0 percent yield). The strategic emerging debt portfolio represents approximately two-thirds of our equity securities portfolio.

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 September 30, 2011									Three Months Ended September 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	$	20		$	81		$	101		$	113		$	795	$	908
Fixed income derivatives		(89	)		—			(89	)		(1	)		—		(1	)

Total fixed maturities		(69	)		81			12			112			795		907

Public equity		(2	)		(59	)		(61	)		7			14		21
Other		(5	)		(4	)		(9	)		(8	)		20		12

Subtotal		(76	)		18			(58	)		111			829		940

Derivatives
Fair value adjustment on insurance derivatives		(926	)		—			(926	)		50			—		50
S&P put option and futures		220			—			220			(110	)		—		(110	)
Fair value adjustment on other derivatives		2			—			2			(14	)		—		(14	)

Subtotal derivatives		(704	)		—			(704	)		(74	)		—		(74	)

Foreign exchange gains (losses)		20			—			20			(87	)		—		(87	)

Total gains (losses)	$	(760	)	$	18		$	(742	)	$	(50	)	$	829	$	779


	Nine Months Ended September 30, 2011									Nine Months Ended September 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	$	143		$	244		$	387		$	271		$	1,626		$	1,897
Fixed income derivatives		(157	)		—			(157	)		23			—			23

Total fixed maturities		(14	)		244			230			294			1,626			1,920

Public equity		9			(51	)		(42	)		84			(41	)		43
Other		(10	)		2			(8	)		(16	)		72			56

Subtotal		(15	)		195			180			362			1,657			2,019

Derivatives
Fair value adjustment on insurance derivatives		(925	)		—			(925	)		(154	)		—			(154	)
S&P put option and futures		152			—			152			(26	)		—			(26	)
Fair value adjustment on other derivatives		(1	)		—			(1	)		(19	)		—			(19	)

Subtotal derivatives		(774	)		—			(774	)		(199	)		—			(199	)

Foreign exchange gains (losses)		(89	)		—			(89	)		(36	)		—			(36	)

Total gains (losses)	$	(878	)	$	195		$	(683	)	$	127		$	1,657		$	1,784

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


	Three Months Ended September 30, 2011									Three Months Ended September 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	$	(19	)	$	39		$	20		$	(19	)	$	132		$	113
Equity securities		(1	)		(1	)		(2	)		—			7			7
Other		—			(5	)		(5	)		—			(8	)		(8	)

Total investment portfolio gains (losses)	$	(20	)	$	33		$	13		$	(19	)	$	131		$	112


	Nine Months Ended September 30, 2011									Nine Months Ended September 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	$	(28	)	$	171		$	143		$	(42	)	$	313		$	271
Equity securities		(1	)		10			9			—			84			84
Other		(3	)		(8	)		(11	)		(13	)		(3	)		(16	)

Total investment portfolio gains (losses)	$	(32	)	$	173		$	141		$	(55	)	$	394		$	339

Our net realized gains (losses) for the three and nine months ended September 30, 2011, included write-downs of $20 million and $32 million, respectively, as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $19 million and $55 million for the three and nine months ended September 30, 2010, respectively.

At September 30, 2011, our investment portfolios held by U.S. legal entities included approximately $139 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 $49 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 $21 million at September 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 A/Aa as rated by the independent investment rating service Standard and Poor’s (S&P)/Moody’s Investor Service (Moody’s). This average credit quality rating reflects the recent downgrade by S&P of the credit rating of securities issued by the U.S. government. 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 3.7 years both at September 30, 2011 and December 31, 2010. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.9 billion at September 30, 2011.

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


	September 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	$	41,577	$	40,334	$	37,539	$	36,542
Fixed maturities held to maturity		8,873		8,731		9,461		9,501
Short-term investments		2,376		2,376		1,983		1,983

		52,826		51,441		48,983		48,026
Equity securities		621		647		692		666
Other investments		2,194		1,970		1,692		1,511

Total investments	$	55,641	$	54,058	$	51,367	$	50,203

The fair value of our total investments increased $4.3 billion during the nine months ended September 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 September 30, 2011 and December 31, 2010. The first table lists investments according to type and the second according to S&P credit rating.


	September 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	$	2,060		4	%	$	2,075		4	%
Agency		1,640		3	%		2,015		4	%
Corporate and asset-backed securities		16,803		32	%		15,900		33	%
Mortgage-backed securities		13,821		26	%		12,362		25	%
Municipal		2,741		5	%		2,449		5	%
Non-U.S.		13,385		25	%		12,199		25	%
Short-term investments		2,376		5	%		1,983		4	%

Total	$	52,826		100	%	$	48,983		100	%

AAA	$	9,495		18	%	$	23,718		48	%
AA		21,105		40	%		4,714		10	%
A		9,923		19	%		8,482		17	%
BBB		5,883		11	%		5,487		11	%
BB		3,588		7	%		3,357		7	%
B		2,197		4	%		2,393		5	%
Other		635		1	%		832		2	%

Total	$	52,826		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 September 30, 2011, one state, including political subdivisions and other municipal issuers within the state, represented approximately 21 percent of our Municipal investments. A majority of the single state exposure represents special revenue bonds. Over 57 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 September 30, 2011:


	Market Value
	(in millions of U.S. dollars)
United Kingdom	$	1,102
Canada		935
Republic of Korea		415
Japan		410
Germany		328
Province of Ontario		235
Federative Republic of Brazil		205
France		170
Swiss Confederation		152
Province of Quebec		141
Kingdom of Thailand		132
Federation of Malaysia		122
State of Queensland		110
Commonwealth of Australia		100
People’s Republic of China		93
United Mexican States		86
State of New South Wales		67
Taiwan		54
State of Victoria		49
Republic of Austria		45
Arab Republic of Egypt		41
State of Qatar		38
Dominion of New Zealand		37
Province of Manitoba		35
Province of British Columbia		33
Other Non-U.S. Government		450

Non-U.S. Government Securities		5,585
Eurozone Non-U.S. Corporate
(excluding United Kingdom)		2,391
Other Non-U.S. Corporate		5,409

Total	$	13,385

Our non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. We have 80 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 54 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 Eurozone fixed income portfolio (excluding United Kingdom) by industry at September 30, 2011:


	Market Value (in millions of U.S. dollars)
	Bank		Financial		Industrial		Utility		Total
Netherlands	$	188	$	145	$	230	$	129	$	692
France		151		39		98		137		425
Germany		285		22		62		8		377
Luxembourg		27		1		228		93		349
Euro Supranational		209		—		—		—		209
Spain		57		4		56		6		123
Ireland		21		—		74		19		114
Italy		32		1		15		2		50
Austria		21		—		4		—		25
Finland		7		—		3		3		13
Belgium		—		—		12		1		13
Portugal		—		—		1		—		1

Eurozone Non-U.S. Corporate Securities	$	998	$	212	$	783	$	398	$	2,391

The table below summarizes the market value of the top 10 Eurozone bank exposures within our Eurozone fixed income portfolio (excluding United Kingdom) at September 30, 2011:


	Market Value
	(in millions of U.S. dollars)
European Investment Bank	$	189
KFW		173
Rabobank Nederland NV		95
Deutsche Bank AG		47
BNP Paribas SA		35
Credit Agricole Groupe		32
Bank Nederlandse Gemeenten		30
Intesa Sanpaolo SpA		26
Banco Santander SA		25
Groupe BPCE		25

The table below summarizes the market value of the top 10 Eurozone corporate exposures within our Eurozone fixed income portfolio (excluding United Kingdom) at September 30, 2011:


	Market Value
	(in millions U.S. dollars)
ING Groep NV	$	82
EDF SA		79
Deutsche Telekom AG		73
Royal Dutch Shell PLC		62
Telecom Italia SpA		50
Telefonica SA		46
Intelsat SA		45
Gazprom OAO		42
France Telecom SA		36
ArcelorMittal		36

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


	Market Value
	(in millions of U.S. dollars)
JP Morgan Chase & Co	$	453
General Electric Co		436
Citigroup Inc		359
Morgan Stanley		327
Goldman Sachs Group Inc/The		316
Verizon Communications Inc		314
Bank of America Corp		302
AT&T INC		259
Wells Fargo & Co		222
HSBC Holdings Plc		208
Lloyds Banking Group Plc		208
Comcast Corp		169
Kraft Foods Inc		166
Royal Bank of Scotland Group PLC		160
Credit Suisse Group		148
Time Warner Cable Inc		146
ConocoPhillips		132
American Express Co		120
Pfizer Inc		119
Enterprise Products Partners LP		118
Dominion Resources Inc/VA		115
BP PLC		115
Anheuser-Busch InBev NV		114
Barclays PLC		112
UBS AG		111

Mortgage-backed securities

Additional details on the mortgage-backed component of our investment portfolio at September 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
Agency residential mortgage-backed (RMBS)	$	—	$	11,550	$	—	$	—	$	—	$	11,550
Non-agency RMBS		250		41		14		22		573		900
Commercial mortgage-backed		1,333		22		13		3		—		1,371

Total mortgage-backed securities	$	1,583	$	11,613	$	27	$	25	$	573	$	13,821

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
Agency residential mortgage-backed (RMBS)	$	—	$	11,110	$	—	$	—	$	—	$	11,110
Non-agency RMBS		259		45		16		24		719		1,063
Commercial mortgage-backed		1,281		19		13		3		—		1,316

Total mortgage-backed securities	$	1,540	$	11,174	$	29	$	27	$	719	$	13,489

Our mortgage-backed securities are rated predominantly AA and comprise approximately 26 percent of our fixed income portfolio. This compares with a 35 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of the third quarter of 2011. The minimum rating for our initial purchases of mortgage-backed securities is AA for agency mortgages and AAA for non-agency mortgages.

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 93 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 130,000 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 13 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 15,000 loans, and 64 percent of the portfolio was issued before 2006 and 23 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 1.6 and weighted-average subordinated collateral of 32 percent. The cumulative foreclosure rate would have to rise to 42 percent before principal is impaired. The foreclosure rate for our CMBS portfolio at the end of the third quarter of 2011 was approximately 2.5 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 September 30, 2011, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 11 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes over 700 issuers, with the greatest single exposure being $74 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:


	September 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	$	12,042	$	12,149
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance		795		722

Net reinsurance recoverable on losses and loss expenses	$	12,837	$	12,871

Reinsurance recoverable on policy benefits	$	248	$	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 provision for uncollectible reinsurance is based on a default analysis applied to gross reinsurance recoverables, net of collateral. The decrease in net reinsurance recoverable on losses and loss expenses was primarily due to favorable prior period development on ceded reserves and a reduction in ceded reserve estimates related to the Japan earthquake, partially offset by increases due to seasonal crop activity.

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 September 30, 2011, our gross unpaid loss and loss expense reserves were $38.5 billion and our net unpaid loss and loss expense reserves were $26.4 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 $66 million.

The table below presents a roll-forward of our unpaid losses and loss expenses for the nine months ended September 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		9,779			2,545			7,234
Losses and loss expenses paid		(8,943	)		(2,748	)		(6,195	)
Other (including foreign exchange translation)		249			96			153

Balance at September 30, 2011	$	38,476		$	12,042		$	26,434

(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:


	September 30, 2011						December 31, 2010
	Gross		Ceded		Net		Gross		Ceded		Net
	(in millions of U.S. dollars)
Case reserves	$	15,625	$	6,267	$	9,358	$	16,899	$	5,951	$	10,948
IBNR reserves		22,851		5,775		17,076		20,492		6,198		14,294

Total	$	38,476	$	12,042	$	26,434	$	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 nine months ended September 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.

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.

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 September 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 two percent of our total liabilities at September 30, 2011. During the three and nine months ended September 30, 2011, we transferred $24 million and $70 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 nine months ended September 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.

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, second, and third 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 $6.2 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 nine months ended September 30, 2011, we recorded realized losses of $952 million and $969 million, respectively, due to increasing net fair value of reported GLB reinsurance liabilities resulting substantially from declining equity markets and falling interest rates. This excludes realized gains of $220 million and $152 million during the three and nine months ended September 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 nine months ended September 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 $111 million and $21 million at September 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		23	%
2014		18	%
2015		5	%
2016		5	%
2017		19	%
2018 and after		22	%

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 September 30						Nine Months Ended September 30
	2011			2010			2011		2010
	(in millions of U.S. dollars)
Death Benefits (GMDB)
Premium	$	23		$	26		$	74	$	81
Less paid claims		24			32			73		93

Net	$	(1	)	$	(6	)	$	1	$	(12	)

Living Benefits (Includes GMIB and GMAB)
Premium	$	41		$	41		$	123	$	121
Less paid claims		1			1			3		2

Net	$	40		$	40		$	120	$	119

Total VA Guaranteed Benefits
Premium	$	64		$	67		$	197	$	202
Less paid claims		25			33			76		95

Net	$	39		$	34		$	121	$	107

Death Benefits (GMDB)

For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $144 million of claims and $87 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 $155 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 July 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 September 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 September 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 September 30, 2011). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $138.1 billion.


	U.S. Hurricanes									California Earthquakes
	September 30, 2011							September 30, 2010		September 30, 2011							September 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	$	1,295		5	%	$	138,071	$	1,159	$	804		3	%	$	36,832	$	792
1-in-250	$	1,739		7	%	$	200,258	$	1,531	$	954		4	%	$	58,103	$	906

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 third quarter, other than our purchase of 50% of a $200 million layer excess of $1.1 billion that covers the same perils as our core program except it excludes the peril of earthquake. This layer incepted on August 15, 2011 and expires December 31, 2011. 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 nine months ended September 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. In addition, we participate in a notional multicurrency pool (Pool) with a third-party bank to effectively manage our cash on a global basis. The Pool allows us to optimize investment income by avoiding portfolio disruptions. See Note 12 to the Consolidated Financial Statements for more information. At September 30, 2011, our available credit lines totaled $2.4 billion and usage to support issued letters of credit was $1.3 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 September 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 . Subsequent to September 30, 2011, we posted additional collateral of approximately $600 million primarily related to our variable annuity reinsurance business in the form of letters of credit. 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 nine months ended September 30, 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2011 and 2010.

Our consolidated net cash flows from operating activities were $3.0 billion in the nine months ended September 30, 2011, compared with $2.8 billion in the prior year period. Net loss and loss expenses paid were $6.2 billion in the nine months ended September 30, 2011, compared with $5.5 billion in the prior year period. Operating cash flow increased in the nine months ended September 30, 2011, in part due to an increase in net loss and loss expense balances during the period and to $284 million of cash collateral received related to a large insurance transaction, net of collateral returned, partially offset by net payments of insurance and reinsurance balances. 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.

MPCI 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 $2.5 billion in the nine months ended September 30, 2011, compared with $2.7 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.

Our consolidated net cash flows used for financing activities were $478 million in the nine months ended September 30, 2011, compared with $282 million in the prior year. Financing cash flows included $168 million for share repurchases in the current period, with no share repurchases in the prior year period.

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 September 30, 2011, there were $1.3 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:


	September 30 2011			December 31 2010
	(in millions of U.S. dollars, except for percentages)
Short-term debt	$	1,250		$	1,300
Long-term debt		3,360			3,358

Total debt		4,610			4,658
Trust preferred securities		309			309
Total shareholders’ equity		23,750			22,974

Total capitalization	$	28,669		$	27,941

Ratio of debt to total capitalization		16.1	%		16.7	%
Ratio of debt plus trust preferred securities to total capitalization		17.2	%		17.8	%

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


	September 30, 2011
	(in millions of U.S. dollars)
Balance at December 31, 2010	$	22,974
Net income		835
Dividends declared on Common Shares		(349	)
Change in net unrealized appreciation on investments, net of tax		127
Repurchase of shares		(100	)
Change in net cumulative translation, net of tax		119
Other movements, net of tax		144

Balance at September 30, 2011	$	23,750

In August 2011, our Board of Directors authorized the repurchase of up to $303 million of ACE’s Common Shares through December 31, 2012. The amount authorized in August 2011 was in addition to the $197 million balance remaining under a $600 million share repurchase approved in November 2010. Under the November 2010 authorization, we had purchased $303 million of ACE’s common shares as of December 31, 2010. During the nine months ended September 30, 2011, we repurchased $100 million of Common Shares in a series of open market transactions. At September 30, 2011, $500 million in share repurchase authorization remained through December 31, 2012 pursuant to the November 2010 and August 2011 Board authorizations.

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)
September 30, 2011	October 21, 2011	$0.35 (CHF 0.31)

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 following 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 September 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 above average growth over the next several years. Management regularly examines both quantitative and qualitative analysis and for the nine months ended September 30, 2011, determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at September 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 September 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 September 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	$	123		$	27		$	(102	)	$	(272	)	$	(491	)	$	(779	)
	(Increase)/decrease in FVL		604			395			169			(61	)		(283	)		(474	)
	Increase/(decrease) in hedge value		(140	)		(7	)		129			265			404			545

	Increase/(decrease) in net income	$	587		$	415		$	196		$	(68	)	$	(370	)	$	(708	)

Flat	(Increase)/decrease in benefit reserves	$	101		$	—		$	(137	)	$	(317	)	$	(549	)	$	(850	)
	(Increase)/decrease in FVL		259			—			(273	)		(542	)		(793	)		(1,003	)
	Increase/(decrease) in hedge value		(134	)		—			136			273			413			554

	Increase/(decrease) in net income	$	226		$	—		$	(274	)	$	(586	)	$	(929	)	$	(1,299	)

-100 bps	(Increase)/decrease in benefit reserves	$	76		$	(30	)	$	(176	)	$	(366	)	$	(610	)	$	(926	)
	(Increase)/decrease in FVL		(225	)		(534	)		(850	)		(1,151	)		(1,421	)		(1,632	)
	Increase/(decrease) in hedge value		(128	)		7			143			282			421			563

	Increase/(decrease) in net income	$	(277	)	$	(557	)	$	(883	)	$	(1,235	)	$	(1,610	)	$	(1,995	)


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		181		(183	)		(7	)		1		(24	)		22
Increase/(decrease) in hedge value		—		—			—			—		3			(3	)

Increase/(decrease) in net income	$	181	$	(183	)	$	(7	)	$	1	$	(21	)	$	19


Sensitivities to Actuarial Assumptions
	Mortality
	+20%			+10%			-10%			-20%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	(47	)	$	(24	)	$	26		$	55
(Increase)/decrease in FVL		35			18			(18	)		(36	)
Increase/(decrease) in hedge value		—			—			—			—

Increase/(decrease) in net income	$	(12	)	$	(6	)	$	8		$	19


	Lapses
	+50%			+25%			-25%			-50%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	70		$	38		$	(44	)	$	(97	)
(Increase)/decrease in FVL		365			197			(231	)		(502	)
Increase/(decrease) in hedge value		—			—			—			—

Increase/(decrease) in net income	$	435		$	235		$	(275	)	$	(599	)


	Annuitization
	+50%			+25%			-25%		-50%
	(in millions of U.S. dollars)
(Increase)/decrease in benefit reserves	$	(50	)	$	(27	)	$	32	$	72
(Increase)/decrease in FVL		(290	)		(168	)		219		499
Increase/(decrease) in hedge value		—			—			—		—

Increase/(decrease) in net income	$	(340	)	$	(195	)	$	251	$	571

The above tables assume benefit reserves and FVL using the benefit ratio calculated at September 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. Our liabilities are sensitive to global equity markets in the following proportions: 70%-80% US equity, 10%-20% international equity ex-Japan, 5%-15% Japan equity. We would suggest using the S&P 500 index as a proxy for US equity, the MSCI ex Japan index as a proxy for international equity, and the TOPIX as a proxy for Japan equity. Our liabilities are also sensitive to global interest rates at various points on the yield curve, mainly the US Treasury curve in the following proportions: 5%-15% short-term rates (maturing in less than 5 years), 20%-30% medium-term rates (maturing between 5 years and 10 years, inclusive), and 60%-70% long-term rates (maturing beyond 10 years). 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 September 30, 2011 market levels.

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. Sensitivities may also vary due to foreign exchange rate fluctuations. 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 nine months ended September 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 reasonably estimated 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 1A. 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 10-K. The Risk Factor listed in our 2010 Form 10-K under the subheading, “Changes in U.S. federal income tax law could adversely affect an investment in our shares” is amended and restated to read in its entirety as set forth below.

Changes in U.S. federal income tax law could adversely affect an investment in our shares.

Legislation is periodically introduced in the U.S. Congress intended to eliminate some perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. For example, HR 3157 and S 1693 (which appear to mirror a tax proposal contained in the President’s Fiscal Year 2012 Budget) were introduced during the current (i.e. 112 ^th ) Congress and, if enacted, would effectively render cross border affiliate reinsurance by foreign-owned U.S. insurance/reinsurance companies uneconomical regardless of whether or not it is properly priced under the Internationally accepted arms-length standard. Such a law could have an adverse impact on us or our shareholders. It is possible that other legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders.

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

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

Issuer’s Repurchases of Equity Securities


Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽²⁾		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan ⁽³⁾
July 1 through July 31		2,789	$	66.35		—	$	297 million
August 1 through August 31		1,599,110		62.61		1,597,432		500 million
September 1 through September 30		2,942		62.35		—		500 million

Total		1,604,841

⁽¹⁾

This column includes 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.

⁽²⁾

The aggregate value of shares purchased in August 2011 as part of the publicly announced plan was $100 million.

⁽³⁾

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

November 3, 2011				/ S / E VAN G. G REENBERG
				Evan G. Greenberg
				Chairman and Chief Executive Officer

November 3, 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

Organizational Regulations of the Company, as amended and restated

8-K

August 15, 2011

001-11778

4.1

Organizational Regulations of the Company, as amended and restated

8-K

August 15, 2011

001-11778

10.1*

Description of Executive Officer Cash Compensation for 2011

10.2*

Description of Directors Compensation

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

*	Management Contract or Compensation Plan

Exhibit 10.1

ACE LIMITED

DESCRIPTION OF EXECUTIVE OFFICER CASH COMPENSATION

Set forth below are the 2011 annual base salaries of the Chief Executive Officer, the Chief Financial Officer and each of the three other most highly compensated executive officers whose compensation was disclosed in our proxy statement for our 2011 annual meeting.

Evan G. Greenberg, Chairman, President and Chief Executive Officer

2011 salary

$1,200,000

Philip V. Bancroft, Chief Financial Officer

2011 salary

$700,000

Robert Cusumano, General Counsel and Secretary

2011 salary

$560,000

Brian E. Dowd, Vice-Chairman, ACE Limited; Chief Executive Officer, Insurance-North American ¹

2011 salary

$650,000

John Keogh, Vice-Chairman and Chief Operating Officer – ACE Limited; Chairman, ACE Overseas General ²

2011 salary

$812,500

¹ Mr. Dowd received a salary adjustment effective July 1, 2011. Salary has been pro rated for the year.

² Mr. Keogh received a salary adjustment effective July 1, 2011. Salary has been pro rated for the year.

In addition to the above, these officers receive bonuses, perquisites and other personal benefits as described in our proxy statement for our 2011 annual meeting.

Exhibit 10.2

ACE Limited

Outside Directors Compensation Parameters

August 2011

•

Annual Retainer Fee of $230,000. Paid $140,000 in restricted stock and $90,000 cash or, at the election of the director, $230,000 in restricted stock. Includes expectation of service on up to two committees (not counting service on Executive Committee). No fees are payable for regular board or committee meetings.

•

Annual premiums for committee chairs and lead director:

—

Audit—$25,000

—

Compensation—$20,000

—

Risk & Finance—$15,000

—

Nominating & Governance—$12,000

—

Lead director—$50,000

•

Annual premiums for selected committee service (non-chair): None.

•

Committee chair and lead director service premiums are payable in cash quarterly or, at the election of the director, in restricted stock annually.

•

Meeting fees for “special” meetings (required to consider transactions or other special circumstances, as determined jointly by the Lead Director and Chairman): $2,000 per telephone meeting, $3,000 for ‘in person’ meetings. Payable in cash quarterly.

•

Restricted stock will be awarded at beginning of the plan year (i.e. the date of the Annual General Meeting) and become non-forfeitable at end of the plan year, provided that the grantee has remained an ACE director continuously during that plan year. Increases shall be paid on a pro-rated basis, based on date of award.

•

Equity ownership maintenance for outside directors:

•

Minimum equity ownership: $400,000.

•

Each Outside Director has until the fifth anniversary of his or her initial election to the Board of Directors to achieve this minimum.

•

Previously granted restricted stock units (whether or not vested) and restricted stock (whether or not vested) shall be counted toward achieving this minimum.

•

Stock options shall not be counted toward achieving this minimum.

•

Once a given Outside Director has achieved the $400,000 minimum equity ownership, such requirement shall remain satisfied going forward as long as he or she retains the number of shares valued at $400,000 based on the NYSE closing price for the Company’s Common Shares as of the date such minimum threshold is initially met.

•

Any vested shares held by an Outside Director in excess of the minimum share equivalent specified above may be sold at such Outside Director’s discretion.

•

Shares may be sold after consultation with General Counsel.

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 November 3, 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 November 3, 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 September 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: November 3, 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: November 3, 2011				/s/ Philip V. Bancroft Philip V. Bancroft Chief Financial Officer